Gladstone Investment Corporation (GAINI) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation Fourth Quarter and Year-Ended 3/31/2016 Earnings Call and Webcast. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. David Gladstone, you may begin.

All right. Thank you, Kevin, and hello, and good morning to all of you out there. This is David Gladstone, the Chairman, and this is the quarterly as well as the year-end conference call for shareholders and analysts that follow Gladstone Investment, common stocks on NASDAQ under the trading symbol GAIN. And we have 3 series of preferred stocks as well: there's GAINO; there's one that ends in P; and also an N. Again, thank you all for calling in. We're happy to talk to our loyal shareholders and potential shareholders. I'd like to give an update on our company and its investments and we like to give you a view of the business environment. I wish we could do this more often, but quarterly is probably enough. Also, there's an invitation out. If you're ever in the Washington, D.C. area, we're here in McLean, Virginia, just outside Washington, D.C. so please stop by and say hello. There's about 60 or so people here in this office, and I think they're the finest in the business. Now, I'll switch over to our General Counsel, Secretary, Michael LiCalsi. And Michael is also the President of Gladstone Administration, which serves as the Administrator to all the Gladstone funds and related companies. He'll make a statement regarding forward-looking statements. So Michael, go ahead.

Good morning, everyone. This conference call may include forward-looking statements that may constitute within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the company's future performance. And these forward-looking statements involve certain risks and uncertainties and many other factors, even though they are based on our current plans, which we believe to be reasonable. And many of these forward-looking statements can be identified by the use of words such as anticipate, believes, expects, intends, will, should, may and similar expressions. And there are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including information listed under the caption Risk Factors in our Form 10-K filing and our registration statement as filed with the SEC, and all these can be found on our website, www.gladstoneinvestment.com or the SEC's website, www.sec.gov. And the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call, except as required by law. And please also note that past performance or market information is not a guarantee of any future results. We also ask that you take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our email notification service. You can also find us on Facebook, keyword: The Gladstone Companies; and on Twitter, @GladstoneComps. And the call today will be an overview of our results through March 31, 2016. So for more detailed information, we ask that you read our press release issued yesterday and also review our Form 10-K for the year-ended March 31, 2016, again, which we filed yesterday with the SEC. And those can be accessed on our website, gladstoneinvestment.com. And you can find the 10-K on the SEC's website as well. Now, let's turn to David Dullum, President of Gladstone Investment, to get an update on the fund's performance and outlook.

Well, thanks, Mike, and good morning to all. So we're reporting on a good year. And so for a little bit of context, I just wish to reiterate what is Gladstone Investment. We are a publicly traded fund focused on buyouts of U.S. businesses, with annual EBITDA between $5 million and $30 million. The structure that we use for financing in any buyout usually consists of a direct equity investment for significant ownership position in combination with secured first and second lien debt. This combination of the equity and debt produces the mix of assets, which provides a current income for our dividend distributions to our stockholders on a monthly basis and the potential capital gains distributions when we sell or exit a company or sell our equity. So how do we differentiate ourselves? Gain is not a traditional credit or a debt-oriented BDC. What does this mean? Well, we're investing in operating companies and when we make an investment in the company, we take a significant equity position in that company. So, in other words, we really are, in our terminology, becoming the sponsor or, to some extent, the significant equity owner and buyer of that business. Now this differs from other public BDCs that are predominantly debt-focused and generally referred to as credit-oriented BDCs. So for example, the current proportion of the equity to debt for the investments in our portfolio is roughly 30% to 70% at their cost value. Most of the BDCs portfolios you'll find are more to the 10%-90% proportion. So it's a pretty significant difference. And also when we're involved in a company, we generally, in my terminology, are leading with our equity investment and bringing the debt along with it. So this is intentional on our part, as our strategy and the shareholder value proposition is different than most other BDCs. In that, one, we want and we need the debt portion of our investments to provide the income to pay and overtime, grow monthly distributions. Now this is similar to other BDCs. While at the same time, we do want to own significant equity positions, looking for an increase in value to provide the capital gains. Now as we execute on this strategy, these potential capital gains may then be distributed to our shareholders in the form of special distributions or potentially as what's known as deemed distributions. A further advantage to this approach is that a provider of the equity and the majority of the debt in the transaction, such as us, we have flexibility in the terms and the interest rate on the debt and the influence, frankly, over the financing structure in the future. So as we say, we sort of have influence on the right-hand side of the balance sheet. And this is important because we are less susceptible to our debt being financed out unless we are actually exiting the company with the sale of our equity in the retirement of our debt. And that's, again, I want to stress that's important relative to other BDCs, where their debt might get financed out. We have a bit more influence over that aspect of our assets. Now, as our fund matures, and we continue with new buyouts, we should expect, obviously, turnover in the portfolio that's consistent with our strategy. And of course, we will generally be governed by the market conditions and the internal assessment of the risk and return in continuing to hold versus exiting. Now, I am pleased to say that we are seeing the strategy starting to come together. And you might say, how we do it? Well, since October of 2010, and through the end of the 2016 fiscal year, which we just ended, we have exited 6 of our management supported buyout investments, generating about $71.8 million in net realized gains and about $16.2 million in other income. And subsequent to the fiscal year-end, in April actually, we also announced the sale of Acme Cryogenics, another one of our portfolio buyouts. This very successful transaction, in keeping with our strategy, resulted in a realized capital gain and other income of around $21 million and net cash proceeds of $44.6 million, which included the repayment of our $14.5 million debt investments at its par value. So now consistent with my previous comments then, we will continue to evaluate the sale of additional portfolio of companies, and to the extent that market conditions remain favorable and company-specific performance dictate and allows. So clearly, we are mindful that whenever we sell a portfolio company, and based on our strategy, it will and may reduce our income-producing asset base and obviously, income is extremely important to maintain the consistent dividend distributions. Therefore, our deal generation activities must have a high priority. And in this regard, and earlier this month, we announced the acquisition of a company called The Mountain, where we invested approximately $25.5 million and again, a combination of our secured debt and preferred equity. This company, which we acquired along with the executive management team, is a designer and manufacturer of premium quality, bold artwear apparel, as it's called, which serves a diversified global customer base. So I'll just add a little bit. In this past year, while it's been very challenging for the industry as a whole by raising capital and with a high valuations that people see on the buyout side, we have shown here how we've executed on both sides, while increasing our assets overall for the year and preserved our income base for distribution, so very, very pleased with this. So we continue though to increase our presence in the marketplace in all geographic areas of the U.S, allowing us to generate new investment opportunities and our team, primarily calling on independent sponsors, middle market investment bankers and other sources to help create these proprietary investment opportunities. We do not depend on others to negotiate our structure investments and generally, our investments include partnering with the management teams as in the case of The Mountain, this recent acquisition, and other sponsors who may be involved in the purchase of the business. So our strategy of providing this financing package, which includes both a secured debt and the majority of the equity, is, we believe, a competitive advantage as it gives the seller the independent sponsor if one is involved, and the management team, who would be involved, a really high degree of comfort that we will be able to accomplish this purchase, certainly from the financing perspective. So we believe that our strict adherence to the investment fundamentals and the third due diligence process that we employ, have enabled us to provide shareholder returns in both our consistent regular monthly distributions as well as special distributions, which we will look to for from time to time. Now what is our investment focus? And so, generally we invest in companies that are -- with consistent EBITDA, operating cash flow with a potential to expand. And areas of interest would be light and specialty manufacturing, company we acquired last year, GI Plastek, as an example, specialty consumer products and services. And again, last year, we acquired a company called Brunswick Bowling and The Mountain, I just mentioned, those are examples there. Industrial products and services, again, a couple that we did near the end of this past year, such as Counsel Press and Nth Degree. So these are all good quality examples of the types of businesses that we get involved with. We also -- we'll do some aerospace and energy, although I should note that historically, we've had minimum exposure here and we will look at that from time to time, but obviously being very careful. The types of investments on the debt side are generally secured, primary first lien loans, typically carrying a cash yield that's in the midteens. And this rebalance with the equity portion of the investment, thereby, we produce a blended current cash yield that supports our thesis of shareholder distribution expectations. Typically, we also have success fees, which generally are due upon a change of control, may be paid in cash in advance in limited circumstances at the portfolio companies options. And then on the equity side, obviously, we take that very seriously. We look at it very carefully and our target for the equity portion of our investments is a minimum of 2 to 3x cash on cash return as we go into a new investment. Now looking at our overall fund activity. During fiscal 2016, we invested $75.8 million in new deals and existing portfolio companies. During this fourth fiscal quarter, which ended March 31, 2016, we invested approximately $1.6 million into existing portfolio companies. Subsequent to year-end, as mentioned, we sold Acme in April and we acquired The Mountain in May. So at this point, we actually have investments in 36 companies in 19 states and 17 various industries, so we believe we are well diversified. And again, keeping in mind that we're not just a portfolio of loans, but we have significant economic interest in the actual companies and the equity in our portfolio. So in summary, our goal is to continue strategically, add accretive investments and position our existing portfolio for potential exits. Thus, we look to maximize the distributions to shareholders, with solid growth in both the equity and the income proportion of our assets. And given our exits, and the new investments we recently made, we still have reasonable liquidity, look forward to managing our growth in a very careful, responsible manner, maintaining our strategic objectives. So this will include -- conclude my part of the presentation. I'd now like to turn it over to Julia Ryan, our Chief Financial Officer, and she can give you a bit more detail on this performance. Julia?

Thanks, Dave, and good morning, everyone. As Dave just discussed, the fund had another strong fiscal year. So this year's originations together with highly successful originations in previous years, we generated nearly $51 million in total investment income, and over $20 million in net investment income. On the balance sheet side, at the end of this year, we had over $506 million in assets, consisting of approximately $488 million in investments at fair value, $4.5 million in cash and cash equivalents, about $14 million in other assets. Our portfolio's approximate allocation was $369 million of debt securities and $149 million in equity securities or roughly at 70% to 30% allocation at cost, as Dave mentioned earlier. Our liabilities and equity on March 31 consisted of $95 million in borrowings outstanding on our credit facility, approximately $122 million in Term Preferred Stock, $10 million in other liabilities and $279 million in equity. The net asset value was $9.22 per share as of March 31, up $0.56 from December 31, which primarily resulted from net unrealized appreciation of $17.7 million this quarter. The increase was principally due to improved performance of certain portfolio companies. And consistent with the previous 4 quarters, we continued to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We will continue this practice and plan to generally update this externally provided data on an annual basis of all of our significant equity investments. Moving over to the income statement for the March quarter. Total investment income was $12.4 million as compared to $12.1 million in the prior quarter. Total expenses net of credits were $7.5 million versus $7.4 million in the prior quarter, leaving net investment income of $4.9 million as compared to $4.6 million in the prior quarter. The increase in total and net investment income was primarily due to an increase in total interest income, which was principally driven by an increase in our weighted-average interest-bearing portfolio quarter-over-quarter. As mentioned on previous calls, other income has been in excess of 15% of total income historically as compared to 6% during the current quarter and 9% during the fiscal year. We expect other income, which is primarily composed of success fees and dividend income, to remain meaningful but variable from quarter-to-quarter. Net expenses stayed relatively flat in the current quarter, which was in line with the comparable size of the portfolio. As a result of these factors, our net investment income increased to $0.16 per share for the March quarter from $0.15 for the December quarter. Consistent with previous quarters, our current year net investment income, together with undistributed net investment income from the prior year, or what is called the prior year's spillover, more than covered our quarterly distribution to shareholders of $0.18 -- $0.1875 per common share. We continue to proactively manage our current year and prior year's spillover amounts in order to maintain and over time hopefully increase our distribution to shareholders. For the fiscal year, total investment income was $51 million compared to $41.6 million in the prior year. Total expenses net of credit was $30.2 million versus $21.7 million in the prior year, leaving net investment income of $20.7 million compared to $19.9 million for the prior year, which represents an increase of 4.1% in total net investment income. This increase was driven by higher interest income which resulted from an increase in our weighted average interest-bearing portfolio during the same period. Other income of $4.6 million was again meaningful in 2016, but declined 8% year-over-year, primarily due to lower dividends received. Let's turn to realized and unrealized changes in our assets. As a reminder, realized gains and losses, generally result from actual sales of investments. Unrealized appreciation and depreciation is a noncash event and is driven by the requirement to mark our investments to fair value on our balance sheet with the change in fair value from 1 period to the next recognized in our income statement. For the fiscal year ended March 31, 2016, we recorded a net realized loss of $4.6 million, primarily consisting of previously reported realized losses of approximately $22 million related to the restructurings of our investments in Galaxy and the Alliance Red [ph] partially offset by a realized gain of $70 million related to the sale of our investment in Funko. During the March quarter, we recorded minimal realized activity. We also recorded $17.7 million of net unrealized appreciation in the current quarter, which was principally due to improved performance of certain portfolio companies. For the year ended March 31, 2016, we recorded net unrealized appreciation of investments of $8.7 million, consisting of $13.3 million of net appreciation and $4.6 million of reversals of previously recognized net appreciation related to the realized gains and losses mentioned above. Such reversals of previously recognized appreciation or depreciation are recorded when realization events such as exits or restructures occur. At March 31, 2016, our entire portfolio was fair valued at 94.1% of cost compared to 90.7% of cost last quarter and 92.2% last year. One of our portfolio companies continues to remain on nonaccrual, but this company represents less than 1% of the fair value and the cost basis of our total debt investments. And speaking of the debt portfolio, it is well-positioned for any interest rate increases with approximately 86% of our loans having variable rates with a minimum or a floor and the remaining 14% having fixed rates. The weighted average yield on interest-bearing debt investments remained consistent quarter-over-quarter and year-over-year at 12.7% for the current quarter, as compared to 12.6% in the previous quarter, the previous year and this current year overall. The strong yield excludes success fees on our debt investments. It also doesn't include any paid-in-kind, or PIK income as we currently don't have any debt securities that have a PIK feature. Success fees are yield enhancements that are contractually due generally upon a change of control, although there are certain circumstances when the portfolio company can elect to pay it earlier. We generally only recognize success fees in our income statement when they are received in cash and deemed to be earned. For comparison purposes, if we had accrued these success fees, as we would if it was paid-in-kind interest, like other BDCs do, our weighted average yield and interest-bearing assets would approximate 15.4% during the current quarter. Also, as of the end of this year, the success fees accruing off balance sheet totaled $27.8 million or approximately $0.92 per common share. There is no guarantee that we will be able to collect all of the success fees or have any control over the timing. From a credit priority perspective, a 100% of our loans are secured, with approximately 80% having a first lien priority and the remaining 80% having a second lien priority in the capital structure of the respective portfolio companies. Overall, Gladstone Investment had another year of solid investment activity and started fiscal '17 with the successful exit of our investment in Acme and the closing of a new investment in The Mountain. The prior year activity helped the company generate strong financial results. We have maintained and increased distribution rates, while still remaining committed to covering our distributions by current or prior year net investment income as we have done consistently over the last 4 fiscal years. And now, I'll turn the call to David Gladstone.

Thank you, Julia, and Dave and Michael and Julia, those were great reports on the operations, the past operations of the company. And during this past year, we were able to report some great accomplishments such as good originations, successful exiting our sale of that 1 portfolio company and a very strong return as well as restructuring a few of the portfolio companies hopefully enabling them to improve their performance going forward. And just to let you know, we have other portfolio companies that are on a path to being positioned for sale, one of them may go public, if the public marketplace comes back, so lots of activity. To recap this year, we made 3 new investments for approximately $56 million. We exited 3 investments, resulting in over $70 million in realized capital gains. In addition, we got about $1.9 million in other income out of that, and we were repaid about $14.5 million of debt. We also restructured 3 companies that had gone through a lot of problems in the past and hopefully enable them to improve their performance in the future. We believe we continue this success going into the next fiscal year. We're off to a great start, obviously, with the announcement of the sale of Acme, we got that money in and turned around and invested most of it into The Mountain. So that kept us going in terms of interest income. There is an indication that we may be entering recession time. It's sort of waxes and wanes back and forth between that and we'll continue to be extra cautious when making investment decisions regarding that. While we continue to monitor the economy, we don't see anything on the horizon that indicates the economy is very strong. There are some signals that are making me worry that there might be a recession, no real indications are strong enough to say we're in one, of course. But we still have the same concerns that we always mentioned every time on these calls. We, like all the others, are watching the direction of the Federal Reserve's monetary policies and which way they're going to take us. We have variable rates on most of our loans, so we don't worry about increasing in the rate. But, however, I doubt the Fed is going to raise rates again until there is a much stronger signal that the economy is improving and none of those had appeared anytime soon. Volatility of oil and gas industry, pricing, low oil prices is a terrific benefit to consumers and many of the businesses, but the oil industry, as you all know, is an integral part of the U.S. economy and the loss there will certainly be painful to the economic growth. Fortunately, we don't have a significant investment that's based on oil and gas companies. The fiscal crisis in the federal government is still top of mind. I mentioned it every time, federal deficit now is over $19 trillion, continues to climb at astronomical rates. After this round of spending, that they are currently negotiating, we'll easily go over $20 trillion. It's just way out of sight, and hopefully a new round of politicians coming in this time will put that in check. Many of the private companies, as well as our company, just feel there's much too much regulations. The regulations around healthcare, financial services, the energy area, emissions, it just hinders performance and stifles growth of jobs. So we are all worried about that and hopefully it will slow down. From what we hear, the people in Washington, D.C, the amount of pages that the Federal Register new regulations for 2015 were the largest number of pages in history. And I suspect that 99% of those were increases and very few of those pages were reductions of the regulation. In light of these concerns, our company, Gladstone Investment has continued to be very selective in investing in new businesses. We worry about it every time we get ready to write a check to buy into something. These are still unsettling times, and we want to be very cautious. In April 2016, the Board of Directors declared our monthly distributions on our common stock at $0.0625 per common share for each of the months, April, May and June of 2016, that's a run rate of about $0.75 per share, which is consistent with the prior year. Through the date of this call, we've made 130 sequential monthly cash distributions to our common shareholders. In addition, we've made some special distributions along the way. And as of March 2016, we distributed $168.2 million or $7.55 per share to common stockholders, and that was based on the number of shares outstanding at the time the payments were made. Current distribution rate of common stock, with a stock price at $6.87 yesterday, the yield is now 10.9%, very high yield for such a strong stock. We've got 3 series preferred stock, a Series A is earnings about 9 -- 6.9%, Series B at 6.6% and the Series C is 6.56%, all 3 of these are very steady, well covered in terms of earnings, so those are good for those who want absolute dollars of getting some -- getting some dividends. So in summary, we believe Gladstone Investment's attractive investment for investors seeking [indiscernible] continuous monthly distribution. We expect to have a good quarter for June 30, 2016. Hope to continue to show you strong returns all during the year that we're in. So now let's stop and we have Kevin come on and we'll get some questions from our analysts, many of our loyal shareholders.

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

The sound quality was a little garbled at some points of the discussion. I just wanted to go back and understand, when I looked at the K that was probably shortfall when you compare the fiscal '16 distributions to taxable income. But I think there were some comments made about that in terms of that shortfall and whether there would be a return of capital. Could you repeat that?

Sure, Mickey, this is Julia Ryan. What I was discussing and apologies if it wasn't as clear. We have a significant portion of prior year's spillover of undistributed NII as well as with current year NII, all of that covered our current year dividend with NII, so all of distributions for this fiscal year are from ordinary income.

There's no return of capital, Mickey.

Right, right, that's what I was getting at. Okay, Dave, maybe for Dave, B-Drys and Meridian Racks valuations are sort of been trending down the last several quarters. Are those credit-related issues? Or is that just mark-to-market situations?

Yes, well, I would, Mickey, in both cases, they're different. B-Dry has been one that we may have reported on a number of quarters ago, where we effectively took, I'll say, control of the business in a sense that we instituted -- put a new CEO, et cetera, and progress is very, very positive with that company. So right now, that's a function more of just the, I would call it, the progress on the EBITDA, it's heading in the right direction. So that one I think is good. Meridian had a slight downturn in its -- in EBITDA. Nothing to worry about as well. And so, it's not a credit per se in terms of the debt, it's the function of the overall enterprise value of the company. And again, the trends, and that is positive as far as going forward. So I don't have any over-worry in any either of those.

Okay. That's good to hear. Congratulations on the Acme sale. I wanted to understand a little bit more about it. It was valued -- the total investment was valued at $29 million in September and then $33 million in December, but you ultimately sold it for $44 million, which is, obviously, a very nice result. So will you be booking a success fee? And if you are, how much?

I'll let Julia respond to that one.

Sure, Mickey, I think we reported -- we believe that we'll generate roughly $21 million of capital gains and related ordinary income in the form of likely dividend income. We're still going through the analysis of how all that will, ultimately, I guess, clear out. As you can imagine, there's a lot of considerations to be had from a tax perspective and other areas that we need to fully flesh out before we can report a definitive number to our shareholders.

I understand. Dave, what -- you ultimately sold this for about 50% more than you were valuing it just a couple of quarters ago. What transpired over that time that ultimately led to that valuation? What multiple did you get?

Mickey, I think I'm not going to mention the multiple necessarily, but the market these days, as you well know, is very strong on the M&A side. And so finding multiples in the, frankly, the high severance, low 8s, is not unusual. The company developed a very strong EBITDA over the last year or so. The process which was managed by investment banking firm you'd recognize, they did a very good job, and we had very strong interest in the company, so it was a classic case of a well-run process, with a very good company, the EBITDA was trending up to the level of $7-plus million range, which as you know tends to get slightly higher multiples in this market. So it’s just a confluence of all the -- all of the right things frankly. So we were very fortunate, very happy with the outcome.

And Mickey, we had 1 buyer that wanted this to match up with 1 company they already own, so they probably paid a little more than everybody else.

For synergies, I guess. So you got a good multiple on that exit. Can you give us an idea of what you paid for Mountain in terms of a multiple?

Not the same as the multiple we got on Acme.

It's a different business, so different multiples for different industries, as you well know.

Yes, but I do...

We're not high multiple buyers, Mickey, you know that.

I know, I understand. But I do agree with Dave's comments, the market has been pretty strong for good quality companies, so the multiples have been elevated. Couple of more questions.

Mickey, if I may add that, I think it's an important point, I tried to allude to a bit, I think it's really important. We are, as you well know, the good news about our approach to what we do is, we don't have to go out there and do significant number of deals every month. We really have to do a really good job, I think we've been doing protecting our base, keeping these companies, again, recognizing we have significant ownership in these companies. We have good value in terms of the way which we treat the debt side, keeping those going. And if we make good solid investments, at a rate of 1 every sort of 2, 3 months type of thing in the environment that we're in at multiples that are more in the 5 to 6.5x, that's the good approach for us, and give it us a good strong basis not only for our current distribution, obviously, but overtime to grow it. And obviously, reduces some of the effort or the pressure, if you will, on the funding side, so I think that that's important to keep in mind.

That's a good segue into my next question. And Dave, you and I have talked about this before. Despite the fact that there is about 3 dozen companies on the schedule of investments, when you look at it, there's 14 of them represent almost 60% of the portfolio. So there is actually some meaningful concentration by borrower, and you and I have talked about that. I'd like to hear what strategies you're understating to, from an operational perspective to get more deal flow and increase diversification, therefore reduce some of the risks in the stock?

Mickey, let me just bump into this conversation because just because something is qualified by the SIC code that it is in the same industry and we -- and you put them together with 14 different -- there is really quite a bit of room within the SIC codes that we categorized these by to be able to say that I think we've hit diversification about as good as anybody is going to hit. 36, if you look -- if you are a statistician, is the magic number, so that when you get to 36, you're usually diversified by almost any analysis. I just -- I think this idea that you have to have 100 or 200 of investments in order to make diversification is wrong. I think we're there.

But David, all due respect, what I was referring to was borrowers, unless my math is wrong, I counted 14 borrowers. I'm not talking about industries, I'm talking about individual borrowers representing about 60% of the portfolio's fair value.

Yes, Mickey, let me respond on that. We can have this discussion further offline. I hear what you're saying and I'm going to I guess also respectfully -- not disagree with you entirely, but to say that I'm not sure that's the right focus for the kind of firm and company that we are. Again, I keep mentioning that keeping in mind that the investments that we have, we have very significant equity ownership positions. We do have loans to those companies and the more important thing, I think, is our makeup of assets of those companies, such that we are able to maintain the level of net operating income from those loans, from that category, and be able to generate the income necessary to pay the distributions that we have on cap going forward. I'd much rather think the way we go at it, that way, then I can't run out honestly, and say we're going to diversify by going and making 3 new investments this next month. Remembering we're not just in the loan business, we are actually in this fund, we're making these acquisitions, so we have both the debt and the equity. And so I think it's important to keep that in mind from a -- I understand what you're saying about diversification, but it's more around the individual companies that we own, the way in which we manage those companies, the way in which we make new acquisitions, make exits as we go along the way, as we're showing now as we have been doing, that I think is probably, for me, is as important as anything. I couldn't tell you we can run out and all of a sudden make 4 new investments because we're not going out just to make loans, right? We're looking to own these companies by and large and have significant ownership positions in them.

Okay. Maybe we can talk about that a little bit more offline. Just my last question, I think, David sort of alluded to this. If you look at the SIC Codes, the chemical segment represents 19% of the fair value and I understand that that's a real sort of general definition. What I'm really curious about is, how sensitive is that segment to changes in energy price?

Go ahead, Dave.

I'd say not, I mean, the chemical section, again, as David said, the key thing is really look through how these things get categorized by the SIC codes, how many companies that we have in there, like TruForm, as an example, they're not really certainly impacted by energy per se, they're raw materials. Sure there's always a commodity orientation to the pricing there, but again, that's a company actually it's doing exceptionally well, continuing to grow, so I don't see any issue, any tie there to the energy sector.

Next question, please?

Our next question comes from Kyle Joseph with Jefferies.

I just have one really left over. And so with the unrealized depreciation on the portfolio in the quarter, did you guys see similar performance in your portfolio to sort of the broader equity and credit market, sort of that the economy really started improving after February 11 or whatever the date was where markets really started reversing? And just, I also wanted to get your -- a little more color on what your thoughts on the broader economy as well?

Well, I think -- hey, Kyle. I'd say it's generally for us, given our uptick in the unrealized appreciation, I think it's more just again fundamental performance of our underlying portfolio companies. I would say clearly as you know, we still use outside services to help us establish values and we do that with different companies from quarter-to-quarter. So there is, obviously, some relative inputs from what's going on in the market. But I don't believe that we had significant, for instance, uptick in the EBITDA multiples that were used. It was more that we got an uptick in just the fundamental performance, which helps those values is how I'd address that. It might -- I'll give you my response, David Gladstone might have another 1, but from the -- looking through our portfolio of companies, as it relates to the economy, in general, I'd say it's kind of neutral to probably in some cases a slight improvement, but I would say nothing overwhelming, up or down, frankly. We're not seeing any major things around looking any significant upset, so to speak, and as I can tell it from our portfolio of companies at this point.

We don't see anything in the economy that's giving us a lot of strong signals. On the other hand, we don't see any big negatives that are popping out, other than the 3 that I mentioned when I was going through my part of the -- if you look at our portfolio versus the S&P, the S&P has been driven pretty substantially by technology companies and we're not a tech investor, so we don't get quite that. So I think if it took tech out of the S&P and took it out of the economy, you'd see our portfolio is performing better than the remainder. I don't have any statistics to back that up, but that's just a guess.

Got it. That's helpful. And then I know we have 1 transaction from when you guys sold 1 company in the quarter at an attractive gain. But can you give us an idea of sort of recent trends and middle market valuations as a whole? And sort of your outlook there?

Well, we continue, as Mickey asked correctly earlier, what did you pay for The Mountain? And what did we sell Acme for? And I'd say that good quality companies are definitely getting bigger multiples, certainly, when they're being sold. I think it's not unusual, on average, everything we're looking at might have a 7 multiple or an 8 multiple, we've seen some at a 10 multiple, as David Gladstone said, somewhat depending on the industry, so still pretty, I'd say, strong if you on the sell side. Therefore, obviously, on the buy side, it makes it tougher to buy things at 5x and 6x, but again, we can afford to be patient, careful how we do it, and that's where we are, so looking forward. I'm not hearing that it's necessarily going to get any easier, I do think one thing that we're starting to see a little bit, you might have a sense of this, is clearly the amount of leverage that is becoming available to the classic buyouts environment seems to be coming down a bit. That's, obviously, therefore, puts pressure either you got to put more equity in or, obviously, reduce the enterprise value and therefore the multiple. I think we may see a bit more of that, certainly in the $5 million to $7 million, $8 million EBITDA companies, where it's just harder to get the kind of cheaper leverage and therefore people getting a little more sensible on the multiple they're willing to pay.

So thinking about our business again, there's 2 approaches here. First of all, small businesses have lower multiples when you buy them. And so we like the smaller ones. And then, we put in strong management, hopefully, and they build the growth of the company, either by just internal growth or buying other small businesses and merging them in, a sort of buy and build strategy. And of course, when they get to a certain size, there are other buyers out there that will look more favorably upon them in terms of the multiple they are willing to pay. So we get multiple expansion on what we put together. And that's the crux of the business here and it hasn't changed in the last 30 years, it still works that way. And the only time you get hurt is, when the multiples in a certain industry, perhaps, or multiples in general, just change dramatically, and that's usually during a recession. So very hard to exit during a recession and we need good economy in order to make our exits happen. But since we're not any -- in under any pressure to sell and pay back to investors, we can wait as long as we can make the dividend out of our ordinary income. Other questions, anybody else?

[Operator Instructions] And I'm not showing any further questions. At this time, I'd like to turn the call back over to David.

All right. Thank you very much. We appreciate you all calling in. Wish we had more questions. We enjoy the question-and-answer session. And that's the end of this conference call. Thank you all.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.