Gladstone Investment Corporation (GAINI) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Gladstone Investment Corporation's Third Quarter Earnings ended December 31, 2016, Conference Call and Webcast. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. David Gladstone. Sir, you may begin

Thank you, Chelsea. That's a nice introduction, and hello, and good morning to all you out there. This is David Gladstone, and this is the quarterly earnings conference call for shareholders and for analysts of Gladstone Investment and common stocks traded on NASDAQ under the symbol GAIN. And we have some preferred stock traded under the symbols GAINO and GAINN and GAINM. So we are in good shape here today, and we are going to start off by thanking you all for calling in. We're always happy to talk to our loyal shareholders who call in for these calls. And any potential callers that are on the call and analysts as well, I would like to give an update on the company and its investments and would like to give you a view of the business environment that's out there. And we wish we could do this more often. Also, you have an invitation that you are ever in the Washington, D.C. area, we're located just outside of Washington, D.C. in McLean, Virginia. So please stop by and say hello. We've about 60 or so people here. You will see the finest people in the business. And now I would like to introduce the General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator to all of the Gladstone public funds and related companies. He will make a brief statement regarding forward-looking statements. Michael?

Good morning, everyone. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933, and Securities Exchange Act of 1934, including statements with regard to the company's future performance. These forward-looking statements involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by words such as anticipates, believes, expects, intends, well, should, may, and similar expressions. 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-Q and 10-Q filings and in our registration statement as filed with the SEC, or can be found on our website www.gladstoneinvestment.com or the SEC's website, www.sec.gov. This company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. And please also note that past performance and market information is not a guarantee of any future results. Please take the opportunity to visit our website, gladstoneinvestment.com and sign up for our e-mail notification service. You can also find us on Facebook, the keyword, The Gladstone Companies; and on Twitter, @GladstoneComps. The call today will be an overview of our results through December 31, 2016. So for more detailed information, please read our press release issued yesterday and our Form 10-Q for the quarter ended December 31, 2016, which we also filed yesterday with the SEC. You can access the press release and the 10-Q on our website, www.gladstoneinvestment.com. Now let's turn to David Dullum, President of Gladstone Investment. He will give you an update on fund's performance and outlook.

Well, thanks, Mike. So I'm happy to report that we had -- Gladstone Investment, we had a good third fiscal quarter and the 9 months which ended 12/31/16 and leading actually to hopefully a good outlook for the fiscal year ended 03/31/17. During this period, we actually increased our net asset value or NAV from $9.65 in the second quarter of the fiscal year to $9.82 in this third quarter and actually year-over-year by $1.16 from $8.66 a share to $9.82 a share. So we are very pleased with that progress. And as a publicly traded business development company, we are focused, as we all know, on the buyouts of U.S. businesses, usually with annual earnings, as we define it before interest, tax, depreciation, amortization or otherwise known as EBITDA. Generally, the range for us is somewhere between $3 million and $10 million on an annual basis of the companies that we look to buy out. And we use a financial structure for funding the buyouts consisting of secured first and second lien debt, which is in combination with a direct equity investment, which gives us a generally significant ownership position in the particular portfolio company. And it is this combination of this debt and equity in the individual transactions that actually produces the portfolio of assets, which allows us to have a current income for the monthly distributions to our stockholders and then the potential capital gains and some other income that comes from these sales of any one particular company. It's important to just be sure we touch on how we differ from other publicly traded BDCs, and that GAIN is not managed as a traditional credit or debt-oriented BDC. And if you say, what does that mean? Well, we are investing in operating companies, and when we make an investment in a company, we generally take a significant equity position in that company and as a component of the management buyouts. Now this differs from most other public BDCs that are predominantly debt-only focused and generally referred to as credit-oriented BDCs. So for example, the current portion of equity to debt for the investments in our portfolio are approximately 28% in equity to 72% in debt at cost. Most of the BDCs you will find, generally, are going to be around 10% equity and 90% debt. So this is intentional on our part and as our strategy and the shareholder value proposition, because we believe it's different than most of the BDCs in that further what we want the debt portion of our investments to provide the income to pay, and over time, certainly try to grow our monthly distributions. And this is similar to other BDCs that we are yield-oriented after all. And secondly, along with the debt investments, though, we want to own significant equity positions, looking for an increase in value to provide the capital gains and other income, as I mentioned, on the exit. So as we execute this strategy, these potential capital gains and this other income may then be distributed to our shareholders in the form of incremental or additional distributions. Third, a further advantage to our approach is that as a provider of the equity and the majority of the debt in any transaction, we generally have flexibility in the term of the particular debt and certainly the interest rate on that debt, and if necessary, influence, if you will, over the downside protection of a particular portfolio company as time goes along. Now to continue growing, we make new buyouts, and as our portfolio matures, we will manage the sale, or as we call it, the exit in this portfolio consistent with our strategy. We will generally be guided by 3 things: one, market conditions; two, assessing the risk and return in continuing to hold an investment versus exiting of that investment; and three, we are sensitive to preserving the portfolio of assets, which does produce the income base for our monthly distributions. So with these exit definitions and so on, since inception, which is 2005, we've achieved 9 buyout liquidity events exits, which, in the aggregate, have generated about $95 million in the net realized gains and about $20 million in this other income which comes from exits, and we'll touch a little bit more on this later on, which is resulting in an aggregate cash-on-cash return on the equity -- excuse me, on the exit of the equity portion of those investments of approximately 3.8x, which has given us a total increase to our net assets of about $150 million. So to this point and as recently reported, we actually sold our investment in Behrens Manufacturing, it was this quarter, which resulted in a realized gain of $5.8 million, that's on the equity, and other income of around $900,000, so -- and net cash proceeds of $19.2 million, which does include the repayment of our $10 million of debt investment that we made at the time, and that of course, comes out of par. Earlier in the year, we have reported the sale of Acme Cryogenics, which actually generated a net realized gain of $18.8 million on equity and about $2.8 million of dividend income from that transaction. So for the fiscal year-to-date, we have generated net realized gains of $24.6 million and other income resulting from these exits of about $3.7 million. So again, the effort to have realized gains come from our investments that we make is starting to -- starting to occur, and we look forward to more of the same. Now from time to time, also, we may need to right-size the capital structure in a portfolio company to allow us this flexibility we touched on earlier, which will allow us to improve that company's future success. Now we most recently did this, actually in October, with one of our investments. And one of the restructure created a realized loss. We do remain with a significant equity ownership position in that company and a first-lien loans, which is current. So this investment has also been recorded previously with an unrealized loss. So there's been no real change or effect, if you will, on NAV as a result of us doing this restructure, which we do for the right reasons. The company is doing very well now. And we look forward to its future. Now we are very mindful that whenever we do sell a portfolio company that it may reduce our income-producing asset base, and the income is obviously very important for us to maintain the monthly distributions to stockholders. Therefore, our deal generation activities must continue to have a very high priority. To generate new investment opportunities, our team calls on independent sponsors, middle market investment bankers and other sources to create these proprietary investment opportunities. We do not depend on others to negotiate or structure our investments. So generally our investments include partnering with the management teams and other sponsors that we might work with in purchase of any one business. And again, our strategy of providing this financing package, including this secured debt and the majority of the equity is a competitive advantage, since it gives the seller or the independent sponsor, if one is involved, and the management team, a high degree of comfort that this purchase will occur certainly from the financing perspective. So we believe that our strict adherence investment fundamentals and our thorough due diligence process have enabled us to provide shareholder returns in both our consistent regular monthly distributions as well as incremental distributions, which we touched on from time to time from cap gains. We continue to build our pipeline of portfolio -- of opportunities and while we have made no new investments in this quarter and one earlier in the year, which is The Mountain, which we had reported on, we are actively reviewing and conducting due diligence on a few potential investments, and hopefully, one new investment perhaps before our fiscal year-end. So, we are operating though in a buyout environment where the competition for new purchase is currently very high. Purchase prices being paid are often contrary to our conservative value approach and expected financial returns. So we are going to stick with our approach and be successful by not hopefully making investments that we're overpaying for. Now the target for the equity portion of our investments in this regard is a minimum 2x to 3x cash and cash return. And then our secured debt investments, which again are primarily first-lien loans, typically carry a cash yield that is in the low teens, which balances the equity portion of the investment, thereby producing this blended current cash yields which supports our shareholder distribution expectations. Typically, we also have a success fee, which is attached to the debt security and generally occurs, when we have a change of control and could be paid in cash in advance from time to time by the portfolio company at its option. So our investment focus has not changed, in that we generally invest in companies with consistent EBITDA, as we mentioned earlier, operating cash flow with the potential to expand and the areas of interest for us, generally, are the light specialty manufacturing, specialty consumer products and services, industrial products and services, and we have 1 or 2 that fall around the aerospace and energy area, although we have minimum exposure there. And right now, we're not necessarily considering anything in that sector. So briefly, our fund activity during the quarter, December 31, 2016, we mentioned we had exited Behrens Manufacturing with a $5.8 million gain. We recognized a gain of $1.2 million related to additional earn-out proceeds from our prior exit of Funko, which we still have a small participation in. And as previously reported, we did restructure one of our investments. So our goal is to continue strategically to add accretive investments and position our existing portfolio for potential exists. Thus, we hope to maximize distributions to shareholders with solid growth in both the equity and the income portion of our assets. In this regard, as our portfolio is beginning to mature and we are able to look forward to managed exits and realized capital gains, we are considering a distribution strategy to reward shareholders with additional distributions from the realized capital gains and other income, which is generated at the time, which is over and above our monthly distributions, which are made from our net investment income. So with that, I'm going to turn this over to our Chief Financial Officer, Julia Ryan, and she will give you some more details on this financial performance.

Thanks, Dave, and good morning, everyone. The funds had a strong quarter with the successful exit of Behrens, as Dave mentioned, and the generation of $5.2 million in net investment income. We also successfully amended our credit facility in November, which among other things extended the maturity date to 2021, decreased the current interest margin to 3.15%. And while we decreased our available commitment to about $165 million, overall the changes to the credit facility increased net available borrowings to us. At the end of December, we had over $486 million in assets, consisting of approximately $471 million in investments at fair value, $4 million in cash and cash equivalents, and about $11 million in other assets. Our liabilities at the end of the quarter consisted of $43.7 million in borrowings outstanding on our credit facility, about $139 million in terms of our stock at liquidation value, and about $10 million in other liabilities, leaving $297 million in net assets. Our net asset value per share was $9.82 at the end of this quarter, up $0.17 from the last quarter which primarily resulted from net unrealized appreciation of $9 million, which was slightly offset at a net realized loss of $3 million, Dave mentioned earlier. The appreciation was principally due to an increase in the operating performance, such as EBITDA of certain portfolio companies. Overall, our fair value to cost remains at over 90%. Consistent with previous quarters, we continue 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 incomes. We plan to continue this practice and update the externally provided data on an annual basis for all of our significant equity investments. Moving over to the income statement for the December quarter, total investment income was $13.4 million compared to $11.7 million in the prior quarter. Total expenses net of credits were $8.2 million compared to $6.6 million in the prior quarter, leaving net investment income of $5.2 million compared to $5.1 million in the prior quarter. Net investment income remained relatively flat as the increase in other income, which was both dividend income and success fees, of $1.7 million was offset by an increase in net expenses. Other income was 12% of total investment income in the current quarter, as compared to less than 1% in the prior quarter. As mentioned on previous calls, 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 increased by $1.5 million in the current quarter, which was primarily driven by a $0.8 million increase in bad debt expense, a $0.6 million decrease in credits on the advisory, and $0.6 million increase of the incentive fee, which was primarily due to the higher other income. As a result of these factors, our net investment income per share remains at $0.17 per common share in the current quarter. Consistent with previous quarters, our current period net investment income, together with undistributed net investment income from prior period, were an amount that we refer to as the spillover, more than covered our quarterly distributions to shareholders of $0.1875 per common share. Our distributions coverage ratio was more than 230% this quarter, which means that current and prior period net investment income covered our quarterly distributions by more than 230%. As of December 31, total undistributed net investment income and total undistributed net realized gains were $14.4 million or $0.47 per common share. We continue to actively manage our undistributed income and net realized gains with the ultimate goal to cover, and over time, increase distributions to our shareholders. This may take the form of incremental periodic distributions. Now let's turn to realized and unrealized changes in our assets. For the quarter ended December 31, 2016, we recognized a net realized loss of about $3 million, consisting of the realized loss on the restructure of Funko, offset by realized gains from the exit of Behrens and a $1.3 million additional earn-out proceeds gain from the exit of Funko, which we recorded in the prior year. During the previous quarter, we recorded minimal realized activity. We also recorded $8.9 million of net unrealized appreciation in the current quarter, which was due to the improved performance of certain portfolio companies as well as the reversal of net unrealized depreciation as a result of the exits and restructure as noted earlier. One portfolio company continues to remain on nonaccrual, representing less than 1% of the fair value and the cost basis of our total debt investments at the end of this quarter. Our portfolio's approximate allocation between debt and equity securities was 72% to 28% at cost. Our debt portfolio is well positioned for any interest rate increases with about 90% of our loans having variable rates with a minimum or a floor and the remaining 10% having fixed rates. The weighted average yields on interest-bearing debt investments remained consistent quarter-over-quarter at about 12.7%. This strong yield excludes success fees on our debt investments. We also do not currently have any debt securities with a noncash paid-in-kind interest feature. Success fees are yield enhancements that are generally contingent upon a change of control, such as an exit or a sale, although there are certain circumstances when a portfolio company can elect to pay the fee earlier. We only recognize success fees in our income statement when they are earned, which generally coincides with the receipt of cash. 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 on the interest-bearing assets would approximate 14.8% during the current quarter. As of December 31, the success fees accruing off balance-sheet totaled about $25 million or $0.81 per common share. There is no guarantee that we will be able to collect any or all of these success fees or have any control over the timing of collection. On the credit priority standpoint, 100% of our loans are secured, with 74% having a first-lien priority and the remaining 26% having a second lien priority in the capital structure of the respective portfolio companies at cost. Overall, Gladstone Investment had another quarter of strong operational performance, financing and investment success. We have maintained our distribution rate while remaining committed to covering our distributions with income as we have done consistently in the past. And now I will turn the call to David Gladstone.

All right. Thank you, Julia. Nice report, and good report from Dave Dullum. Good quarter. Michael good report. During the past quarter, we were able to report some great accomplishments, such as the sale of the investment in Behrens for the $5.8 million and -- that makes up about -- almost $25 million worth of capital gains for the 9 months plus about $3.7 million in fees. So the company is doing very well on the equity side. We've amended our credit facility and that made us much stronger and good performance for the future and the portfolio is doing well. The net asset value increased by about 1.7% just for the quarter, but it's up almost 13% for the 9 months. So we're doing something right. Additionally, we continue to look at a lot of the yields, but when the marketplace is hot, as it is today, we don't like to go out and overpay for transactions. So we're still being very careful. We believe that we will have continued success going into this fourth quarter that we're in, in this March 31, 2017. You know folks, there is a lot of optimism out today. However, there is still people saying that we're going to enter a recession, and our company is well positioned to handle a potential downturn, should it happen. We can handle it because of the diversification we have in the portfolio plus the structure of our loans, mostly being in first liens and being able to take possession of these companies should there be a problem. With regard to the current concerns, we, like everybody else, are still watching the Federal Reserve, or the Fed as they call it, for monetary policies. And while we have variable rates on most of our loans, increasing rates will not hurt us much. And anyway, they don't raise it by that much anyway. The increase is maybe 0.25% of 1%. It's more of a psychological rate rise than there is a big change. And the main reason, I think the Fed is pushing so hard for higher rates, is because they have to find buyers for all the money that they're printing, which is borrowing using treasury notes and T-bills and to get people to buy the U.S. Treasuries when they are issued is -- they're just printing money. So they need higher rates to get the next person to buy. So higher rates are not going to have a big impact on us. Obviously, if it gets extremely high, it hurts the small business concerns that we lend to. Another concern is the volatility still in oil and gas. Lower oil prices are really terrific. They benefit the consumer and many businesses, but the oil industry still is an integral part of the U.S. economy and a loss there is a lot of pain in the economy. I know the folks in Houston feel it pretty bad down there. Fortunately, we don't have a significant investment related to oil and gas companies. So this company has avoided investments there. The federal deficit is now over $19 trillion, probably going to hit $20 trillion this year, with the rounds of spending that are going on and all the spending puts pressure on the Fed to fund more and more of the spending that's going on by borrowing money at a fairly furious rate. Many private companies, like those which we invest in, feel there is still too much regulation around healthcare, financial services, energy, emissions and now the minimum wage. It's really hindering performance, and it stops us from expanding and a lot of job growth. We all understand why big businesses move operations out of the United States and place them in Latin America, Mexico, for example, Asia, where there is less regulation and lower taxes. But midsize businesses, similar to the ones that we invest in, end up having to hire manufacturing operations outside the U.S. in order to stay competitive. That again puts pressure on job growth here in The United States. At this point in time, there is a tremendous positive feeling. All of the midsize or small businesses, the optimism index that's measured by a number of different associations show it at all-time highs. Business are expecting the new administration to cut taxes, cut regulations, and cut out the current healthcare insurance program for a better insurance program when they come onboard. We'll just have to wait and see if some or all of these expected changes will happen. I'm very optimistic that there will be some good strong changes that will favor capitalism and the small business community. And for those companies that import parts and products from Asia, there is some heartburn because some of our business do that, of course, but you have to remember, if there is a tax, it's on all of the companies. So those businesses that compete with other businesses here in the United States, will all be suffering the same thing if there is some kind of import tax. At this point, we don't have any idea what the tax may look like and how it will be applied or phased in. So we have to wait and see. Some of our companies buy parts and products from Asia. We have to note that this tax is not just on our companies but across the board, on all the imports. So it will hit some of our companies very bad. And it may mean that our people, here in the United States, will have to pay more for products. It may be that lower tax rates in the U.S. companies and the import tax on imports encouraging foreign companies to open plants here. So we may see competition that's in Asia now or in Mexico move here. That will be good for job creation, but that will mean more competition from local companies. Auto manufacturing plants, many of them, Toyota for example, BMW, Mercedes, Honda, they're already here -- in fact, I think some of them may be manufacturing more cars here than they are in their own country. But in light of all of these concerns, our company, Gladstone Investment, is continuing to be very selective. We ask lots of questions about businesses before we invest, and I think we'll just keep being very conservative. The distributions, of course, in January, our Board of Directors declared our monthly distributions on our common stock at $0.625 per common share for each of the month of January, February and March of 2017 were an annual rate of $0.75 per common share, which is consistent with prior years. And through the date of this call, we made 139 sequential monthly cash distributions to our common stockholders and additionally have made some special distributions as well. In December, 2016, we've distributed a total of $185 million or $8.11 per share to common stockholders, based on a number of shares outstanding at the time of payment. Current distribution rates are very nice, with the common stock moved up yesterday to about $9 a share. That means the yield is down to 8.3%. It's still very high compared to lots of other alternatives out there. We also have the Series B Preferred Stock that's trading at $25.55, came out at $25, that's about 6.6%; the Series C Preferred Stock trading at $25.54, that's about 6.4% yield; and Series D to $25.54, about 6.1%. In summary, at this point in time, this company is clocking along at a great rate and doing a great job. And in summary, we believe that this company is in for some attractive investments that we're going to continue our monthly distributions, and hopefully, incremental distributions from potential capital gains and other income. We expect this quarter to be a good one, that ends on March 31, 2017, and that's our year-end as well. So hope to continue to see some strong returns. Now Chelsea, if you will come on, we'll get some questions from the analysts out there and some of our shareholders.

[Operator Instructions] And our first question comes from the line of Laura Engel with Stonegate Capital Partners.

I wondered if, related to the restructuring, if you all could tell us just a little bit more about Funko, the trigger for that, either the request or maybe it was something that you all approached them on? And related to their business, what gives you this confidence going forward that they are in a good place now and this was a successful restructuring as far as the rightsizing?

Sure, Bunchie. It's Dave. So this particular investment has been in our portfolio for some period of time. It's actually one that we acquired -- actually, we were not the lead as we do. Nowadays, our model has changed a little bit over the years as you know. And so we, ultimately, back a few years ago, had to essentially -- effectively take the business over, if you will. For the right reasons, we have made changes to the management and the team that's in there currently we brought in just about 2 years ago. And they are in the highly, I will call it, specialized machining business serving both the healthcare marketplace and also the aerospace industry. And with the new team in place that made great strides in improving their overall manufacturing efficiency, getting this sort of margins necessary. So we chose to give the company the opportunity, given what we see as a great upside now, and frankly, more incentive to the management team to have more ownership than they had before. And as a result of that, we were able to, as I mentioned earlier, restructure in a way where we still have a very significant equity ownership. But in doing that, we obviously did realize a loss, which I mentioned earlier. We also had it as an unrealized. So no impact, so to speak, on NAV. And now we think they've got the right capital structure. And looking forward, we think we have an opportunity yet to make some pretty decent returns on our equity. So that's basically it. We like the team. We think it's a good investment. And there are some other things they are doing now with their customer base is pretty good.

Okay. And then I know as far as diversification being important, we talked about -- or I guess you mentioned the maturing portfolio and it does look like the pace is speeding up a little bit for these exits. So this is something I guess we can expect to continue at this pace going forward? And then also if you could comment, you mentioned maybe one company you're looking at to close on before year end. Is there anything specific as far as that addition, to kind of complement your portfolio or further diversify your portfolio?

Yes. I can't comment specifically on that, obviously. I think the way to think of it is, we are a -- we keep rolling forward. Our objective is to continue growing assets at the same time, as we -- as I mentioned. We do -- because of the nature of the business and the way profile is, where we're acquiring businesses and as a result of that we'll exit them and take the realized gains. So the real way to think of this is that we're now in a mode in our company with the maturity, I mentioned maturity meaning that we now have a portfolio of 35 companies. A number of them have been in a portfolio from say, 2 to 5 or 6 years. So we are managing the methodologies and the way we think about exits at the same time without eroding the asset base, which is obviously important to us. So the short answer would be, keep looking forward to exits as we manage them, hopefully, constructively, and likewise, looking to bring on new investments, that's the main part of our business obviously, working hard to make new acquisitions as we can within the context of the marketplace that we operate in.

And our next question comes from the line of Kyle Joseph with Jefferies.

I just want to talk a little bit about -- when you guys talked to your companies, how their outlook has changed, maybe pre and postelection, and even a little more recent pre and post-inauguration?

Kyle, this is Dave again. I don't think I'll be honest that, that we feel like we have seen much change in certainly anything on the demand side, given the nature of the companies we have. I think clearly where you see conversations occurring, and David Gladstone sort of touched on it, is obviously there are potential changes. We think some of them potentially are really good from the regulatory perspective. And then obviously thinking through impact on any -- either import taxation or otherwise. But nothing obviously where -- there's nothing definitive. So as of right now, I would say, our business actually is slight, I would say, uptick. And that reflected itself somewhat in the performance we have seen from the portfolio companies, and as a result of that, the relative valuation. So I would say neutral to perhaps optimistic.

So Kyle, what I was referring to, Kyle, is the indexes that are published on optimism. And I think you see this from lots of people that are in the capitalistic side of our country. Lot of promises had been made. So we are optimistic. But this is like cooking a steak. We are all hearing the sizzle. We're waiting for the steak to come now.

That's helpful. And then just in terms of middle market valuations. So they kind of followed public market valuations? Or can give us some color there?

Yes, I think they've stayed the last probably 9 months to a year, we have seen, as you know, multiples where we think of it -- somebody just addressed it from that perspective, a good businesses that are anywhere up to say $10 million EBITDA or still getting multiples that are in the certainly 6x to up in some case, 8x, 9x. And that seems to maybe moderating slightly, but not a heck of a lot. So I don't know if that follows public valuations or not. But I think it's pretty much around the fact that there is still significant cash capital available and demand for good quality, operating businesses in the middle markets. So that's tend to put somewhat of, I think, a bit of an artificial price value up on some of these companies.

So the other thing, Kyle, just from that perspective is that we are not in the technology sector and haven't been from the beginning and the technology sector is getting huge multiples. As you move down to, what I will call, more standard businesses or some people would call mundane businesses, you see these 6x to 9x on some of those depending on the growth outlook for it. People will pay up for growth. We've been little reluctant to do that, but at the same time finding good businesses with a 6 multiple is a good way to think about us.

And our next question comes from the line of Andy Stapp with Hilliard Lyons.

Is my understanding correct that the real driver of -- the lack of new investments in the quarter were just valuations being at levels that you just weren't willing to pay? And do you have any feel as to when market conditions may become more favorable?

Yes. Well, Andy, thanks for the question. I think first part is, yes, we certainly -- we are very active in the reviewing, looking at in our lingo making indications of interest on deals and working through the initial phases of diligence. And yes, I have not been able to get there in the ones that we've been looking at, because the multiples have been, as we mentioned, both myself and David Gladstone, had been on the higher end of where we believe the value is. So that's the main driver. We've certainly got -- we've lot of availability, we have capacity. So issue is not around any of that. It's all a function of wanting to maintain a good quality portfolio. We have a good portfolio now, and we feel good about that. We're certainly looking forward. So we want to add to it in a positive incremental way. In terms of changing, that anyone can speculate. I think looking out and looking at our backlog, looking at some of the things we're doing, I think I'm hopeful, frankly, that we are going to see a pickup in our activity over the next 9 months. But that's really more around just continuing to work hard at the companies that we think are going to be in a value range that work for us. But I would say it's probably going to be -- I think there is a sense out there of a slight uptick in opportunities and values that we would be willing to pay.

And Andy, just to tag along on that. When optimisms come forward as they are now, where people are very optimistic, you have sellers that are willing to sell, because they think it's a good time to sell. But more importantly, they're really good managers that are working for the larger companies that are willing to let go the big umbrella that's protecting them and step out and do smaller transactions like ours. So we get a double whammy. We get sellers willing to sell, we get great management teams that are willing to leave the larger companies and go run a smaller business and make some upside projections for how much their wealth might be, if they make it work right. So it's a very good time right now. And I would expect, unless something blows up that we don't see coming out of left field, I think this is a great time to be in this business.

Okay. And could you provide some more color on the linked quarter increase in the weighted average yield on interest-bearing investments?

Andy, this is Julia Ryan. And I believe the yield went up from 12.5% to 12.7%, and that's just a result of the change in the way that average portfolio over the period of interest rates have stayed relatively consistent.

Okay. And how much would short-term interest rates have to rise to pierce interest rate floors?

They would not to raise very much, but from a sensitivity perspective, if that's where your question is going, it would not impact us and our net investment income significantly, even if rates were to rise.

And our next question comes from the line of Mickey Schleien with Ladenburg.

Dave, there were a lot of prepared comments. I think I heard you say that you're reluctant to sell because you want -- sell portfolio companies because, obviously, you want to generate NII to support the dividend. Did I hear that correctly?

I don't know that I said it, Mickey, the way you just said it. I think what I said was, and I had mentioned actually I think when also Bunchie asked the question about diversity is, we manage a portfolio, and again, recognizing that we differ from the credit BDCs, we are going to have a smaller universe of portfolio companies. So we look very hard as we do our forecast internally and all projections and think about the portfolio of assets, which are operating businesses, and when the timing might be right to perhaps try to take an exit, if everything works, if the management's interested in doing that, so we manage it accordingly to that. So I don't know if that helps or not.

It does -- I mean, what I'm asking is, essentially, why not strike while the iron is hot. I understand you and I've talked about the conservation of the portfolio as being an issue. But I'm sure, given the level of interest amongst the PE community to buy good quality businesses that you are getting bids -- but I think I understand what you're saying. Going back to the Funko restructuring, I'm just little curious on understanding the actual structure and because you are carrying the debt at about 64% of cost, but it's on accrual. So why wouldn't you take the cost down to the $5.7 million that you are valuing it at and call it what it is, which is basically a 15% coupon?

Well, I don't -- I'm not sure why we would do that, honestly. I think we structured it according to and working with the management team to what we thought made sense for the company, for the carrying cost, and for the upside that we have with the equity ownership. So I don't think we would want to change the structure we have at this point.

All right. And a few more valuation questions. I see that Mitchell debt was revalued upward pretty -- very nicely, quarter-to-quarter. And in fact, at 111% of cost, that's pretty unusual even with prepayment fees. Can you help me understand how a piece of debt gets to 111% of cost? And likewise, with Auto Safety, the same sort of things happened over the last year?

Sure, Mickey. This is Julia Ryan. Without getting too nuanced with reporting requirements, as you know, some of our debt tranches have success fees attached to them. So in certain instances, GAAP will require us to include the success fee feature in the valuation of the debt instrument. And so, therefore, some of these marks would reflect that concept under GAAP.

Okay. So as opposed to PIK, which is accruing to the income statement as reflected in the balance sheet, I get it. And Julia, did you actually give the spillover taxable income number for the December 31, per share?

Yes. I did not give you a taxable number because our tax planning, of course, always lags a little behind us. It does for everybody. But the amount, as of 12/31, is $14 million -- or roughly $14 million of undistributed income and capital gains.

$14 million? Okay. And lastly, TREAD is now valued back at par, which has been your nonaccrual for a while. Would that indicate that there is a possibility for that credit to be placed back on accrual in the near future?

Go ahead.

We would likely -- we would hope so. We are not quite there yet. We continue to evaluate. I know a policy is generally -- once they start making payments, we evaluate it and evaluate whether that's sustainable. And we are not quite there yet, but stay tuned.

Have they started making payments?

They have not.

Not yet.

They have not, but clearly the valuation from your perspective would indicate that that's a likelihood, correct?

Hopefully so.

You never know, Mickey. We're just not going to say yes or no to that at this point. It's still up in the air.

Our next question comes from the line of David West with Davenport & Company.

My only question is left, I guess, to David Dullum. You've talked about the capacity, the availability that you have to make new loans. I know the company don't like to get too close to the one-to-one leverage, but do you feel like you have, say, $40 million or $50 million availability to put on the current balance sheet?

Yes. At least, yes, David. It's not more. We're in good shape there.

And do we have another question?

We do have a question from the line of Mitchel Penn from Janney.

A quick question. Can you provide us some color on The Mountain. I know the preferreds got written down?

Yes. So, Mitch, that is the company we acquired earlier this year -- well, actually, physically in the last calendar year. We had to make some changes in the people. The company is doing well. Their earnings were slightly lower than what we had anticipated due to some spend that was -- they had to make. So as a result of that, effectively, it was adjusted multiple relative to EBITDA decline. But there is no fundamental change in the business at all, or what they are about, what they are doing. And in fact, we are doing some significant strengthening in the management team, which is very positive.

Okay, terrific. One other question. Thinking about your strategy in a rate-rising environment, you guys typically purchase the whole company, and you can sort of structure the debt and the equity the way you and the company wanted. The question is as rates rise, are you thinking that maybe you will increase the interest rate you receive? Or will you leave it sort of at current levels on companies that you purchase in the future, if you do get some significant increase in rates?

Yes -- no. I think it's a good question. I would answer it this way. Probably not just decide to raise rates because they are rising just for that sake. Another way to think of it is, again, as I try to stress without going into the detail too much, is the relationship between the proportion of debt and the proportion of equity in any one deal, right? And that combination again blending down to what we believe is the right sort of current cash pay, recognizing we do not take into account PIK, which in our case we have none as you know and it's all exit fee. So that's how we think of it. So where we could potentially make some adjustment might be on the ratio between the debt and the equity and remembering that an important factor for us in all of these deals is what we call fixed charge coverage, which means that we do not want to overstress the company from a cash flow perspective. It's more important to be able to have the companies pay our interest at a level that works for that combination of debt and equity. So it's a long answer to your question, but I would say, just the mere fact that interest rates goes up is not necessarily going to drive our either willingness or desire just to raise rates. It's got to work in combination with the right capital structure for the company and the debt and the equity combination.

[Operator Instructions] And our next question comes from the line of Mark Fariani with -- I'm sorry, a private investor.

My question is more for Julia. I think -- at what level do your excess profits result in a pass-through to the investors. And as far as any increase in the dividend, going forward, how many months would you say you would make an announcement of that type?

Mark, thanks for the question. We continue to evaluate the amount that has not yet been distributed. And we are working with our board to evaluate when would be the right time to potentially make any additional distributions to our shareholders. So at this point, there is no definitive plan, and we're working on it.

[Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. David Gladstone for any closing remarks.

All right. Thank you, Chelsea. And we appreciate all of the questions. We enjoy it much more -- much more fun, quite frankly, if we get a lot of good questions, and you had a lot this time. So that wraps it up for this quarter, and we will see you next quarter. That's the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.