Fidus Investment Corporation (FDUS) Q3 2022 Earnings Report, Transcript and Summary

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fidus Quarter Three 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Jody Burfening, you may begin your conference.

Thank you, Abby, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's third quarter 2022 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential operating results and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, November 4, 2022, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of the telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody and good morning, everyone. Welcome to our third quarter 2022 earnings conference call. On today's call, I'll start with a review of our third quarter performance in our portfolio at quarter end, and then offer you an update of our views on market conditions in the lower middle market. Shelby will cover the third quarter financial results and our liquidity position. .After we have completed our prepared remarks, we'll be happy to take your questions. For the third quarter, our portfolio delivered strong results generating a 27% increase in adjusted NII on a larger debt portfolio with higher yields and net realized gains of $40 million or $1.64 per share from monetizing a meaningful portion of our equity portfolio. We ended the quarter in a net originations position with a portfolio that overall remains healthy even in the face of higher interest rates, persistent supply chain and inflationary challenges, potential for a recession. Although deal activity is slowing down relative to the high velocity we experienced last year, ample opportunities in the lower middle market that meet our investment criteria continue to be available to us. As a result, we continue to redeploy proceeds from equity realizations into income producing assets further building our debt portfolio while adhering to our proven strategy of investing in high quality companies that operate in industries we know well, generate cash flow to service debt and support growth and possess resilient business models and positive long term outlooks. Adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee, attributable to realized and unrealized gains and losses was $12.7 million, or $0.51 per share, an increase of $2.7 million, or $0.11 per share compared to last year. Growth in adjusted NII reflects both an increase in debt investments under management and higher yields at quarter end compared to the second quarter debt yields increased 100 basis points. NAV was $474.4 million or $19.41 per share at quarter end. For the third quarter, Fidus paid a base dividend of $0.36 per share and a supplemental dividend of $0.07 per share. In August, the Board also declared a base dividend of $0.36 per share and a minimum supplemental dividend of $0.07 per share for the fourth quarter. This skewed NAV at quarter end as the fourth quarter dividend declaration was recognized for GAAP purposes in the third quarter. As a reminder, the early declaration of a fourth quarter dividend was intended to satisfy the distribution requirement of our 2021 investment company taxable income. Adjusting for the early declaration of the fourth quarter dividend, NAV at quarter end was $19.84 per share for a modest increase of $0.04 compared to $19.80 per share at the end of the second quarter. As of September 30, our spillover income is estimated to be $2.86 per share. On last quarter's call, I mentioned that we were evaluating a variety of options with respect to our excess of spillover income, including increasing the base dividend, payout of incremental supplemental dividends, a special cash distribution and/or a deemed distribution. In evaluating these options and looking ahead to 2023, we've carefully assessed our ability to continue delivering stable to growing dividends to our shareholders, while retaining liquidity to grow NAV over the long term. If we look at the portfolio today, in light of the recent period of high levels of M&A and investment activity, we have successfully built our debt portfolio on a fair value basis from $549.8 million as of December 31, 2021 to $747.3 million as of September 30, 2022, in part by redeploying proceeds from equity realizations into income producing assets. In addition, since the beginning of 2020 we have generated proceeds from equity realizations totaling $192.3 million and accumulated net realized gains of $155.3 million. Based on this performance and our strong liquidity position, we believe we are well positioned to continue growing adjusted NII, extending our track record of generating cumulative adjusted NII in excess of cumulative base dividends. For the fourth quarter, the Board of Directors has increased the supplemental dividend to $0.15 per share, and declared a special cash dividend of $0.10 per share for a total cash dividend of $0.61 per share. The fourth quarter dividends will be payable on December 16, 2022 to stockholders of record as of December 2, 2022. For the year, we will have paid shareholders total cash dividends of $2 per share, a 25% increase over the prior period. For 2023, our Board has approved a dividend policy that encompasses a base dividend, a supplemental dividend and a special cash dividend. First, with respect to the base dividend, I am pleased to announce that the Board has decided to increase the base dividend to $0.39 per share, restoring our pre-COVID base dividend. In addition, we will retain our formula for calculating a supplemental dividend equal to 100% of the excess adjusted NII over the prior quarter's base dividend. We will also pay out a special cash dividend of $0.10 per quarter. Finally, in order to satisfy the RIC distribution requirements, we will be making a deemed distribution for 2022. While the amount of the deemed distribution will depend on final 2022 results, our planned approach, as we have consistently stated, is to maintain a certain level of spillover in the business to ensure the stability of our base dividend. We plan to communicate more information regarding the 2022 deemed distribution in January 2023. Moving to originations and repayments for the quarter. We invested $107.9 million in keeping with our proven strategy of investing in debt securities to generate recurring interest income and in equity securities to generate a margin of safety and incremental profits, $75.1 million was invested in first-lien debt, consistent with our focus on that security. Of the $107.9 million, a total of $82.3 million was invested in six new portfolio companies comprised of $10.8 million in AmeriWater, LLC leading provider of water purification systems and aftermarket parts and consumables for health care and industrial applications, consisting of $7.8 million in first lien debt, $2 million in subordinated debt and $1 million in common equity. $21 million in BP Thrift Buyer LLC a drift store operator specializing in the sale of secondhand merchandise consisting of $20 million in first-lien debt and $1 million in common equity. $7.2 million in second-lien debt of Magenta Bayer LLC, doing business as Trelix, a global cybersecurity company, $27 million in first lien debt of MBS OpCo LLC, doing business as Marketron, a leading provider of enterprise software solutions for radio and television broadcasters. $11.5 million in OnePath Systems LLC, a leading provider of a full suite of managed IT services, consisting of $11 million in first-lien debt and $0.5 million in common equity and $4.8 million in second-lean debt of SonicWall U.S. Holdings, Inc., a global provider of network and access security solutions. The remaining $25.6 million was comprised of add-on investments in 8 existing portfolio companies, including a $10 million subordinated debt investment in Van steel. In terms of repayments and realizations in the third quarter, we received proceeds totaling $60.2 million, of which monetization of equity investments accounted for $43 million or a little more than 70% of the total. As you may recall, some of our portfolio companies had initiated strategic alternative discussions toward the end of 2021. In terms of sales and exits, we received a distribution on our common equity investment and realized a gain of approximately $1.9 million related to the sale of Palisade Company, LLC. We received a distribution on our common equity investment and realized a gain of approximately $3.2 million related to the sale of Bandon Fitness, Inc. We received payment in full of $4.5 million on our first lien debt investment in Precision Parts, we received a distribution on our common equity investment and realized a gain of approximately $9 million related to the sale of SES Investors, LLC, doing business as SES Foam. We received payment in full of $5.3 million, including a prepayment penalty on our first-lien debt investment in Health Fuse LLC. We saw the portion of our equity investment in Fan Steel and realized a gain of $24.3 million. In conjunction with the transaction, we invested $10 million in subordinated debt and we received a distribution on our equity investment and realized a gain of approximately $1.4 million related to the sale of the Transonic companies. With originations exceeding repayments, the fair value of the portfolio at quarter end reached $856.9 million, a record level and equal to 103.6% of cost. We ended the third quarter with 75 active portfolio companies and 13 companies that have sold their underlying operations. Debt investments reached $747.3 million demonstrating continued success in building our debt portfolio this year. In fact, our debt portfolio has -- as of September 30, 2022, is now $197.5 million larger than it was as of December 31, 2021, on a fair value basis. Similar to the second quarter, the total portfolio mix on a fair value basis continued to shift in favor of debt investments, largely as a result of equity monetization. As of September 30, debt investments comprised 87% of the total compared to 83% as of June 30 and about 80% as of March 31. First lien debt as a percentage of debt has held steady at around 66% equity investments as a percentage of the total portfolio on a cost basis was 7.1%, within the boundary of our target allocation of 10%. Taking into account the changes to the portfolio this quarter from net originations and the rotation of equity to debt investments. Overall, our portfolio remains healthy with credit quality solid and well-structured to produce recurring income and through our equity investments to provide us with not only incremental profits, but also a reasonable margin of safety. With resilient business models designed to weather adverse economic conditions and geopolitical uncertainties, the vast majority of our portfolio companies are performing reasonably well even in the face of ongoing inflationary cost pressures and supply chain disruptions. However, risk is a bit elevated compared to the beginning of the year as these tougher economic conditions are weighing more heavily on select companies. In the third quarter, we experienced modest depreciation in our debt portfolio due to calibration and the financial performance of various companies. We did not place any conditional companies on non-accrual, and as of September 30, non-accruals accounted for less than 1% of our total portfolio on a fair value basis. We will continue to proactively monitor operations of our portfolio companies especially in light of current market headwinds. Subsequent to quarter end, we invested $1 million in common equity of EPL LLC, which was acquired under a new holding company, [indiscernible] Holdings LLC, doing business as Evolent and became a controlled affiliate investment. In conjunction with the transaction, we amended the terms of our second lien debt investment and committed up to $0.4 million in incremental common equity. In addition, we exited our debt investment in UPG Company LLC. We received payment in full of $17 million on our first lien debt which includes a prepayment fee. We also exited our debt and equity investment in OMC Investors LLC, doing business as Ohio Medical Corporation, received payment in full of $5.2 million on our second lien debt, includes a prepayment fee. We received a distribution on our equity investment for a realized gain of approximately $0.7 million. Finally, we invested $6 million in second lien debt of Education Inside LLC, doing businesses Acceleration Academies, a leading provider of alternative education academies focused on high school dropout recovery, throughout the United States. As we enter the last quarter of the year, we remain well positioned to continue building our portfolio in the current economic environment without sacrificing credit quality due to the strength of our rigorous underwriting standards, strong relationships with deal sponsors, and industry knowledge. For this reason, even with deal activity slowing down in the lower middle market, we remain optimistic about our opportunities to grow our debt portfolio for continued adjusted NII growth. While we are focused on growth, we will, as always, be patient and deliberate in our selection of investments in high quality companies, and we will continue to structure our debt investments with a high percentage of equity cushion. Our focus on managing the business for the long term continues to serve us well, supporting our goals of preserving capital and generating attractive risk-adjusted returns for our shareholders. Our performance over the past two years positions us to continue delivering shareholder value through increased cash dividends while growing NAV over the long term. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our third quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q2 2022. Total investment income was $25 million for the three months ended September 30, a $3.8 million increase from Q2, primarily due to a $2.1 million increase in interest income, including PIK, a $1.1 million increase in fee income due to higher levels of investment activity and prepayment fees, and a $0.6 million increase in dividend income. The increase in interest income was driven by an increase in average debt investment balances outstanding as well as an increase in the yield on our debt investments, given increase in interest rates on variable rate loans Total expenses, including income tax provision were $12.3 million for the second quarter, $2.1 million higher than Q2, primarily driven by a $1.9 million increase in the income incentive fee. As a reminder, expense will be higher in the fourth quarter as we will incur an annual excise tax expense, which I would estimate to be roughly $0.06 to $0.07 per share. We ended the quarter with $400 million of debt outstanding comprised of $133 million of SBA debentures, $250 million of unsecured notes and $17 million of secured borrowings. Our debt to equity ratio as of September 30 was 0.8 times or 0.6 times statutory leverage, excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 3.9% as of September 30. Net investment income or NII for the three months ended September 30 was $0.52 per share versus $0.45 per share in Q2. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.51 per share in Q3 versus $0.43 per share in Q2. For the three months ended September 30, we recognized approximately $40 million of net realized gains primarily from the partial sale of our equity investment in Fan Steel and the sale of our equity investments in SES Foam, Bandon Fitness, PALISADE and Transonic. Turning now to portfolio statistics. As of September 30, our total investment portfolio had fair value of $856.9 million, our average portfolio company investment on a cost basis was $11 million, which excludes investments in 13 portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 77.3% of our portfolio companies with an average fully diluted equity ownership of 3.7%. Weighted average effective yield on debt investments was 12.9% as of September versus 11.9% at June 30. Approximately 72% of our debt portfolio on a fair value basis has variable rates with interest rate floors. The weighted average yield is computing using the effective interest rate for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any. Now I'd like to briefly discuss our available liquidity. As of September 30, our liquidity and capital resources included cash of $40.4 million, $27 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $167.4 million. Taking into account our subsequent events, we have approximately $183.9 million of liquidity. Now I will turn the call back to Ed for concluding comments.

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Abby for Q&A. Abby?

[Operator Instructions] Your first question comes from the line of Bryce Rowe from B. Riley Financing. Your line is open.

Thanks. Good morning.

Good morning, Bryce.

Yeah. I think I'll try to start here on the dividend and I appreciate the approach you're taking here, maybe in terms of the deemed, and trying to think about kind of what an optimized spillover level might be, can you help us think about what that might look like and maybe we'll just start there. Just what do you think that might look like from an optimization perspective on the spillover?

Sure. Great question, Bryce. I think if you look at really what we've been doing over the last couple of years, spillover has been at a higher level, but call it close to three quarters dividends. And what I think -- our thinking is to keep it in a similar place as that. So somewhere close two, three quarters worth of a dividend is kind of a long-term spillover position that we'd like to maintain, if possible, obviously, performance depending, that's the goal.

And Bryce, I would add that's kind of three quarters worth of base dividend.

Okay. That's helpful. And so Shelby, maybe you can help us kind of think about what the deemed impact will be depending on whatever the dollar amount is, there will be some level of taxes, I assume that kind of come out of that level to leave you with the retained capital.

That's correct. Fidus will end up paying a 21% C-corp tax on the amount of the deemed distribution that is ultimately declared that will then be passed through to the shareholders. But there will be a 21% tax impact to NAV in Q4 related to the deemed distribution.

Okay. That's helpful. And then maybe shifting just to some of your prepared comments, Ed, around company performance. You talked a little bit about some unrealized depreciation within the debt portfolio. Can you talk about kind of maybe what metrics or what's happening within specific portfolio companies to have led to some level of depreciation?

Sure. Obviously another very good question and a good topic. I think as I think about the world today and the good news for our portfolio is, I'd say over 90% of the portfolio companies are performing very well or okay, which provides very good cushion, if you will, to deal with fixed charges and to spend as necessary. So very comfortable positions. And then very well documented issues in today's world, whether it's supply chain issues, interest rate increases inflation, labor cost, availability of labor, you name it. All those are real issues of today. And so we do -- we're not immune to that. And so we do have some companies experiencing underperformance or stress because of those types of issues. And obviously, we're in good contact with those companies, but that's the real world today. So as I think about this credit quality in an environment like this, thankfully, we've been in a very good environment over the last 18 months or so and credit quality has been abnormally -- almost abnormally good. What I would expect over time is for credit quality to go back to more of a normal level, still very manageable, and -- but that would be my expectation. It's just today's -- issues of today are real, and companies are all dealing with it. Most are finding it easy to do so or easy is probably the wrong word, but are managing quite well. And then there's a few that are -- obviously, things are a little tougher for, and we're working with those companies to improve the situations as we can.

Great. That’s helpful. I’ll jump back in queue, get somebody else a chance. Thanks.

Okay. Thank you. Good talking to you, Bryce.

The next question comes from the line of Robert Dodd from Raymond James. Your line is open.

Hi, everyone. Congratulations on the quarter, obviously, and the outlook. I mean, on that, I mean, you sound still quite bullish, Ed, on the ability to grow the debt book and deploy more incremental capital going forward, and obviously, at the same time, like the environment is tougher. So can you give us any color on how -- has your -- the underwriting process probably hasn't changed. You're always underwrite in a recession anyway, even if one is more imminent. But how have you -- what have your asks changed for when you're looking at a deal in terms of structure or coupon or how much changes there on what you're asking for in order to commit your capital on a go forward basis to new opportunities.

Sure. I guess I'll start, Robert, with we do think despite the issues of today, there are plenty of good opportunities to invest today, but then your question is, okay, so how are you doing that? And we're going about that in an obviously very deliberate way. We are excited about the market opportunity, quite frankly. But if you think about things like pricing, to spreads, obviously, SOFR is up, LIBOR is up, but just spreads are up as well. So that's a good thing from our perspective. And then leverage levels have come down. So risk levels have come down. And we're obviously looking for the types of companies that are not being meaningfully impacted by the issues of today that I just articulated, so we like this environment. We think it's a great time to invest. At the same time, we're being very cautious and deliberate with our approach, but we think we'll continue to be able to uncover opportunities as we move forward at the same time. Hopefully, that's helpful.

Yeah. That is very helpful. And then just a question on the deemed and a follow-up to Bryce's question. You said, spillover close to kind of optimize at three quarters worth of dividend, which is on the basis obviously effectively the MAX without moving declaration dates and things like that, which obviously you did do this quarter. On that three quarters, I mean, is that -- you're declaring this -- the dividend plan for next year looks like basically distributing all of earnings plus $0.10. It's basically the base plus whatever you earn it by plus another 10. So is the plan to actually take if the deemed distribution brings it down to three quarters and then you overdistribute, not acquisitive overdistribute next year. Is the plan to actually take that spillover down to a somewhat lower level in the near or medium term?

To take the what down, I'm sorry.

The spillover down because if the deemed distribution, hypothetically brings it down to three quarters the incremental $0.10 would actually make it decline from there as well. The incremental $0.10 special dividend each quarter next year.

Yeah. What I would say is I don't think we -- obviously, there's a lot of -- there's still two quarters to go here. And so we're trying to stay away from giving too much information because we don't have the details, right. But at the end of the day, what I would say is the dean distribution is most likely going to be $1.50 or above per share. And that's how we are currently planning to deal with that. I don't think -- I mean clearly, NAV will drop by those $0.10 you just mentioned each quarter, but our view is that will get us largely in line with where we need to be for rig purposes at that point in time. So it's unclear where we'll be in the third quarter, which is really when it matters, as you well know. But we'll be very close. So it's a little bit fluid, but hopefully, I'm trying to give you a little bit of direction of where we're -- how we're thinking about it.

That's incredibly helpful. Sorry, go ahead.

Robert, I would just add, I would think about the spillover level of three quarter base dividend is kind of an desired normalized run rate. So to your point, there's a little bit of magic in how do you solve for 2022 and 2023 in light of the $0.10 special, but I would also highlight, if we had net incremental realized gains in 2023, that would also increase the spillover position. So there are a variety of factors, as Ed suggested that kind of go into once we see how the year end closes, what's the right amount of spillover for 2022, taking into account what we've already declared for 2023.

Understood. And yeah, none of this is a bad thing for shareholders because I just want to clarify a couple of points. So I appreciate it. Thank you.

Yeah. Good talking to you Robert.

Your next question comes from the line of Ryan Lynch from KBW. Your line is open.

Hey. Good morning, and thanks for taking my questions.

Good morning, Ryan.

First one, I just had was as far as -- as you guys are monitoring your guys' portfolio and as interest rates continue to go up, could you just provide a little color on where today your overall interest coverage levels on your portfolio are? And how did that compare to where it was maybe six months ago for your borrowers?

Sure. It's a great question. The answer is a little confused, which I'll go through. So we use an average EBITDA to average interest coverage calculation is what we've done historically. In last quarter at June 30, if I do have that in my fingertips, we were at 3.4 times. To be honest, it actually went up this quarter from there, and it's because of the additions to the portfolio in Q2 and Q3 have been under levered situations. Our leverage has actually gone down. Leverage meaning debt to EBITDA, it's at about 4 times. And that's excluding our ARR investments as well as three, what I would call, very large EBITDA businesses that aren't the norm for us. And obviously, those are levered a little bit higher and they skewed the analysis, so that's why we've excluded it. So leverage for the core portfolio is actually reduced. And then we've added, obviously, eight companies here over the last two quarters that have interest coverage that are pretty high. And so it skews the analysis. What I would say is we're still in pretty good interest coverage levels overall. And I think there's plenty of cushion with the, call it, 90% plus of the portfolio for additional rate increases. So we've got plenty of cushion there. It really comes down to the one-off situations, whether it's, again, supply chain issue or an interest rate increase, causing an issue for a certain company, and then inflation. A lot of companies have been dealing with inflation. And usually, you got to raise prices to do that. And thankfully, a large, large, almost all of our portfolio has been able to accomplish that. But it's been tougher for some than others, right? And so there's varying degrees. And so at the end of the day, I think we feel very good about our ability to just cover general interest coverage. It's really the one-offs that we're spending a lot of time right now and that's where we have more work to do at the end of the day. But it's -- again, we feel good about overall the core part of the portfolio and really the 90% plus. The rest, we've got to work through, and there's a lot of ways to do that. We feel that's manageable as well. But it's -- obviously, there's more risk.

Okay. That's helpful and definitely makes a lot of sense. The other question I just had was, obviously, one of the main core benefits you guys have had so much success in over the years is your equity realizations over time. I would just love to get a little color. Obviously, we know that the lending environment has improved significantly for lenders, given some of the choppiness in the environment, but I would think that, that would come at some of the pain from the equity holders. And so I would just love to hear your thoughts on how has the market environment changed for companies' ability to transact and exit positions as well as how are those multiples changed over the last six months or so?

Sure. Great question, Ryan. I think it's interesting when you think about the market environment 12 months ago, right. The level or the velocity of activity, investment activity was extremely high and it's greatly reduced as we sit here today. That's because the number of M&A processes that are taking place today it's much lower. The good news is, and one of the things that our market offers is it's very fragmented. There's a lot of add-on activity going on, so that's creating investment opportunity. There are a few M&A processes still taking place. And those are usually companies that are not being material or meaningfully impacted, and there's usually a reason for the transaction, whether it's growth or just liquidity, what have you. So the good news is there continues to be opportunity to invest. The other piece of the puzzle, which is also very different than last year's repayments are at much lower levels. So last year, debt repayments for us was extremely high. And this year, it's been much lower, and we expect that to continue that we don't see a ton of just repayments taking place anytime in the near term. And -- but at the same time, we see ability to make incremental investments and grow the portfolio. So it is a very different market, but the lower middle market in our opinion, is different. And relative to the larger market, it's just very, very fragmented, and there are a lot of different reasons for financings and creating opportunity. So hopefully, that's helpful. But it's a very different market than 12 months ago, that's for sure.

Yeah. That makes a ton of sense. That’s all from me. I appreciate the time today.

Yeah. Absolutely. Good talking to you, Ryan.

Your next question comes from the line of Mickey Schleien from Ladenburg. Your line is open.

Yes. Good morning, Ed and Shelby. A lot of good questions have already been asked. I just wanted to follow up with one question. Ed, your company has a lot of expertise in investing in second liens. I know that you have purposefully moved away from those. But in the last quarter, I think you were a little disappointed that there actually weren't more opportunities in second liens, and I'm curious whether the current market dislocation has made that segment more interesting to you, notwithstanding the outlook for an economic slowdown in the coming quarters?

Sure. Great question, Mickey. I think our approach, quite frankly is very much the same. I mean, we have, for a while, been primarily providing first lien solutions to our borrowers. Having said that, second lien and sub debt investments is something we've always done, and we'll continue to do. And our hope is we'll continue to see some very high caliber junior debt opportunities as we move forward, we did take advantage of a couple, quite frankly, more liquid market opportunities. They were small and I referenced those in my prepared remarks, and those are more recurring revenue businesses that for technical reasons, it traded down and the overall returns look to be very positive. So we did do that in Q3. We are looking for the right companies in the right situations to continue to invest in second lien and sub-debt investments. There are those companies that are actually thriving right now, and have an outlook of thriving. And those are the types of situations we're looking for. But as I discussed with Ryan, I think overall, market activity levels are down. It is at a different level. And so we haven't seen anything recently that piques our interest, if you will. But we'll continue to make those types of investments, first lien makes a ton of sense, it's quite frankly, it enhances our ability to manage those securities and investments. And also, we're providing very -- solution that is resonating in the marketplace today. So that will be the core and as it has been for the last really four years or so, but we expect to continue to invest in all the different asset classes that we've discussed.

I appreciate that. Ed, can you remind me within first lien, how much unit tranche are you doing, if any? And do you typically sell first out pieces in that business model?

Great question, Mickey. The answer is, yes. Most of our first lien investments or some form of unitranche whether we're doing 100% of that capital or we are bringing in for style partners. I would tell you, a majority of our first lien investments are first out last out structures, where we bring in a bank typically to partner with on that solution. So that is a majority of the first lien, but it's not a large, large majority.

Okay. And in those unitranche deals, do you typically have a call on the first lien -- on the first out piece in the event of a covenant breach when a company gets in trouble so that you can take control of the situation.

Yes. In most cases, yes. And generally speaking, we are kind of the primary mouthpiece in the -- to the client, if you will of the borrower. And so -- but the answer to that is yes. We are -- we do have a call and ability to manage those kinds of issues, if necessary. We haven't encountered it, thankfully, and we hope not to, but I'm sure you never say never in this world.

Right. I understand. That’s it from me this morning. I appreciate your time. Thank you.

Thank you, Mickey. Good talking to you.

There are no further questions at this time. Mr. Edward Ross, Chief Executive Officer, I turn the call back over to you.

Thank you, Abby, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in early March 2023. Have a great day and a great weekend.

This concludes today's call. You may now disconnect.