Main Street Capital Corporation (MAIN) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Main Street Capital Corporation's Fourth Quarter Earnings Conference 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. It is now my pleasure to introduce your host Mr. Zach Vaughan with Dennard Lascar, Investors Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's fourth quarter 2020 earnings conference call. Main Street issued a press release yesterday afternoon that details the company's fourth quarter financial and operating results. This document is available on the Investors Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning in an hour, after the completion of the call and will remain available until March 10. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today February 26, 2021 and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call 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 or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call and there are no 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 will turn the call over to Main Street's CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us today. We appreciate you taking the time to join us. We hope that everyone is doing well and staying safe and healthy. Joining me for our call today with prepared comments are David Magdol, our President and Chief Investment Officer; and Brent Smith, our CFO. Also joining us for the Q&A portion of our call are Vince Foster, our Executive Chairman; and Nick Meserve, our Managing Director and Head of our Middle Market Investment Group. Since this is our fourth quarter and year-end conference call. I will cover some of my normal updates regarding our performance in the quarter, while also providing some commentary on our results and activities for the full-year and our expectations for 2021. I will also address some developments within our asset management business, our investment activities and current investment pipeline, our recent dividend announcement and several other updates. Following my comments, David and Brent will provide additional comments on our investment strategy, investment portfolio, financial results and future expectations, after which we'll be happy to take your questions. We are pleased with our fourth quarter results, which we believe represented a strong finish to a difficult and unusual year in which continue to illustrate the strength of our portfolio companies and evidence of their ongoing recovery from the impacts of the COVID-19 pandemic. We continued our investment origination success in the fourth quarter in both our lower middle-market and private loan investment strategies, with the two strategies combining for almost $200 million in investment originations in the fourth quarter, resulting in over $560 million in investment originations for the year. Additionally, we are pleased that we generated distributable net investment income or DNII per share in excess of our monthly dividends for the fourth quarter, which is earlier than the guidance we provided on last quarter's call and represents significant progress in our efforts to return to consistently generating DNII in excess of our monthly dividends on a quarterly basis, consistent with our long-term historical practice prior to the onset of the pandemic. We believe that our conservative capital structure and significant liquidity position, which we further enhanced by our new investment-grade notes issuance in January, will allow us to continue to manage the recovery from the pandemic from a position of strength and to successfully execute on our pipeline of attractive lower middle market and private loan investment opportunities. We're pleased that during the quarter, we continue to see improved performance across the vast majority of our portfolio companies, allowing us to continue the recovery of the unrealized depreciation we experienced earlier this year with net appreciation in each of our primary investment strategies and 3.9% increase in net asset value per share in the quarter. We continue to feel good about the overall quality of our investment portfolio, and the leadership provided by the management teams of these companies. And we currently expect to see additional recovery of some of the unrealized depreciation we experienced in 2020 and new incremental fair value improvement in 2021. We also made significant progress in our asset management business during the fourth quarter in early 2021. As we've previously discussed, we closed an agreement at the end of October, through which we became the sole investment advisor to MSC Income Fund. One of our first priorities in our new role was to improve the fund’s liquidity position and capital structure, and we're pleased to report that we have completed those actions and the fund has resumed normal investment activities. We remain excited about our future plans for the fund as we continue to execute on our investment strategies and other strategic initiatives for the fund. We also launched Main Street's first privately-held investment fund since prior to our IPO in 2007. This new fund, MS Private Loan Fund 1, is focused on co-investment opportunities with Main Street and MSD Income Fund in our private loan strategy. While this new fund does not represent a material amount of capital to the overall Main Street platform, we're excited about this new opportunity and believe it is an integral part of our overall strategy to grow our asset management business within our internally managed structure and continue to provide this unique benefit to our mainstream stakeholders. We've made significant progress in our efforts regarding the non-accrual and underperforming and investments that existed at the end of the third quarter, resulting in substantial improvement in our non-accrual staff at year end. And we achieved this result without a negative impact to our net asset value as Brent will cover in more detail in his comments. Our team continues to focus on working through these investments to realize the best possible outcome for our stakeholders. Based upon our results for the fourth quarter and the positive developments we have seen in our existing portfolio companies, coupled with the future benefits of our growing asset management business, the attractive new investment opportunities we are seeing in our lower middle market and private loan strategies are efficient operating structure and strong liquidity position, we remain confident with our expectations for continued improvement in our DNII and net asset value per share in 2021 and our expectations to resume consistently generating DNII in excess of our monthly dividends later this year, followed by the eventual growth of our monthly dividends consistent with our historical results. To that end, earlier this week, our Board declared our second quarter 2021 regular monthly dividends of $0.205 per share payable on each of April, May and June and amount that is unchanged from our monthly dividends for the first quarter. Now, turning to some additional details on our investment activities in the fourth quarter and our current investment pipeline. Our lower middle market investments of $98 million in the quarter included investments in two new companies and financing for acquisitions by two of our existing portfolio companies. As of today, I would characterize our lower middle market investment pipeline as above average. We continue to be very active in our lower middle market strategy and we are excited about the new investment opportunities in the current pipeline. Consistent with our activities since the beginning of the pandemic, the current pipeline includes several follow-on investments and existing portfolio companies as we and our companies continue to actively look to execute on various growth opportunities. We find these follow-on investment opportunities very attractive, as they allow us the dual benefits of reinvesting in some of our top performing companies and management teams and the opportunity for meaningful equity value creation through these accretive acquisitions. As we look forward, we continue to believe that the difficult environment experienced broadly across the economy over the last year has caused many entrepreneur owners to refocus their financial and estate planning priorities. Consistent with our historical experiences over the last two decades as the industry leading partner for lower middle market companies and their management teams, we believe that our unique combined debt and equity investment offering and our ability to be a long-term to permanent partner for the companies we invest in, positions us as the favorite investment partner for these business owners. During the fourth quarter, we also continued the successful focus of our non-lower middle market investment activities on our private loan portfolio, resulting in new investments of approximately $98 million. Due to an increase in repayments in the fourth quarter, the private loan portfolio decreased by $58 million on a net basis in the quarter, while our middle market portfolio decreased by $29 million. As of today, I would characterize our private loan and investment pipeline as average. Now as we turn the page to 2021, our plans are simple, maintain our primary focus on growing our unique investment strategy in the lower middle market and continue the growth of both our private loan investment strategy and our asset management business. We are confident that this plan will result in strong performance and significant value creation for our fellow shareholders. Before I turn the call over David, I wanted to again provide our thanks to our Main Street employees and the management teams and employees of our portfolio companies for their hard work and efforts as we collectively worked to navigate the challenges caused by the pandemic. As a result of the pandemic, 2020 was full of unexpected challenges and we greatly appreciate the efforts of these individuals. Our experiences over the last year also reinforced the significant value we have always placed on our relationships with the management teams and equity owners that our partners in these portfolio companies. Our Main Street employees and these relationships with our portfolio companies provide us with significant confidence that we will achieve our expectations for 2021 and beyond. With that, I will turn the call over to David.

Thanks, Dwayne, and good morning, everyone. At the end of each year, we like to take a few minutes to look back at our history and recap how the benefits of our unique investment strategy and efficient operating structure have enabled us to deliver what we believe are attractive returns for our shareholders. With our February dividend payment earlier this month, we achieved a significant milestone. Since our IPO over 13 years ago, we have increased our monthly dividends per share by 86% and we've paid cumulative total dividends to our shareholders of over $30 per share, which is over two times our IPO price of $15 per share. Over this time, our shareholders have also benefited from significant stock price appreciation, in addition to the dividends paid. During the time from our IPO through the stock market close yesterday, we have achieved an annual rate of return of approximately 16%, which again, we believe compares very favorably to other investment options over this period of time. To illustrate the point an investor who bought one share of our stock in our IPO at $15 per share and chose to participate in our dividend reinvestment plan would now see the value of that share over $112 or a 7.5x multiple of their original investment. Primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market and specifically our strategy of investing in both the debt and equity and lower middle market companies alongside the strong existing management teams, whereby we act as their partner. We believe that we can achieve attractive risk adjusted returns for our investors by benefiting from the structural protections provided through our first lien debt investments while participating in the potential equity upside of our portfolio companies can achieve. Without our lower middle market strategy, it would have been very difficult for us to produce such attractive returns for our shareholders over the years. The lower middle market is a true differentiator among our industry peers and has been the cornerstone of our investment philosophy since our founding as a private partnership nearly 24 years ago. As Dwayne noted in his comments, the lower middle market will continue to be the cornerstone of our investment strategy in 2021 and beyond. As a result of the impacts of COVID-19 over the course of 2020, we saw significant variable performance in the prospective companies we seek to invest in. Because of the uncertain environment, we have seen business owners increasingly seek minority equity investments and we expect this trend to continue in the future. We believe that the universe for minority equity investors is less competitive than the environment for the more frequent majority change and control transactions that dominate the private equity marketplace. In 2018 and 2019, minority transactions represented approximately 50% of our new lower middle market equity investments. Whereas in 2020, we saw minority transactions represent over 80% of our new lower middle market equity investments. The significant advantages of our permanent capital structure, along with our preference to partner with the existing management teams and owners of our portfolio companies, as opposed to buying them out in a change of control transaction allows us to deliver unique structures and transactions that address the specific needs of family owned businesses. We believe that differentiated approach will allow us to maintain and increase or lower middle market investment pace in the future. Additionally, last year, we grew our private loan portfolio and private loan origination capabilities, which positions us well for the future, not only with our own portfolio, but through our third-party asset management business. Most notably, unlike the structures of many of our BDC competitors, the fee income we derived from our growing asset management business directly benefits our shareholders. During 2020, our continued success with both our lower middle market and private loan investment activities allowed us to originate over $563 million in new investments. We completed $294 million in total lower middle market portfolio investments, including $200 million in six new lower middle market portfolio companies, which after aggregate repayments of debt principal and return of equity capital resulted in a net increase of $103 million in total lower middle market portfolio investments. Additionally, we completed $269 million in private loan portfolio investments, which after aggregate repayments of debt principal and exits of equity investments resulted in net increase of $24 million in total private loan portfolio investments. Finally, consistent with our prior stated goal to deemphasize our middle market investment portfolio, we had a net decrease of $89 million in this segment of our business. As of year end, we continue to maintain a highly diversified portfolio with investments in 175 portfolio companies spanning across more than 50 different industries. Our largest portfolio company investment represented 2.7% of our total investment portfolio fair value at year end and 2.8% of our total investment income. The majority of our portfolio investments represent less than 1% of our income and our assets. Our lower middle market portfolio included investments in 70 companies representing approximately $1.3 billion of fair value, which is approximately 16% above our cost basis. The contributions from our lower middle market portfolio continue to be well diversified, with 46 of our 70 lower middle market companies having unrealized appreciation at year end and 34 of these companies contributed to our dividend income in 2020. At the lower middle market portfolio level, the portfolio's median net senior debt to adjusted EBITDA ratio was a conservative three to one and the total adjusted EBITDA to senior interest ratio was 2.4 to 1. As a compliment to our lower middle market portfolio, we had investments in 63 companies in our private loan portfolio, representing more than $740 million of fair value. And in our middle market portfolio, we had investments in 42 companies representing approximately $446 million of fair value. As we've discussed on previous conference calls, given our favorable view of the lower middle market and private loan opportunities that exist today, we've primarily focused our investment activities on these segments of our business. The total investment portfolio at fair value at year end was approximately 105% of the related cost basis. And we had seven investments on non-accrual status, which equaled 1.3% of the total investment portfolio at fair value and 3.6% of cost. Additional details on our investment portfolio year end are included in the press release that we issued yesterday. With that, I'll turn the call over to Brent to cover our financial results, capital structure and liquidity position.

Thanks, David. Our total investment income in the fourth quarter increased by 3% over the same period in 2019, to a total of 62.5 million, primarily driven by an increase in fee income and dividend income partially offset by a decrease in interest income. The change in total investment income includes an increase of 2.9 million related to higher levels of accelerated income for certain debt investments, or other income generally considered non-recurring when compared to the fourth quarter of last year. Our operating expenses excluding non-cash share base compensation expense increased by 1.6 million over the same period of the prior year to a total of 20.2 million, primarily related to an increase in compensation expense in the quarter. For the full-year compensation expense decreased from prior year by 4%. The ratio of our total operating expenses excluding interest expense, as a percentage of our average total assets was 1.5% for the fourth quarter on an annualized basis and 1.3% for the full-year 2020, a decrease from 1.4% in the prior year. The activities of our external investment manager benefited our net investment income by approximately 3.2 million during the fourth quarter. Through the allocation of 2.1 million of operating expenses for services we provided to it at 1.1 million of dividend income. This increase is the result of Main Street taking over as a sole advisor in October to the HMS Income Fund, since we named the MSC Income Fund. We recorded a net realized loss of 71.6 million during the fourth quarter, primarily relating to the realized losses from the restructure or exit of several middle market and private loan investments that were previously non-accrual, including one private loan Access Media Holdings that have been on non-accrual for several years and accounted for more than 40% of the total net realized losses for the quarter. However, this loss on access media resulted in a net positive impact on NAV during the quarter, as the realized loss was less than the previously recognized unrealized depreciation. Overall, the total net realized losses had little to no net impact on NAV during the quarter, due to the accuracy of their previously recognized net unrealized depreciation. These activities resulted in a significant improvement from prior quarter in our non-accrual stats and we ended the year with seven investments on non-accrual status that from 12 at prior quarter end, comprising approximately 1.3% of the total investment portfolio at fair value and approximately 3.6% at cost. We recorded net unrealized appreciation on the investment portfolio of 40.1 million during the fourth quarter, primarily relating to 13.3 million of net appreciation on our lower middle market portfolio, 5.1 million of net appreciation on our private loan portfolio, 7.9 million of net appreciation on our middle market portfolio, 16.2 million of appreciation related to our external investment manager and 2.4 million of net depreciation on our other portfolio. Our operating results for the fourth quarter resulted in a net increase in net assets of 79.3 million or $1.19 per share. Our overall capitalization liquidity remained very strong as our total liquidity is currently in excess of 800 million. During the fourth quarter, we raised approximately 47 million in net proceeds under our ATM equity issuance program. And then recently in January, we issued 300 million investment grade notes with a cash coupon of 3% and a maturity in July 2026. This service as a significant increase from our liquidity position prior to the pandemic and we continue to believe that our conservative leverage strong liquidity and continued access to capital are significant strings that have us well positioned for the future. As we look forward to the first quarter, we expect that we will generate distributable net investment income of $0.58 to $0.61 per share, as we continue to work on covering our monthly dividend with our distributable net investment income on a quarterly basis, consistent with our long-term historical results. With that, I will now turn the call back over to the operator, so we can take any questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hi, guys. Congratulations on a really good quarter. On - first one on the dividend and - the dividend income and then on the asset management business. Can - on the dividend income, you kind of hinted at this. And really pronounced snapback in the fourth quarter, I mean, up year-over-year. Is there any way to tell, how much of that is kind of catch up from earlier in the year and may not be sustained? Obviously, dividend income is a little hard to project. But is there a lack of better term, any one-time income within the dividend income this quarter?

Hey, thanks, Robert. What I would say on the dividend income is that clearly, there were instances where we had elevated dividend income from certain companies. But I do think that that the companies that paid dividends in the fourth quarter were largely companies that had consistently paid dividends in the past, so you did have some catch-up, a lot of it may have been driven by year-end tax calculations and evaluation of what their taxable income was in Q4 and they had under, you can estimate it or distributed in prior quarters. So you had some catch-up. And then you also, as you recall, had an increase in the dividend income from the advisory activities in the asset management business. But I wouldn't say there was anything in there that was purely a one-time item, but you would have seen some elevated or catch-up activities.

Got it. I appreciate that. And then on exactly that the dividend income from the asset manager. I mean, it's a really high return to shareholders, obviously not putting capital at risk, and you can increase the work that in large part you're already doing. So what can we -- what should we expect from that business over time? Obviously, the HMS, MSC now is back in a position where it can potentially grow by deploying capital and leveling up a little bit. But is reopening that to new equity on the cards as a private fund? And then on the private fund itself, I mean, obviously, it's very small right now, is the intent to grow that? And what would your target expectations maybe long-term or maybe near-term be from the contribution from the asset management, given how accretive it can be to ROE?

Sure. So, Robert, as you've heard us say in the past, we find that part of our business to be very attractive for all the reasons that you outlined or highlighted there. When we look at the MSC Income Fund contributions, the way we would look at it, as we would expect, Q4, even though it was elevated above Q3, because we became the sole adviser, as opposed to the sub-adviser. When you look at the assets at MSC Income Fund, there were some significant repayments at the end of the year and they did not at the time, had the ability to reinvest. So the total assets at MSC Income Fund declined, which obviously, has a negative impact on the fee income. So we would expect that that asset amount to be the low level for MSC Income Fund and hopefully see that elevating, as we move into 2021, you may not see it as much in Q1, but hopefully, later in the year now that they have capital and we restarted investment activities, you should see that total asset number increase over time, and that will drive an increase in the fee income from that activity. In addition to us being the adviser for the full quarter as opposed to two months out of three months in the fourth quarter. When you look at the new private loan fund, I think we're very excited to have new activity there. But we are expecting that to still be a pretty modest contribution to Main Street at least initially. Obviously, the benefit there will be dictated by how successful we are first and raising capital and then longer-term in deploying it, I think, we feel really good about both of those, but we do continue to expect it to be a fairly small contributor in comparison to the other components we have on our side and really view it as a long-term investment with significant opportunity, not just on this first fund, but hopefully on the subsequent funds that we raised in the future as a follow-on to this first fund.

Got it. I appreciate it. Thank you, and again congratulations covering the dividend.

Thank you. I appreciate it.

[Operator Instructions] Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Hi, good morning, and thanks for taking my question. Just one on the prepared remarks. Within what you're seeing in the lower middle market portfolio, you mentioned that you're seeing potentially a lot more folks looking for minority equity investments and this could drive some potential increase in the pace of capital deployment. I'm wondering if you could just further flesh out those comments whether there are any specific sectors that you're seeing this kind of activity, or was it rather broad-based on just any further color on this? Thanks.

Yes, sure. Thanks for the question. I'll give some real quick comments and I'll let David, follow on to that. I think when we look at our activities in 2020, in the lower middle market, despite the impacts of the pandemic, we felt really good about our activities there. And we saw benefits from both our existing portfolio companies being more interested or more active on follow-on investments to fund acquisitions they completed. I think we expect to continue to see that activity going forward. On your point about the minority investments, I think we view the opportunity in today's marketplace to be one where business owners of private companies likely want to get some liquidity just like they have in the past, but we expect that there could be elevated activities there, but they may not necessarily want to sell their business. And in that scenario, we think our combined debt and equity investment strategy and then more importantly, our strategy where we can be a minority investor for as long as they want us to be, their partner, their investor, we think that that flexibility you should play very, very well in this environment. I'll let David add on additional comments he has?

Yes. So as it relates to the privately-held business community, I think back in 2019, we're seeing some frothy valuations and also EBITDA increases in visibility. As we gotten to 2020 with the pandemic, there was less visibility. And so transactions became more difficult to close. So from our perspective, we saw great opportunity to pivot from larger equity checks to smaller equity checks, where we could still get minority equity exposure, put some great money to work on the debt side and partner with those management teams. There's also a considerable amount of those folks who looked at getting on the side of -- positively looking for opportunities to grow their companies. So a lot of the proceeds went to being opportunistic in the market with that capital deployment.

Gotcha. That's very helpful, very helpful color there. And just one follow-up, if I may, wonder if you could just share with us any updated thoughts around what would be the key drivers in terms of improving distributable net investment income over the near-term? Thanks.

Sure. So we would look at the activities we have both on the new investment side, I think we touched on your structural originations at the end of the year, as we closed out, 2020, but also a healthy pipeline as we sit here today. The contributions as you would expect from those investments, at least in Q1 will largely be dictated by the timing of the closing. So a lot of that activity might really be more beneficial for Q2 going forward. But a new investment activity will be a big driver. And then as I touched on earlier in my comments, we do expect to see continued increases in contribution from the asset management business. And then that coupled with continued improvement in the overall economy, which we're seeing in our lower middle market portfolio companies, should drive continued increases in the dividend income. And really, we expect there could be some volatility, at least, over the next couple of quarters in dividend income. But longer-term, as we look at it, Q2, Q3 and later, we expect that dividend income contribution from our lower middle market companies to become more consistent like it was in the periods prior to the pandemic. So those would be the big drivers we have on our side.

Great. That’s very helpful. Thanks, again.

Thank you.

Our next question comes from the line of David Miyazaki with Confluence Investment Management.

Congratulations on a good quarter and a good year. Just to kind of the question, a little more granularity. And forgive me for not knowing this, you guys can [indiscernible], when you're providing equity capital in, typically, what is the proportion of ownership that you usually wind up having in the company?

Yes, David. Thanks for the question. I'd say that that percentage of ownership that we that we end up having on our side can vary significantly, it's really on our side, when we make an equity investment, we're providing a highly customized, feel very specific solution to that portfolio company or to that, to that owners desires. So our ownership in the company, as a result of our transaction is really driven by what those business owners and what that management team is trying to achieve. So the more liquidity, the business owners want are equity check and percentage ownership will increase, if they're really, trying to take some chips off the table, but they want to maintain control. We love that scenario. And then in those scenarios, or those transactions, we end up being a significant minority investor. But clearly, we end up being a minority with the existing management team and existing owners of the business, retaining majority control of the company. So it varies significantly. The key for us is that the common transaction for us is a mix of debt and equity, between 75% to 80% debt and 20%, 25% equity and ownership position really is dictated by the desires of the existing owners of the business.

And typically, then, what is your experience for the transaction of exit on those kinds of equity investments?

Yes, I mean, one of the things that we really think is unique about our model and it's given to us purely by being a public company, which is different than most other investors and private companies is that we have permanent capital on our side. So we are very, very happy to be an investor in these companies alongside the other existing owners and more importantly, the management team literally forever. So we do not underwrite to an exit, like you would see a typical private equity group that has to exit everything that they invest in over five, seven year time period. We love kind of being the permanent investor providing something that we think is materially different than other people in the marketplace. And that's why you hear us say that we think our low middle market strategy is unique or different. And we could point you across our portfolio numerous companies that have been in the portfolio for longer than a decade, I think, as we sit here today, out of the 70 companies, we have about a third of those companies have been in our portfolio for longer than eight years that really is a big part of our strategy. And that's why you hear us make positive comments here over the last three or four quarters, about our excitement about seeing those same types of companies that we expect to be long-term investors in deploying activities on their side, whether it's acquisition growth, or organic growth activities, you're really seeking those growth opportunities, because we expect to be investors with those management teams, and those other owners for the next five to 10 years or longer. It's really a significant strength from our standpoint and a core part of our strategy.

That's great, very helpful. I appreciate the extra color there. If I can shift gears on you, do you have any thoughts on the regulatory environment? I know that you guys have been involved in varying ways over time with regard to some of the regs that are out there? And what are you seeing or do you have any hope for 2021 and forward with regard to some of the rule changes out there that may or may not happen?

Yes, we have a lot of hope, is it going to be 2021 or 2022? I don't know. You still have the SEC getting staffed up and you've got the congressional committees trying to figure out what their short-term agendas are, et cetera and how they're going to work together. But so we continue to work on in a bipartisan manner with both the relevant House and Senate Committees, on legislative fixes and also with the SEC on regulatory fixes. And so obviously, our priority is AFFE, both on a legislative front and a regulatory front, mostly regulatory today and tax parity, our individual shareholders get the 20% 199A deduction like REIT shareholders, for example and that would be statutory. And you're going to see some bills drop on that, once we kind of reset with our new co-sponsors on a bipartisan basis at the committee level and just kind of go forward. Unfortunately, you have two years, then there's a new Congress. So you try to get as much done as you can but probably not a lot of hope for '21, probably more hope for '22. But things can change quickly. But we don't really see any, a lot of opposition. It's more prioritizing and trying to figure out what bill, we can attach, our bill to that needs to get passed as opposed to maybe try to pass something on a one-off basis, is it going to be done in reconciliation? Isn't going to be done in another manner? And is that a really effective group of SBIA working on this? And we also have a lot of resources among some of the larger members. And we're really working together pretty well as an industry at this point.

Right. It does a lot of these issues, particularly the AFFE, it's kind of like watching a glacier come down the mountain, it is moving forward. At some point, it's going to drop into the ocean, but my goodness, every day look at it, it doesn't look any different than the day before. And I think one of the things that at least from my distant perch, it appears that the efforts are now much more bipartisan than they had been in the past. Is that a fair characterization?

Yes, I think so. And with respect to AFFE, specifically, the SEC has really done quite a bit because after all, it was their rule in 2014. They put it off for public comment, having received none, they finalized the rule and now we try to get them to change their rule back. So they proposed to do that they haven't proposed to do it in a way. It's a slam dunk with Russell and S&P in terms of their index inclusion rules. So really, we need to see how far the SEC is willing to go, get to real finalized and then go back to the indices and see what we can do to get them to modify their inclusion criteria and that going to be real important. But I'd say we really did a pretty good job with the SEC considering the history and the fact that, we're trying to get them to change their own rule.

Right. And I mean, I have to agree with that wholeheartedly. That at least in my observation that the SEC has been increasingly engaged in trying to gather the concerns around the impact of the rule. And I know that this is kind of getting outside of maybe what you're able to know. But I greatly value your opinions on it. Do you get a sense that the primary equity sponsors that I think Russell and S&P would like to get the BDCs back in? Or is it something that is not really all that important to them?

I think they're a conduit for the views of their subscribers. I really don't think they have a view. I do think like anyone else, they're not too eager to sign up for a bunch of work. And so with respect to the SEC proposal, with a 10% threshold below which you have footnote disclosure and above which you don't, they're not really excited about being the ones to monitor that into a quarter, into a year. That's not really workable for them. But aside from some administrative difficulties, my view is they don't have a view. They want what their members want, their members, or subscribers, who are having great difficulty in 2014. And so they supported them and helped get the real change. And to the degree that those same people are willing to have us back in. So we have parity with mortgage REIT, for example that I think they'll do it.

Right, right. No, I think that's a really great point. I mean, while the fee issue is important, just the work in calculating what the fee is, is just going to put a burden on the user of the index. And so if you make it cumbersome, you can get pushed back just from the complexity. So I'm glad that concern is getting voiced and certainly appreciate the leadership that you guys have provided on various fronts over the years.

You bet and I always happy to talk offline.

This concludes our question-and-answer session. I'd like to turn it back to management for closing remarks.

We just want to thank everyone again for joining us this morning. And we'll look forward to talking to you again at the first week in May. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.