Main Street Capital Corporation (MAIN) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Main Street Capital Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jenny Zhou. Thank you. You may begin.

Thank you, David, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation first quarter 2016 earnings conference call. Joining me today on the call are Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith. Main Street issued a press release yesterday afternoon that details the company's first quarter 2016 financial and operating results. This document is available on the Investor Relations section of the company's website at mainstreetcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until May 13. Information on how to access the replay is included in yesterday's press release. We also advise you that this conference call is being broadcast live through Internet webcast that can be accessed on the company's webpage. Please note that information reported on this call speaks only of today, May 6, 2016, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening. Our conference call today will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call, and they are not guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies was derived from third-party sources and has not been independently verified. And now, I'll turn the call over to Vince.

Thanks, Jenny, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend announcement and conclude by commenting on our investment pipeline. Following my comments, Dwayne Hyzak, our President, and Brent Smith, our CFO, will cover our operating performance in more detail and comment on our first quarter financial results, originations and exits, our recent announcements, our current liquidity position and key portfolio statistics and our expense ratio, after which, we will take your questions. Our investment portfolio again delivered solid operating results during the first quarter. Our lower middle market portfolio, our primary area of focus appreciated by $3.5 million on a net basis, with 28 of our investments appreciating during the quarter, and 21 depreciating. Our middle market loans depreciated by roughly $9 million during the quarter on a net basis, approximately two-thirds of which was energy related. And our private loans depreciated by $3 million during the quarter. We finished the quarter with a net asset value per share of $21.18, a sequential decrease of $0.06 over the fourth quarter. Our lower middle market companies with nearly $150 million of cash on their balance sheets continued to exhibit highly conservative leverage ratios on a relative basis, which Dwayne will cover in greater detail. Earlier this week, our Board declared regular monthly dividends for the third quarter of $0.18 a share for each of July, August and September, maintaining the second quarter dividend payout amounts. The ex-dates for these dividends are June 29, July 19, and August 17 respectively. These dividends represent an increase of 3% over the monthly payout of $0.175 a share in the third quarter of last year. Last month, we declared a semiannual supplemental dividend of $0.275 per share. 2016 represents our fifth consecutive year of supplemental dividends beginning with the 2012 dividend declared in the fourth quarter of that year. We currently expect to ask our Board to declare our next semiannual supplemental dividend in the fourth quarter in the range of $0.25 to $0.30 a share. Primarily as a result of our recently announced exit of our investments in SambaSafety, we currently estimate that 100% of our third quarter regular dividends will constitute long-term capital gains for federal income tax purposes taxable to our individual shareholders at highly favorable rates. As of today, I characterized our investment pipeline as about average with a higher weighting of lower middle market opportunities. We continue to seek and receive significant equity participation in our lower middle market investments, and as of quarter-end, we have an average of 35% fully diluted equity ownership position in the 96% of these investments in which we currently have equity exposure. Our officer director group has continued to be regular purchasers of our shares investing approximately $0.5 million during the first quarter. With that, I'd like to turn the call over to Dwayne to cover our portfolio performance in more detail.

Thanks, Vince, and good morning everyone. We are pleased to report another quarter during which we generated distributable net investment income in excess of our recurring monthly dividends and continued favorable performance in our lower middle market portfolio. We believe that our unique investment strategy focused primarily on the underserved lower middle market combined with our efficient operating structure provide a unique value proposition that differentiates Main Street from most yield oriented investment options and generates the premium total returns realized by our shareholders. As we’ve discussed in prior quarters, we believe that the primary driver of our long-term success has been and continues to be, our focus on the underserved lower middle market, and specifically our investment strategy of investing in both the debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market companies and not just a financing source. Over the last few quarters, we provided some highlights on different aspects of our focus on the lower middle market to demonstrate the significant benefits of our unique investment strategy. In addition, for the last few quarters, we noted that we had elevated levels of exit activities in our lower middle market portfolio. Those exit activities in two portfolio companies have been completed over the last four months, so this quarter we would like to highlight several points related to the recent exits of our investments in Southern RV and SambaSafety. The first point I want to highlight is the comparison of the actual realized value from our equity reinvestments in each of these completed transactions to the valuations of these investments at September 30, 2015 and December 31, 2014. In the cases of Southern RV, which we exited in January, our actual realized value from the exit of our equity investments was 36% or $4.4 million greater than our fair value estimates at September 30, 2015 and 207% or $11.2 million greater than our fair value estimate at December 31, 2014. In the case of SambaSafety, which we exited in April, our actual realized value from the exit of our equity investment was 49% or $10.1 million greater than the fair value estimate at September 30, 2015 and 405% or $24.4 million greater than our fair value estimate at December 31, 2014. The second point we would like to highlight is a favorable investments returns that our lower middle market investments can generate for our shareholders. In the cases of Southern RV, the exit generated a cumulative 45.9% internal rate of return and a 2.3 times money invested return on a cumulative debt and equity investments in Southern RV, with our debt investments representing greater than 87% of our total invested capital. In the case of SambaSafety, the exit generated a cumulative 34.7% internal rate of return and 2.3 times money invested return on a cumulative debt and equity investments on SambaSafety with a debt investment representing greater than 93% of our total invested capital in Samba. We believe that both of these exits provide evidence of the conservative nature of the valuations of our lower middle market equity investments and the opportunity for significant upside and the ultimate value realized when these equity investments are marketed for sale in a competitive process or in a sale to a strategic investor. In addition, both cases provide evidence of the significant value in investment return opportunities provided by the equity investments on our lower middle market companies and a significant benefits of being both a debt and equity investor in these companies as opposed to just being a lender. With that, our unique investment focus on a combination of senior secured debt with meaningful direct equity investments in our lower middle market companies, it will be very difficult to deliver these types of returns and benefits to our shareholders. Consistent with prior quarters, we also want to highlight that the contributions from our lower middle market portfolio continue to be well diversified with 46 of our 69 lower middle market equity investments having net appreciation at March 31, and with 28 companies in our lower middle market portfolio or approximately 67% of our investments in flow through entities for tax purposes contributing to our dividend income over the last 12 months. We believe that the diversity of our lower middle market portfolio is very important when analyzing the benefits from our lower middle market investments, and we believe that this diversity provides visibility to the recurring nature of these benefits in the future. Now turning specifically to our investment portfolio at quarter-end and our investment activity in the first quarter; we are pleased to report that our overall portfolio performance remained strong. Our investment activity in the first quarter, included total investments on our lower middle market portfolio of approximately $37 million, primarily as a result of our investments in two new portfolio companies, which after aggregate repayments on debt investments and return of invested equity capital resulted in a net increase in our lower middle market portfolio of approximately $7 million. We had a net decrease in our middle market portfolio of approximately $2 million, and a net increase in our private loan portfolio of approximately $26 million. As a result, at March 31, we had investments in 198 portfolio companies that are more than 50 different industries across the lower middle market, middle market and private loan components of our investment portfolio. The largest portfolio company represents approximately 3.5% of our total investment income and approximately 3% of our total portfolio fair value with the majority of our portfolio investments representing less than 1% of our income and our assets. Additional details on our investment portfolio at quarter-end are included in the press release that we issued yesterday, but I’ll touch on a few highlights. Our lower middle market portfolio included investments in 72 companies, representing approximately $860 million of fair value, which is approximately 24% above our cost basis. At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was a conservative 2.7 to 1 or 2.9 to 1, including portfolio company debt, which is junior in priority to our debt position. As a complement to our lower middle market portfolio and our middle market portfolio, we had investments in 84 companies, representing approximately $580 million of fair value and in our private loan portfolio, we had investments in 42 companies, representing approximately $270 million in fair value. The total investment portfolio at fair value at March 31 was approximately 106% of the related cost basis, and we had six investments on non-accrual status, which comprised approximately 0.5% of the total investment portfolio at fair value and 3.8% at cost. So in summary, Main Street’s investment portfolio continues to perform at a high level and continues to deliver on our long-term goals. With that, I'll turn the call over to Brent to cover our financial results and liquidity position.

Thanks, Dwayne. We are pleased to report that our total investment income increased by 13% for the first quarter over the same period in 2015 to a total of $42 million. Interest income increased by approximately $2.1 million. Dividend income increased by approximately $2.5 million and fee income increased by approximately $0.5 million, when compared to the prior year. The amount of income that is less consistent on a recurring basis was approximately $0.6 million or $0.01 per share in the first quarter of this year, which is consistent with the amount in the first quarter of 2015. First quarter 2016 operating expenses, excluding non-cash share-based compensation expense, increased by $0.8 million over the first quarter of the prior year to a total of $13.3 million. The increase was primarily related to a $0.7 million increase in compensation and other general and administrative expenses and a $0.4 million increase in interest expense. These increases were partially offset by a decrease in net expenses of $0.3 million due to an increase in the amount of costs allocated to our external investment manager. The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets, which we believe is a key metric in evaluating our operating efficiency, remains constant at 1.4% on an annualized basis for the first quarter and continues to compare very favorably to other BDCs and other yield oriented investment options. Our increased total investment income and continued leverage of our efficient operating structure resulted in a 16% increase in distributable net investment income for the first quarter of 2016 to a total of $28.8 million or $0.57 per share, exceeding our recurring monthly dividends paid for the quarter by over 5%. Our external investment manager’s relationship with the HMS Income Fund benefited our net investment income by approximately $1.9 million in the first quarter of 2016 through a $1.2 million reduction of our operating expenses for costs we allocated to the external investment manager for services we provided to it and $0.7 million of dividend income from the external investment manager. We recorded a net realized gain of $13.6 million during the first quarter, primarily relating to a $14.4 million realized gain on the exit of lower middle market investments in Southern RV and as Vince discussed, we recorded net unrealized depreciation on the investment portfolio of $14.8 million in the first quarter, primarily relating to $9.3 million of net depreciation on our middle market portfolio, $3.2 million of net depreciation relating to our private loan portfolio and $6.3 million of net depreciation, relating to our other portfolio. This net depreciation was partially offset by a net appreciation relating to our lower middle market portfolio of $3.5 million. Additional details for the change in our net unrealized appreciation can be found in our earnings release. Looking forward to the second quarter of 2016 and consistent with the information we provided on our last earnings conference call, we wanted to provide an update regarding the market movement relating to our middle market portfolio. The overall market for the middle market debt investments has continued to improve during the second quarter. Based on our static middle market portfolio as of March 31, 2016, not taking into account any new investments or sales or repayments during the second quarter and based on quoted market prices for underlying middle market debt investments, our middle market portfolio has generated approximately $5 million to $6 million in net unrealized appreciation to this point in the second quarter. Our operating results for the first quarter of 2016 resulted in a net increase to net assets of $16.8 million or $0.33 per share. On the capital resources front, our liquidity and overall capitalization remains strong. At the end of the first quarter, we had $17.2 million of cash, $1.5 million of marketable securities and $249 million of unused capacity under our credit facility. Today, we have approximately $17.9 million of cash, $1.5 million of marketable securities and $299 million of unused capacity under our credit facility. We also recently received a green light letter from the SBA, allowing us to continue our application process for a third SBIC license. Obtaining our third SBIC license and having the ability to access the incremental SBA debentures will significantly benefit our capital structure and enable us to maintain our long-term focus on growing our lower middle market portfolio. As we look forward to the second quarter of 2016 and consider the impact from the recent exit of lower middle market debt and equity investments in SambaSafety, we currently expect that we would generate distributable net investment income of $0.57 to $0.58 per share during the quarter. This estimate is $0.03 to $0.04 per share above our previously announced monthly dividends for the second quarter of $0.54 per share. In addition, we want to provide guidance on the expected per share difference between our distributable net investment income and net investment income due to our non-cash stock expense. We currently expect the difference to be approximately $0.04 per share per quarter for the remainder of 2016. With that, I'll now turn the call back over to the operator, so we can take any questions.

Thank you. [Operator Instructions] Our first question is from Robert Dodd from Raymond James. Please proceed with your question.

Hi, guys. First on HMS and the Department of Labor rules, have you seen any change in kind of inflows to HMS or have they changed their strategy or anything like that. Can you give us a color on whether we can expect any material change, because it obviously is a pretty big positive contributor right now and have been growing?

Robert, so the initial offering period expired earlier this year or late last year, was it late last year, Nick? And so they had a choice as to whether or not just to close the offering and maybe launch a second fund, Robert, or do a follow-on. They decided to file for a follow-on and they did that. It was declared effective by the SEC, but what that entails is re-signing all the selling agreements with the underlying broker dealers that distribute the product and that process is undergoing now and it's probably in the second or third inning. So we've seen significantly less volume on the capital raising front, probably 75% less or something like that, but there is probably 75% fewer selling agreements at this point if they’re not signed up. And each offering is distinct, you have to -- they have to conduct either their own due diligence or third-party due diligence conducted or both legal due diligence, et cetera. So it's kind of a long process. So it's kind of hard to say, there probably will be headwinds as a result of the Department of Labor, although the non-listed BDCs did fall under this BICE exception, to the best interest of the client exception and it remains to be seen how that works, but I think they emerge from that -- from the Department of Labor regulations, better off than they otherwise feared. So that's kind of the -- anything else that you'd add Nick?

Thank you. Just another one. On the lower middle market and the valuations, because obviously when we look at M&A multiples or buyout multiples in the lower middle market, they're pretty high, although down on the software side that obviously played to your benefit with Samba. How do you address that, your pipeline is pretty good on the lower middle market side, there is obviously a wide range of multiples you're dealing with smaller than average businesses, but can you give us a bit more color on that range of, do you anticipate activity, given the multiples are still fairly elevated, which may -- net activity, which may result in realizations being higher versus originations, I mean?

We're a little agnostic about these exits. It's nice to have our strategies and our valuations validated et cetera when an exit happens. On the other hand, we end up with reinvestment risk and having to go, try to put the money in the company that realistically might not be as nice as the company it was sold, because the companies that are sold typically are first quartile companies, right. So, they're kind of good news, bad news. In the case of Samba, it was completely unsolicited, it wasn't for sale. Someone contacted them. It's kind of a household name, type of a buyer. And managements said, at a certain number, I guess we would be willing to sell, we tend to like to go along with management and the soliciting party hit the number and closed. And was that a first quartile company? I'm not sure, it was an RD dealership, it was performing well and it was growing. It wasn't the type of company you would envision a huge multiple someone coming in and paying, but clearly it was a multiple that we found attractive relative to our [indiscernible] price, relative to our carrying values. So those we cannot, we have no way to predict those. They're probably going to continue to happen. If someone held a gun on my head, I’d say there is probably going to be a couple of those that happen a year. And we were the majority shareholder of SAMBA with respect to the Southern RV. Now with respect to SAMBA that was quite a bit different. I will let Dwayne give you the circumstances there because that was of course a service. We did have a relatively high valuation on a - relative to our other lower middle market valuations.

So, Rob, when you look at this and compensate the – and I referenced in my comments these two exits one was the strategic acquirer that bench test on it as it relates to Southern R, the other was a competitive process. So a lot of these like SAMBA and like we’ve seen several years ago with by Drilling Info, when the company has significant historical growth, but even more importantly significant growth opportunities in the future, they become something that’s very much on the radar of larger private equity groups as well as other strategics. They will start receiving inbound interest from those parties and that’s what happened in the case of SAMBA. So as we sat around the table talking to management, the other equity owners we decided that it made sense to explore the market opportunities, how do investment bank rate a competitive process and obviously as you can see from the results of the exit that I just talked in my comments, ended up with a very, very nice outcome from an exit standpoint. So as Vince said, these are not – it is not going to be the same type of outcome for every single company that we have, but for ones that are either attractive to a strategic industry acquirer or ones that have more significant historical and projected future growth, we do see these type of outlier evaluations that obviously generate significant results for us and our shareholders as well as the management teams of these portfolio companies. Q – Great color. Thank you.

Thanks, Robert.

Our next question is from Bryce Rowe from Robert W. Baird and Company. Please proceed with your question.

Great. Thanks. Good morning, guys.

Good morning, Bryce.

Just wanted to follow up to Robert's question there and I know they are hard to predict, but as you guys talk about within the pipeline higher mix maybe of lower middle market within the pipeline and clearly you had your sights on growth in the lower middle market portfolio, how do you think we handicap what we're hearing about as being a more active M&A market, at least for the second half of the year, how do we handicap that against the growth originations you might have and how do you think about kind of net portfolio growth within the lower middle markets and then how will the portfolio - the overall portfolio trend from a mix perspective within the three buckets?

So the first question - I will just repeat it because it’s kind of a compound question. The first question is, what do we see in terms of our lower middle market origination forecasts as a result of an improving tone being reported in the M&A market generally. And what I would say there, Bryce, is we are really not impacted one way or the other by the tone of the overall M&A market because the overall M&A market is focused on companies where there is a pretty visible exit strategy if you can grow it or bolt on to it. And it's driven by the ability to finance inexpensively and to put a fair amount of leverage on your equity whereas when we are underwriting we're looking - we don't underwrite to an exit strategy, so we have a wider range of industries who will invest in, we will get our returns by having a modest entry multiple going in and not having to compete for the company that is the most likely to have a well attractive exit, IPO or what have you. So we're really kind of disconnected with all of that. Now if we're looking at a company and our view is that it's a nice permanent long-term hold of a modest evaluation and someone else is looking at it differently and so I got the financing and I really think I can do something with this, generally it's going to be adding the company we're looking at it as a platform to an existing company as a bolt on we will lose generally, right. So when the market tone goes up there is more favorable and there is a broader range of companies, target companies out there that have an exit strategy, arguable exit strategy and the financing markets are accommodated then. Things will get more competitive with respect to the more attractive companies. And so but that’s probably only 25% of what we're looking at. When you say the other 75% is, it is recap situation, it’s family situations, it’s situations that don’t really lend themselves to traditional private equity LBO with a near term exit.

That’s why Bryce you hear us talking about being a partner to the management as opposed to being a financing source because as Vince touched on the deal that put us really, really well are situations where the management team and our operators do not want to sell 100% of the company. They are looking to do some stake planning or liquidity planning that they very much want to be involved in the ownership and management of the company going forward just really want to achieve a personal goal as opposed to trying to maximize value and get 100% liquidity. So it's just a different approach to the marketplace.

And what drives our conversion of pipeline into closed deals is the due diligence process. We could easily kill them all in diligence or we might get lucky and they all come through diligence just fine and the diligence process includes these companies are not audited. We are generally the first institutional investor you got to get through documentation. We generally are not bringing in management, so we need to be comfortable with respect to the management team that we're investing with and we do expect the management team to invest with us to accept they have the capability to do that. So that really the outcome of diligence creates the lumpiness in our business. It is not so much the lumpiness in the pipeline. The pipeline is pretty much always there.

And Bryce, the only other thing maybe to add on because I think part of your question was looking at the net portfolio growth. You've heard us talk about accelerated or elevated amounts of exit activity in the portfolio. Id’ say that for the last two quarters or three quarters we've been talking about that. Southern RV and SAMBA were big parts of that activity, so two of those have gone and while we already have some level of exit activity in the portfolio and that level of activity is always subject to change. A big chunk of that activity has transacted now.

Yeah, I don’t – I assume that happen anymore from that steep quarters.

That’s good color. I appreciate it. Just one follow-up kind of unrelated. It looks like we've seen this with some other companies too that that pricing really within all three buckets of your portfolio has stabilized and is even showing some level of increase. How comfortable do you guys feel that we've seen the compression kind of come to an end from the last few years and then maybe we will see stabilization to maybe increases in pricing going forward?

Lower middle market really is uncorrelated to the middle market. It's more a function of how large the companies are if you are competing with someone and the relative attractiveness of their industries at the moment, but with respect to - we don't really - pricing kind of it - hasn’t really changed too much there other than if you are looking at a relatively large attractive company then you begin to have correlation. What’s you forecast in terms middle pricing.

Clearly in the last six months it usually has speed bumps every 18 months or so that kind [indiscernible] that’s about expected, but six to nine months you will see it tie down a little bit. [indiscernible]

All right, great. Appreciate it. I will jump out of queue.

Thanks, Bryce.

Our next question is from Christopher Nolan from FBR Capital Markets.

Vince, can you give some detail in terms of how the overall energy sector did and Houston is actually reacting given the oil is reacting - is coming off the lows and how that – what implications that might have for your portfolio investments?

Well, I guess you're reading more about and hearing more about the market being oversupplied and have being oversupplied sometime you are seeing people now forecast at we are going to come into balance maybe with sometime later on this year and next year. So I think there is some guarded optimism around here whereas probably as gas focus as we are oil focused and it’s offshore focused as we are onshore focused. And offshore is if you are – in any business that’s related to offshore that’s still very tough out there right now. And people aren’t talking about a turnaround in the next couple of years whereas if you are in the Permian and you are more oil centric, you are feeling pretty good right now with prices above the breakevens that you are hearing about. So I think it's overall it's guardedly optimistic. That doesn’t mean people are running around hiring a bunch of people or anything. And the commercial real estate guys are not probably seeing their vacancies go up well. So if you get ready to sign a lease, the pendulum swung back to the tenant, if you get ready to hire someone the pendulum swung back to you. We are still creating jobs in the local economy. The question is, are we replacing an engineering job with a lower paying service sector job. The answer is we probably are, but nonetheless you are seeing population growth and the homebuilding is relatively robust. So I think people feel better now obviously than they did a couple months ago. Would you guys add anything else?

I think you covered it.

Okay. And the follow-up question is on the green light letter, generally what's the timeframe between receiving green light letter and actually getting the first license?

So I think there's - historically SBA has timelines of and I haven’t memorized these. The first license takes the longest, right, because you are being embedded for the first time and I think the goal is from the green light letter to a first license might be something in the six months type range, maybe it’s longer, but it's all – it’s all comment letter dependent much like the SEC. You get a bunch of comment letters, if you don’t’ turn them around quickly or you don’t adequately address the comments, it's going to stretch longer or stuff comes up and your background check particularly stuff that you did not disclose you are going to have a problem. But in general you should be able to get some done in six to nine months. With respect to a second license that timeframe is truncated and they actually had a mechanism for kind of more rapidly getting you second licensee if you’re performing adequately with respect to your first license, although I’m sure and there is a terminology for that, it's like a fast-track but I don't think BDCs quality for the fast-track though for a second license but the second license are typically quicker. So you might expect four to six months let’s say. And with respect to the third license we don't know because there is groups out there that have had a third license as the first one goes into liquidation et cetera. So we are a little bit in unexplored territory here, I would expect that if you’ve received a first and a second and you’ve done well and you get can effectively turn around your comment letters and everything, you haven't had a lot of turnover on your team or in your portfolio performing I would expect that you can improve even on that four months that’s what we are shooting for but again, we are in a little bit uncharted territory.

Our next question is from Mickey Schleien from Ladenburg and Thalmann. Please proceed with your question.

This might be an opportune time to revisit the strategy on the club deals because we saw some growth there but in the past you’ve commented that you haven't always been very happy with some of the underwriting folks in that space. So just curious what you're thinking is there and did you lead the deals this quarter?

Our thinking there - I suppose you can say a lesson learned is the club deals for non-sponsored companies, we have found - have performed - significantly underperformed where we would have liked where we would have expected and the deals that were sponsored. So we're going to be a lot more skeptical as it relates to non-sponsored club deals, besides I don't know what the percentage would be the response at this point, that we’re looking at vast majority in it, there is definitely vast majority. On the other hand, we will do deals, there is crossover deals I’d characterize Mickey where us in a group we've known for a decade in Dallas get together and finance a family owned business there familiar within Dallas buying a family-owned business, a competitor business in Houston that we are familiar with and we jointly lead it and something like that, it is non-sponsored but it's in the context of something we have a lot of control on, we’re jointly documenting, we’re jointly diligencing. We can easily diligence acquired target et cetera, so those types of things we probably like even better than the traditional sponsored club deal so there is kind of three buckets of them but the first bucket, we’re not that familiar with the target company, it’s not sponsored and we're not leading it that’s increasingly tough for us to get comfortable with. Any other comments Dwayne?

No, I think you covered well.

Just one follow up and I appreciate that Vince. In the press release you mentioned the return of equity capital from several LLM investments, are these dividend recaps or what was the nature of that capital upstream to mainstream?

Mickey, when we give that guidance, we are trying to give you guidance on the net change and cost basis. So when you have something like Southern RV that was exited in the first quarter, obviously significant part of the proceeds to Main Street are going to be the realized gain but a part of it is obviously going to be the original invested capital, so we are giving you that guidance so you can take our numbers and roll forward the portfolio.

We are allowed to retain the original principal, original cost basis to the investment and at some point, you have to distribute capital gain piece of it either currently or through the spillover process, a special dividend or something, there is a mechanism where we can pay the tax on it on behalf of the shareholders and give the shareholders a tax credit for that tax which is something we need to continue to think about that’s why we think it’s important to give the information.

[Operator Instructions] Our next question is from Christopher Testa from National Securities Corporation.

So out of the 28 lower middle market companies is that appreciated? Just wondering if there was any specific sectors than appreciated the most, whether you say NGR kind of bounce into the end of the quarter with the price of oil, just any detail there would be appreciated?

I don't think there is anything you could generalize on I mean, when we underwrite these deals, we expect slow steady appreciation due to delevering if nothing else. So if you have no EBITDA growth and no multiple expansion, what EBITDA there is that converts to free cash flow, should delever the company and that deleverage time is on a percentage should result in appreciation quite simply so. A lot of times we would expect to see that. And there is always companies of course that the growing organically, companies whose industry is in favor and you might see some multiple expansions, et cetera, but I can’t think of anything I generalize about, the energy companies have not recovered.

That's the one thing we can’t tell you definitely that when you look at the appreciation it would have been outside of energy and I think before energy really starts to appreciate we're going to need to see continued improvement in the commodity price and overall general activity in the industry.

And have you been seeing any kind of ancillary pressure from obviously the layoffs in energy given your geographic focus. Have you seen some businesses may be struggling outside of the energy sector because they have so many customers who are employed in that industry, is that something that you’ve noticed kind of in the south-west?

I'll give you a - anecdotally we have a restaurant chain we have been, we really like, we've been in for 15 plus years in and around Dallas Fort Worth. They love low fuel prices, [indiscernible] historically, right so low gas prices would help them. On the other hand, they are in Dallas Fort Worth area, you're not necessarily in the basins but you're pretty close and their same-store sales were down 1% year over year and so that was kind of, it wasn't an alarming metric but it’s an interesting one because you almost have to attribute that to the fact that they are probably in a energy oriented region. We don't really have retail restaurant exposure in and around Houston or anywhere else in the state but I think anecdotally I thought that was very interesting because that’s what I would attribute it to but it's more along the lines of - the growth has stopped and they are flat lining rather than the wheels are coming off.

And just with lower middle market it seemed in the quarter that the originations were somewhat light. Are you seeing you know was there just a lack of good opportunities for the structures not right in terms on the leverage of the company is wanted, just any detail on whether you're kind of holding back there on whether there is just not as much activity as was anticipated?

I think you’ve heard us talk about in the past the lower middle market being a very, very attractive sector but it being very lumpy and I think when you look at our efforts there. We did have some closing at several additional closings kind of early second quarter as well as the active activity that takes time as well as you are looking at existing activity, existing portfolio of companies that takes attention from the teams but overall I think we continue to be happy with the portfolio and the pipeline that’s been touched on earlier. And if there lumpiness or slow times in that part of our sector one of the things that we always do is try and take a look at ways to look at opportunities within the portfolio whether that's organic growth, acquisition group or otherwise, I would say that it was - we spend some additional time in those areas during the first quarter.

You got to remember too, there are some seasonality in the business where first quarter is light, and although it really shouldn't be if you think about it, they shouldn’t be a seasonal business. I think what that could be attributable to if you're sitting here in February before you pull the trigger on a deal, you’d really like to see calendars ‘15 numbers or fourth-quarter ‘15 right. And if it's in an audited context you’d like to see that. While the other public companies have a hard time getting their audits done by mid to late March, much less the private companies because the private companies get to stand in line behind the public company. So I think that really causes a lot of what deals that would happen in the first quarter to get pushed into the second quarter. And I’ve heard some other CEOs in our space comment on just that, that first quarter is seasonally light, I don't read too much into, I don't know why it isn’t -- it’s frustrating to me personally but it happens every year, so I try not to reach too much into it.

Ladies and gentlemen there are no more questions at this time and I'd like to turn the call back to management for closing comments.

Well, thank you all for attending today and we will talk again later on this summer, bye.