Gladstone Investment Corporation (GAINI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Gladstone Investment Corporation's First Quarter Earnings ended June 30, 2017 Call and Webcast. [Operator Instructions] I would now like to turn the call over to David Gladstone. Sir, you may begin.

All right. Thank you, Chelsea. That was a nice introduction, good instructions for everybody, and hello and good morning to all of you out there. This is David Gladstone, your Chairman, and this is the quarterly earnings conference call for shareholders and for analysts on Gladstone Investment. The common stock is traded on NASDAQ symbol GAIN. We have 3 preferred stocks out there, GAINO, GAINN and GAINM. All 3 of those are very similar, minor changes in the structure. So we do have a webpage in case you want to go find out more about the preferred stocks. Thank you all for calling in. We're always happy to talk to our loyal shareholders and potential shareholders and analysts. We like to give an update on your company and its investments, and we like to give you a view of the business environment. I wish there were more meetings like this. We try to do some around the press release, but we haven't gotten around to that. Also, you have an invitation. It's open. Visit us here in McClean, Virginia. We're located just outside of Washington D.C. So please stop by and say hello if you're in the area. There's about 60 people in the company now, a lot of them on the road so you may see a few people here. Now we hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator for all of the Gladstone public funds and related companies. He'll make a brief statement regarding forward-looking statements and then some other important information. Michael, take it away.

Good morning, everyone. This conference call may include statements that constitute forward-looking statements within the meaning of the Securities Act of 1933, 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 other factors, even though they're based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including information listed under the caption Risk Factors in our Form 10-Q and 10-K filings as well as in our shelf registration statement. All is filed with the SEC. These can all be found on our website, www.gladstoneinvestment.com, or on the SEC's website, which is www.sec.gov. The company undertakes no obligation to publicly update or revise any of these 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 or market information is not a guarantee of any future results. We also ask that you take the opportunity to visit our website, www.gladstoneinvestment.com. Sign up for our e-mail notification service. You can also find us on Facebook, The keyword there is The Gladstone Companies; and on Twitter, @GladstoneComps. The call today will be an overview of our results through June 30, 2017. So for more detailed information, please read our Form 10-Q and press release issued yesterday. These can be found on our website, gladstoneinvestment.com. Before I forget, we're having our annual stockholders' meeting tomorrow, August 3. You're all invited. Please be sure to vote your shares to help us avoid costs associated with our solicitation campaign. If you have not voted your shares already, you can vote in several different ways. At this point in time, because the meeting is tomorrow, your vote can be cast quickly and easily by calling (800) 690-6903 to vote over the telephone toll-free, or by voting over the internet at www.proxyvote.com. Please note that voting over the phone or internet will require that you have your proxy control number available. That number is printed on your proxy card, which accompanied your proxy statement that you received in the mail. The stockholders with questions on how to vote are strongly encouraged to contact our proxy solicitor, which is a company called Georgeson LLC. Their number directly is (800) 790-6795. And if you call Georgeson you do not need your proxy control number. Stockholders may also vote by attending the virtual meeting, which is going to be through a live webcast. That's going to be at www.virtualshareholdermeeting.com/GAIN. This meeting will be held tomorrow at 11:00 a.m. Eastern Time. If you're unable to attend we just ask that you please vote your shares using one of the methods I described earlier. Now I will turn it over to Dave Dullum. He's the President of Gladstone Investment, and he will give you an update on the fund's performance and outlook.

Thank you, Mike, and good morning to everyone. So I'm pleased to report again that Gladstone Investment had a pretty strong fiscal quarter ending 6/30/17, the first quarter of the fiscal year, and with consistent quarter-over-quarter net investment income and successful exit of one of our portfolio companies with a gain. Our net asset value, NAV, which is effectively our book value, declined slightly by about $0.07 per share. And this was primarily as a result of a previously announced issuance of around 2.3 million shares of common stock, in which we raised about $20 million. Also, we paid a supplemental distribution of $0.06 per common share in June, and we raised our regular monthly distributions to common stockholders to $0.064 per share or roughly $0.77 per share annually. I might add here that, while this is obviously a quarterly call and we do look at performance quarter-to-quarter, from a management perspective we always take a longer look and view on our results for the full fiscal year, which, of course, ends in March. So we will see variations relative to each quarter. Now to put these results in perspective, it's always helpful to reiterate what our business model is, and which is where we focus on the buyouts of U.S. businesses, generally with annual earnings before interest, taxes, depreciation and amortization, otherwise known as EBITDA, and that value is generally between $3 million and $10 million of EBITDA. The financial structure which we use for funding these buyouts consists of secured first or second lien debt, and it's in a combination with direct equity investment so that we end up with a significant equity ownership position in the company when the buyout is made. We also like to really indicate how we differ from traditional credit-oriented BDCs in that the target proportion of the equity to debt for our investments in our portfolio at cost is generally around 25% equity-75% debt. This compares to most other BDCs where you'll see that their portfolios are around 10% equity and 90% debt. So we consider that a significant differentiator and, indeed, is reflective of the approach that we take to our business in the buyout arena. Now as I say, this is intentional on our part and it's our strategy and the way in which we believe we're creating shareholder value within the GAIN structure. And that is that the debt portion of the investments that we make provides the income which we will pay out and, over time, grow our monthly distributions. And as I mentioned, we increased our monthly distributions to an annual run rate of $0.77 per share. So and along with the debt investment, as I also mentioned, we own a significant equity position, and with our strategy focused on increasing the equity value of our portfolio companies to provide capital gains and other income, indeed, when we exit. Now as we execute this strategy, these potential gains and the other income that we generate at the same time may then be distributed to our stockholders in the form of a supplemental distribution, as we're calling it. And to this point, as I mentioned earlier again, we paid the first of such supplemental distributions in the amount of $0.06 per share to common stockholders in June. So we are clearly doing as state in our strategy: generating income to continue growing our monthly dividends and also the generation of realized gains to help drive a supplemental distribution to shareholders. And a further advantage to this approach is that, as a provider of the significant portion of the equity and the debt in the transactions that we do, we believe we have flexibility: first, in how we establish the terms, meaning the interest rate on the debt securities, which allows us also some influence over the companies that if we have a downside issue we are able to do some work in managing and downside protection. This structure provides also, frankly, a means of reducing the risk of our debt being refinanced prior to maturity in periods of yield compressions, some of which we have experienced certainly recently. We've not had to do any of that within our portfolio, where we've been refinanced out. Now I'd like to just again do a quick historical performance scorecard, if you will, and to provide an update on GAIN's historical performance since 2010, which we highlighted in greater detail during our earlier year-end 2017 call, which was back in May. So just to update, from March of 2010 through June of 2017 we have accomplished a few things, one of which we've had excellent growth in net assets, which allowed us to increase our NAV, net asset value per share, by $1.14, which is from $8.74 in 3/31/2010 to $9.88 at 6/30/17. Secondly, we've increased the annual run rate of our regular monthly distributions by $0.29, which is from $0.48 back in 2010 up to $0.77 currently. And we've been delivering on our buyout strategy by paying our first, essentially, supplemental distribution in June 2017 of the $0.06 per common share I mentioned earlier. So we feel pretty good about the overall performance over the last 7 years and certainly look forward to continuing this progress going forward. So as we continue certainly with these new buyouts and building our investment portfolio, we also have managed, obviously, the way in which we exit portfolios or turnover, if you will, which is consistent with our strategy. We obviously need to be guided by market conditions, meaning that we will always be assessing the risk and return in continuing to say hold an investment versus taking an opportunity to exit that investment, and being sensitive to preserving the portfolio of assets, which obviously is producing the income for our monthly distributions. So we're not just going to go and exit for the sake of exiting. We always need to be cognizant of the continuing income stream to generate distributions monthly to our shareholders. Now since our inception in 2005, beyond the income part, we've had some liquidity events in our buyouts and this is where we've achieved an aggregate cash-on-cash return on the exit of the equity portion of those investments, and that's been approximately 3.4x, which has caused a total increase to our net assets of about $107 million over this period on these exits. And during this current quarter, we did sell one investment, a company called Mitchell Rubber, resulted in a realized gain and other income, which is always part of our theory, and a repayment of our $13.6 million of our debt investment that we had in that company at par. So from time to time also we may need to right-size capital structure in a portfolio company, which would allow us to provide operating flexibility to improve that company's future success. Again it comes back to our ability to have some influence over our investments so that we are able to do the right things by our portfolio companies and continue to maintain and grow value going forward. Now in addition, obviously, as we grow, we will need to raise equity capital, and we always believe we're doing it in a responsible manner. Since our IPO, we have raised common equity in 3 secondary market transactions with the most recent one being in May of this year when we issued 2.3 million shares, which is inclusive of the over-allotment, which was exercised in June, and at an offering price of $9.38 per share. This offering resulted in gross proceeds of about $21 million and net proceeds, after commissions, discounts and estimated costs, of about $20 million to GAIN. Now on the net price after commissions and discounts per share of $9 was a discount of approximately 9.5% to our estimated NAV at the time of the offering. We believe that the offering follows our responsible capital raising efforts and we will do it as necessary, but again, we've been able to do it responsibly. And our results to date have shown that we've been able to invest those proceeds, when we've raised them before, pretty constructively and, indeed, has resulted in, as I mentioned already, a growing of our NAV while we have obviously been generating capital gains as well. Now the main part of our business obviously is out there in finding new opportunities and making new buyouts. So we always have to be mindful that when we sell a portfolio company it could reduce the income-producing asset, and the income is very important, as mentioned, to maintain monthly distributions. Therefore our deal-generation activity, the one of adding more assets to the portfolio, must continue and will have a very high priority. Now to generate new investment opportunities, usually we're out there calling on independent sponsors. These are folks that see deals that we may not see otherwise. We're calling on the middle market investment bankers and other sources to create somewhat of a, we believe, proprietary flow of investment opportunities. We never depend on others to negotiate our structure, our investments. Generally, our investments will always include partnering with the management teams when we're buying a business, and we do believe that our financing package, which includes both secure debt and again majority of the equity, is a competitive advantage as it will give the seller and the management team a high degree of comfort that once we've decided on doing the deal that the purchase will continue and will occur and there is a sort of a certainty to close. Now we believe that our strict adherence to investment fundamentals in our thorough due diligence process have enabled us to provide shareholders returns in both consistent regular monthly distributions as well as these supplemental distributions, which will occur now from time to time. We do continue to build our pipeline and we're actively reviewing and conducting due diligence on a number of new potential investments. However, we're still operating in a buyout environment where the competition for new investments is great, which is leading to purchase prices being paid that are quite high, and this increases the difficulty for us to close on many new buyouts. And that generally is as a result of the conservative value approach which we bring to transactions. I will say, though, that we're fairly close now on a new buyout, which hopefully will occur in the fairly near future. As to how we do think of returns on our equity, our target for that is around 2 to 3x cash-on-cash return. And we've generated those sort of returns in those exits we've made. And on the debt investments, which are primarily first lien loans, typically carry a cash yield that's going to be in the low teens and that, when we balance it with the equity of the investments that we make, produces this sort of blended current cash yield that we believe is important in our modeling to support our stockholder distributions and the expectations for the same. We also generally have what we call success fees, which are generally due upon when we have a change of control, and they are paid in cash. And we do have limited circumstances, perhaps, when a portfolio company may pay sooner, but generally these are generated when we exit a transaction. Our investment focus continues to be in companies that has consistent EBITDA and operating cash flow and certainly a potential to expand. The areas of interest generally are light specialty manufacturing; specialty consumer-type products and services, not necessarily retail or storefronts; industrial products and services, and a recent investment we made, as an example is a company called JR Hobbs, which is in the HVAC heating, ventilating, air conditioning construction business. Then also we have had some investments in the aerospace area, not much in energy, and we really try to limit our exposure to those categories. So very briefly to recap our investment activities for the quarter, as I mentioned earlier, we successfully exited our investment in Mitchell Rubber Products. We had a realized -- small realized gain and other income and we had a full repayment of our $13.6 million debt investment. We also partially exited an investment in Aqua Venture which actually went public, and we now hold some public stock. We did sell some, resulting in a return of capital to us of about $2 million. And we invested about $2.1 million in existing portfolio companies. So as we look forward, we certainly will continue strategically to add accretive investments to grow that income generating, which is the debt piece equity portion of our -- and the equity portion of our assets and position our existing portfolio for the exits that are necessary to maximize distributions to shareholders. And again to be a little bit redundant, we mentioned earlier we increased our annual distribution run rate to $0.77 per common share and paid the first supplemental distribution to common stockholders in June which is in addition to our monthly distributions. We do anticipate paying semi-annual supplemental distributions as the portfolio continues to mature and we are able to manage exits and the realized capital gains. Now these distributions are generally expected to be made from undistributed net capital gains, but may also include undistributed net investment income from time to time. We, the management and our Board of Directors will evaluate the amount and the timing of these semi-annual supplemental distributions as we continue to execute on our strategy. And at this point, I will conclude my part of the presentation. I'd like to turn it over to Julia Ryan, our Chief Financial Officer, and she can go in a bit more detail on the income statement and balance sheet. Julia, over to you.

Thanks, Dave, and good morning, everyone. The fund had another quarter of consistent net investment income and the successful exit of one portfolio company at a gain. Now let's turn to the balance sheet for a summary of the financial position. At the end of June, GAIN had over $500 million in assets consisting primarily of $487 million of investments at fair value, $6 million in cash and about $7 million in other assets. On the liability side, we had about $34 million in borrowings outstanding on our credit facility, $139 million in term preferred stock at liquidation value and about $6 million in other liabilities, which leaves us with over $321 million in net assets. That translates, after the equity offering that Dave mentioned, to an NAV per share of $9.88 as of June, which is slightly down from March 31, given that we issued those common shares at a small discount to the then current NAV. Now moving over to the income statement for the June quarter, total investment income was $13.6 million versus $12.4 million in the prior quarter. Total expenses net of credits were $8.2 million compared to $7.1 million in the prior quarter, leaving net investment income of $5.4 million as compared to $5.3 million in the prior quarter. Net investment income remained relatively flat as the increase in total investment income, which was primarily due to higher other income, was offset by an increase in total expenses net of credits. Other income was 21% of total investment income this quarter as compared to only 10% in the prior quarter. As mentioned on previous calls, we expect other income, which is primarily composed of dividend income and success fees, to remain meaningful but variable between quarters. Net expenses increased by $1.1 million in the current quarter, which was primarily driven by an increase in bad debt expense and a decrease in credits from the adviser. As a result of these factors, net investment income per share remained at $0.17 per common share. Consistent with prior quarters and prior periods -- excuse me -- current and prior period net investment income covered current quarter distributions from net investment income by a significant margin. This is reflected in our distributions coverage ratio of 215% this quarter. As to the supplemental distribution and as of the end of the quarter, undistributed income and net realized gains totaled over $13 million or about $0.40 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 supplemental distributions like the one we recently paid. Now let's turn to realized and unrealized changes in our investment portfolio. For the last quarter, we recognized a net realized gain of $1.2 million primarily related to the exit of Mitchell. We also recorded $1.5 million of net unrealized appreciation, which was predominantly due to the improved operating performance, such as EBITDA, which Dave mentioned earlier, and an increase in comparable multiples of certain portfolio companies. Overall, our fair value to cost was over 95%. As previously mentioned, 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 investments. In addition, certain -- 3 portfolio companies are on non-accrual, representing about 6% at fair value and 7% of cost at June 30. We're actively working with these companies and are hopeful that one will return to accrual status in the near term. Our portfolio companies' approximate allocation between debt and equity securities was 72% debt to 28% equity at cost. Now our debt portfolio is well positioned for any interest rate increases with about 97% of our loans having variable rates with a minimum of floor and the remaining 3% having fixed rates. The weighted average cash yield on investment-bearing debt investment remained relatively consistent quarter-over-quarter at about 12.6%. This strong yield excludes success fees in our debt investments as we only recognize success fees in our income statement when they are earned, which generally coincides with the receipt of cash upon an exit. For comparison purposes, if we had accrued these success fees as we would if they were paid in kind like other BDCs do, our weighted average yield on interest-bearing assets would approximate 14% during the most recent quarter. At the end of this quarter, we had unrecognized contractual success fees totaling $24.1 million or $0.74 per common share. There's no guarantee that we will be able to collect any or all of these success fees or have any control over the timing of the collection. From a credit priority standpoint, 100% of our loans are secured with 78% having a first lien priority and the remaining 22% having a second lien priority in the capital structure of the portfolio companies. Overall, Gladstone Investment had another quarter of consistently strong operational performance as well as financing and investment transaction successes. In addition, we increased our regular distribution rate while remaining committed to covering our distributions with income, and we paid a supplemental distribution. With that, I'll turn the call back over to David Gladstone.

Thanks, Julia. Those were good reports from you and Michael and Dave. You do a great job of informing our stockholders. During the past quarter, we were able to report some great accomplishments such as the sale, and we call it an exit of one of the investments at a good capital gain. We sold some of the stock in one of our portfolio companies to get back some capital. We increased the run rate distribution of the common stock, which is always positive for the stock. And we paid a supplemental distribution to common shareholders. This is a beginning of something we hope to continue forever and continued good performance of our companies that we invest in. And we issued some common stock to help us grow. We always need to continue to grow. We believe we can continue the success going forward into the second quarter for fiscal year 2018 which ends March 31, 2018. Just talking about the economy, it continues to get stronger. It seems to be hitting on all the cylinders. I do have some concerns that things can go wrong, but I don't really know what those could be at this point in time. To counter the unforeseen, we're building a very strong balance sheet with more equity. I don't know what may come of the future, but I think we could withstand most any kind of shock to the world economic system. On July 2017, our Board of Directors declared a monthly distribution to our common stockholders of $0.064 per common share for each of the months of July, August and September of 2017. That's an annual run rate of $0.768 per common share. We often round that up to $0.77 for reporting. As you can tell, the regular distribution is covered by our income, and we hope to make additional supplemental distributions from the capital gains as time goes on. And it is our stated goal to raise the regular distribution rate, and again sometime in the future. No specific date set, but that's our goal. Through the date of this call, we've paid 145 sequential monthly cash distributions to our common stockholders and then several supplemental distributions. As of June 2017, we have distributed a total of about $199 million or $8.61 per share to common stockholders. That's based on the number of shares outstanding at the time of the payments and the distributions. Current distribution rate on the common stock with the common stock price at $9.58 yesterday, the yield on the current regular distribution is about $0.081, and the yield including the June supplemental distribution of $0.06 per share is about $0.087. This yield is far too high for such a successful and relatively low-risk company and the stock price should increase to rightsize the yield. We're not planning to cut the dividend to rightsize it. We're just going to continue to grow the dividend and hopefully the stock price will increase and catch up with it. We have 3 preferred stocks, all of them about the same. The only slight difference in them: we have a GAINM, a GAINN and a GAINO. Those are the 3. We do have a webpage for all 3 of them. They're all yielding somewhere between 6.1% and 6.6%, very strong dividends, well covered by what we have out, the income that's coming in. The preferred stocks are very much the same, and at some point we may look to consolidate them. We have a webpage that explains in details what's there. So just to summarize, Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions on the common stock. There should be some substantial capital gains in equity because we hold a lot of equity positions in a lot of different companies. We expect the quarter for September 30, 2017 ending to continue to show you strong returns on your stock that you hold in our fund. I hope you all read an analyst report that came out. Wedbush is a broker dealer in California and other states and Henry Coffey is the analyst there. He's been following BDCs as long as I can remember. He now has a buy rating out on GAIN and I think that's substantial and right on as this company continues to grow. Let me remind you again, as Michael did at the beginning, since the meeting is tomorrow, please vote your shares today by calling (800) 690-6903. You can vote over the telephone or voting at www.proxyvote.com. You can also attend the virtual annual meeting tomorrow and vote, and you can go to virtualshareholdermeeting.com/GAIN. The meeting will start at 11 a.m. They're usually pretty short so hopefully you'll dial in and we'll get to talk to some of you. Please note that voting will require that you have your proxy card and number available. If you don't have it available then you just need to call the company's proxy solicitor. That's Georgeson, and they're at (800) 790-6795. That's the number that you can call and not have your proxy number, 790-6795. Well, that's the end of my part and we are finished as our presentation so if the operator will come on and give instructions on how people can ask questions.

[Operator Instructions] And our first question comes from the line of Mickey Schleien with Ladenburg.

Dave, I was curious to ask you what the reasoning was for raising equity capital instead of using the proceeds from Mitchell Rubber to fund the new investments that you're looking at.

Well, timing is always an issue, Mickey. And as we know, we always look forward to production that we would anticipate and plan going forward. And we always want to balance our debt-to-equity ratio, as you know, which is very important in any BDC, the ratio of 1:1. We have a lot capacity in our line of credit and we just want to always be slightly ahead of the game. We felt the timing was appropriate and where the stock was, and we felt like it was a reasonable time to do it. So we did it. So the Mitchell Rubber, it was no guarantee that, that deal was going to get closed at the time, frankly, and so we always try to manage with some thought to being a bit conservative. So that's basically the answer.

And our next question comes from the line of Henry Coffey with Wedbush.

Thanks for the shout-out. It was a real -- it was a lot of fun writing the report. Number one, you did raise equity and with the payoff and sale of investments, assets at cost are down a little bit. The value of those assets is up, which is nice. What is the outlook on originations?

Henry, it's Dave here. And again, thanks for understanding our business. Right now, as I mentioned, the challenge -- we go to work every day doing what we do, obviously. We're not going to go out and pay 7, 8, 9x EBITDA multiples as we're seeing in some of these deals. And so we just keep generating and filling the pipeline with new opportunities. We feel like we're on a pace with some of the things I mentioned. We've got one, hopefully fairly soon, that's going to close here, we've been working on for a little bit. That will add to the -- bring back up the asset base. And I'm not concerned with where it is right now. We just got to keep plugging away. It's, as I mentioned, a tough environment value-wise, but I think within the scheme of how we operate, with our current portfolio, as I look forward, I am not overly concerned at this point.

Henry, as you know, we always have a pipeline and the pipeline is very different for us. We're not looking for the high technology where you pay up. We're looking for the more straightforward companies that are easy to work on. And some of the pricing has gone up on those. We didn't expect it so we ran a little slow last year, but I think this year is going to be different. We're seeing people back away from those. And hopefully we can pick up 2 or 3 more before next year ending in March of 2018.

A second issue, just kind of been going through the 10-Q and one of the most helpful schedules is where you show the write-ups and the write-downs. That appeals to my analytical brain. One thing I did notice in comparing Q1 '16 -- I'm sorry, '17 to '18, a lot of the investments that were written up last year have been sort of -- had some unrealized losses this year. I'd look at it like from more -- from a portfolio perspective, in that in both years the realized gains, on balance, were positive to last year, significantly positive. Can you give me some -- I don't know whether you want to talk about specific companies or just kind of the general atmosphere for in terms of how values are changing and how that affects your sense of what the ultimate outcome should be on some of your portfolio companies.

Henry, it's Julia. As far as those changes quarter-over-quarter, they're really driven by performance of the underlying entities, for the most part, although you might have some changes due to multiple increases or decreases, respectively, as well. But all of those are generally considered temporary, meaning even if there is a dip in performance between Q1 of '17 versus Q1 of '18 we don't believe that to be a permanent decline in the valuation of those entities.

Henry, you've selected the item that's the favorite of our Chief of Valuation. She loves that chart as well. And it does give you a real good snapshot of what's going on in the portfolio. I'd hasten to add that most of the ones that have taken depreciation are still paying as agreed. They're in good shape. And so it's the variation of the marketplace that goes on both in valuation multiples for certain categories of companies as well as the underlying performance. So if they have a small downdraft because they didn't get the right contract for that quarter, it will go down a little bit. But I think the portfolio is in great shape today.

And Henry, keep in mind, and this is generally it's a true statement as well, that our -- we might see a bit more volatility in our valuations because of the higher percentage, if you will, of equity of any one portfolio company, and recognizing that our -- the debt instruments in all our portfolio companies are valued by S&P and you'll see those are relatively consistent across the board. The other thing that can be a little deceptive from time to time is when we just look at quarter-to-quarter, a company that might have been in the portfolio for maybe 3 or 4 years, I'd say, from a perspective of the initial investment might actually be up relatively speaking, but you could have a, again as Julia said, whether it's as a result of a multiple change or even and sort of as David was alluding to between quarters for some reason they have a small decline in the EBITDA, relatively speaking, times whatever the multiple is, it's going to reflect itself essentially in, say, a reduction or an increase, frankly, in the underlying equity value. So I think you're right in terms of looking at overall portfolio. That's certainly how we think of it, how we look at it. And again, to repeat what David said, I think certainly today I feel pretty decent about where our portfolio is and where it's come from.

And we have a follow-up question from the line of Mickey Schleien with Ladenburg.

I do have a couple of follow-up questions and I apologize if someone else asked these. But could you talk a little about the synergies between SBS and Mathey and how that impacted the valuation, which was marked up pretty meaningfully during the quarter?

Yes. I can't really address it relative to, call it, the valuation per se. I mean that sort of happens just because the way the numbers look. But basically, the 2 companies -- without going into a lot of detail, Mickey. I almost could do this offline if you want a little bit. Both are located in Tulsa, Oklahoma. They are both in the manufacturing business. They service some of the same general industries, which range from some energy, aerospace. And we saw an opportunity, frankly, as a result of consolidation, also, of management and leadership, which is always a very, very critical part of any of these companies. So we saw an opportunity and a cost savings, frankly, in putting effectively what Mathey's operations are, coming into the SBS facilities. So we've got a cost savings in that regard, and also we've got now a consolidated really strong management team with what's effectively a pretty broad, call it, product line between the 2. So there was a lot of thought behind this, a feeling of this is a good way to go. And as you point out, in the way the companies have come together, in part, the current valuation had a bit of an increase.

I noticed that Precision Southeast's second lien is on non-accrual, but it's still valued at par. Can you talk about the issues facing that company? What they're doing to address those? And do you believe there's any downside to the valuation of that investment?

Okay. I will start with the last first. I think it's in better shape today than it has been, as a result of the efforts we've been making, again primarily on the management side. PSI, Precision Southeast, is actually, as you point out -- and again recognizing that we do not value the debt, S&P values the debt so the results that we have are okay there. And also the business from an EBITDA standpoint is positive. What we've been working through, frankly, is just an interrelationship with the bank. This is a case where we do have a senior lender providing working capital and so on, and we feel very positive about the direction of the company. So I'd say there is less chance on the downside than there is now, frankly, on the upside.

So it sounds like they may have breached a covenant or something like that that triggered the non-accrual. Is that a fair statement?

Mickey, our policy, and you're likely aware of this already, but typically if somebody doesn't pay for 90-plus days we generally put them on non-accrual, other than, I guess, cases where there's a really good reason why you wouldn't. And in this case, we just went with the policy. It made sense at the time. And we're going to work with them over the next few months and hope to get them off non-accrual in the near term.

Dave, I didn't actually hear the answer to my first question, which was regarding the timing of the equity capital being raised. I apologize, but could you repeat what you were saying in terms of that?

All right. See if I can do it exactly the same way. No, I'd say it's pretty straightforward. I mean, as I was starting to mention, you asked about Mitchell Rubber, using the proceeds. One, timing is always important in these things, and Mitchell rubber, at the time when we did the offering, was obviously not done yet. We weren't sure exactly what the timing would have been on that. So as we looked at it, that was important. Secondly, as we always look out and try to project what we think our potential needs are going to be on new deals, et cetera, and always keeping in mind the importance of our debt-to-equity ratio of 1:1, being sure that we think; okay, at a certain point in time do we, should we shore up our equity so that we're in good shape because we have a lot of capacity with our line of credit, our own line of credit in terms of new deal production. So it's a balancing and we felt like the timing in the market and where the stock was and the performance in general, it was a good time to raise an amount. We did not raise as much as -- we could have raised more, but we chose to raise an amount that we felt just made sense for the company without stressing it too dramatically. And I feel good about having done what we did.

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

Just wanted to talk about -- most of my questions have been answered, but just a couple of little nits in modeling. It looked like other G&A expenses were a little bit above my forecast. Were there any sort of one-time items in there? Is that a good run rate going forward?

As I mentioned in the scripted part of the discussion here, we had a little bit of a bad debt pick-up, which was primarily related to the PSI non-accrual change. So no, I don't believe that that's necessarily a good view going forward. We shall see next quarter, but I do not believe that at least the bad debt expense part would recur.

And then I'd just like to get your sense of sort of lower middle market valuations. Obviously, I mean we follow the public equity markets, which have remained strong, but can you give us sort of a sense of valuation trends in the market you guys follow?

Yes, right now, as I sort of mentioned, we are still seeing valuations of companies that are doing, say, $4 million to $6 million, $7 million, $8 million of EBITDA where valuations are in the 8, 9 and we've even seen some in the 10x as far as transactions that these folks are moving to an LOI phase. So it's still pretty heady right now. Do I think that trend will continue? It's hard for me to tell, to be honest. We are seeing some things that are -- a couple companies that are more in the 6 to 6.5 and 7x so I'm hoping we'll see a bit more of that. But at the current time, I just think we are going to be in this sort of range of anywhere from 6 to 10x for companies that seem to be fairly good performers.

[Operator Instructions] And our next question comes from the line of Andy Stapp with Hilliard Lyons.

The rest of my questions were just answered.

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back to David Gladstone for any closing remarks.

All right. Thank you all for calling in. And please, if you can just vote your shares by calling Georgeson. They're at (800) 790-6795. And we'd like to get the votes in before we crank it up tomorrow at 11:00. Thank you all. That's the end of this conversation.

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.