New Mountain Finance Corporation (NMFC) Q1 2022 Earnings Report, Transcript and Summary

Good morning. Thank you for attending the New Mountain Finance Corporation First Quarter 2022 Earnings Call. My name is Tamia and I will be your moderator for today. All lines will be muted during the presentation portion of the call with the opportunity for question-and-answer at the end. [Operator Instructions] I would now like to pass the conference over to our host Robert Hamwee. Please proceed.

Thank you. Good morning everyone and welcome to New Mountain Finance Corporation's first quarter earnings call for 2022. On the line with me here today are Steve Klinsky, Chairman of NMFC and the CEO of New Mountain Capital; John Kline, President of NMFC; Laura Holson, COO of NMFC; and Shiraz Kajee, CFO of NMFC. Steve is going to make some introductory remarks. But before he does, I'd like to ask Shiraz to make some important statements regarding today's call.

Thanks Rob. Good morning everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our May 9th earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on page two of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections and we ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time I'd like to turn the call over to Steven Klinsky, NMFC's Chairman, who will give some highlights beginning on page five of the slide presentation. Steve?

Thanks Shiraz. It's great to be able to address all of you today as both the Chairman of NMFC and as a major fellow shareholder. I will start by covering the highlights of the first quarter. Net investment income for the quarter was $0.30 per share, fully covering our dividend of $0.30 per share that was paid in cash on March 31st and in line with prior guidance. Our net asset value was $13.56 per share, a $0.07 increase from last quarter's net asset value. We generated approximately $18 million of realized gains this quarter, primarily resulting from the sale of one of our REIT assets. The regular dividend for Q2 2022 was again set at $0.30 per share based on estimated net investment income of $0.30 per share. As we discussed on previous earnings calls, risk control and downside protection has always been part of New Mountain's founding mission. Our firm as a whole now manages over $37 billion of total assets with a team of approximately 200 people. We have never had a bankruptcy or missed an interest payment in the history of our private equity work. We have applied that same team strength and focus on downside protection to NMFC and our credit efforts. The great bulk of NMFC's loans are in acyclical sectors with secular tailwinds such as enterprise software, tech-enabled business services, and health care services and technology. These are the types of defensive growth industries that we think are the right ones in all times and particularly, attractive in the more challenging macro environment we are in today. We believe our portfolio continues to be well-positioned due to this defensive growth investment strategy and is evidenced by an average net default loss of effectively zero since we began our credit operations in 2008. Our portfolio company risk ratings have improved modestly since our last earnings call and we had no new non-accruals this quarter. Coming off of a record origination year in 2021, the first quarter represented a slower origination quarter given the seasonally slower period and the enhanced market volatility, which reduced overall deal volumes. Our sourcing capabilities are as strong as ever and we remain very selective about only lending to what we believe, are the most defensive companies. Our at-the-market or ATM stock program is off to a nice start with approximately $49.5 million of net proceeds since it launched in November. Lastly, I want to remind you that, although we have not had to use it, our dividend protection program remains in place, even if earnings fall below $0.30 per share. Rising interest rates can materially improve our earnings as the team will explain on this call. Together, the New Mountain professionals have invested approximately $700 million personally into NMFC and New Mountain's other credit activities. I and management remain as NMFC's largest shareholders. With that, let me turn the call back to Rob.

Thank you, Steve. While we collectively adapt to life with COVID, we have decided to expand our heat map to reflect the broader market conditions our borrowers face beyond just COVID. The revised risk rating system is outlined on page 8. The X-axis replaces COVID exposure, with operating performance and reflects both business performance as well as overall market environment. Tier 1 continues to be the most negative, reflecting severe business underperformance and/or severe market headwinds and Tier 4 continues to be the most positive, reflecting in line or stable performance and/or market conditions. The Y-axis is generally unchanged and as a reminder, ranks on a scale from A to C the business quality, balance sheet strength and strong sponsor support for the company. We believe our portfolio continues to be very well positioned overall.\ The updated heat maps show the positive risk migration this quarter, as summarized on page nine and with four positions representing $168 million of fair value improving in rating and three positions representing $33 million, worsening in rating. Starting with the positive movers on page 10, two of our formerly red names Haven, formerly known as Tenawa and Permian migrated to orange this quarter, due to significantly better execution at the company's and a stronger operating environment. After quarter end, Haven ceased operations at its plant due to a fire. Fortunately, there were no serious injuries and the company is working with a variety of experts to determine next steps. Given expected insurance coverage and potential rebuild options, we do not currently expect this to negatively impact our carrying or ultimate value. The hospitality management business improved from orange to yellow, as the impact of COVID on the travel industry receipts and KPIs show meaningful progress. Lastly, our UniTek position migrated from yellow to green this quarter, as the ongoing business building we have done has helped transform UniTek into a pure-play, engineering and consulting firm with a best-in-class management team, who are delivering strong results. The three negative movers include NHME, where the company continues to face meaningful top line and inflation headwinds and engineering and consulting firm which was modestly COVID impacted and has an impending revolver maturity and a retail health care business, that is experiencing a lingering COVID impact. The updated heat map is shown on page 11. As you can see, given our portfolio's strong bias towards defensive sectors like software, business services and health care, we believe the vast majority of our assets are very well positioned to continue to perform no matter how the economic landscape develops. We continue to spend significant time and energy on our remaining red and orange names, which represent just 1% and 7% of our portfolio, respectively at fair value. We are pleased with the positive migration in several of the red names this quarter and are optimistic that trend will continue. Page 12 is a view of our Credit Performance based on underlying portfolio company leverage, relative to last 12-month's EBITDA and shaded to the corresponding color of the heat map. As you can see, the vast majority of our green-rated physicians have shown results that are very consistent with our underwriting projections, exhibiting either a very minor leverage increases or in many cases leverage decreases. On the lower right side of the page, we show a group of six companies that have more than 2.5 turns of negative leverage drift, most of which correspond to our yellow, orange and red rated names. These companies represent a small portion of our portfolio that have underperformed partially due to adverse conditions caused by volatility in certain parts of the economy. From a liquidity perspective, we believe that most of these companies have adequate resources to pursue their business plans and have reasonable prospects for improved performance this year. With that I will turn it over to John to discuss market conditions and other important performance metrics.

Thanks, Rob. Since our last call in March we have experienced sustained volatility in most areas of the equity and fixed income markets caused by rising interest rates, inflation concerns, supply chain disruptions and geopolitical instability. Through this period, corporate direct lending has been one of the most resilient asset classes across all financial markets. Our market has benefited from continued good credit performance, particularly in defensive industries, floating interest rates and secured debt structures. Loan-to-value ratios in many of our core industry verticals are less than 40% and in some cases under 30%. While deal flow remains materially lower than the latter half of 2021, we have seen increased activity in the large unitranche segment of the market, as equity sponsors have gravitated to the certainty and stability of direct lending versus other financing alternatives. Yields continue to be very attractive with floating rate spreads of $5.50 to $6.75 on many new unitranche loans. While we remain mindful of the overall economic environment, we continue to have high conviction in our investment strategy of lending to stable and valuable businesses within defensive growth industries that are well researched by the New Mountain platform. Page 14 presents an interest rate analysis, where we show how the current trends in the interest rate market could impact NMFC's future earnings. During Q1, three-month LIBOR increased from 21 basis points on January 1 to 96 basis points on March 31. Given the presence on floor – given the presence of floors on our assets and the lack of floors on our liabilities, this rate movement has been a modest earnings headwind during Q1. However, since quarter end, LIBOR has moved even higher to 1.4% and is expected to continue to increase throughout the rest of the year. If this rate trajectory continues, we expect to experience a material positive change in NMFC's earnings power during the back half of the year. For example, if base rates rise to 2%, which could occur within the next three to six months, annual earnings per share could increase by $0.08 or 6%. At 3% LIBOR, NMFC's run rate earnings power could be 14% higher, representing an incremental $0.17 per share. This positive interest rate optionality continues to offer our shareholders material potential return enhancement and provides an attractive hedge against rising rates and general inflation. Turning to Page 15. We present our book value performance since the COVID pandemic began, where we showed that the portfolio is steadily appreciated over the course of the last two years. Today our book value is more than 2% higher than it was in the quarter preceding the health crisis. This recovery has been driven by an increase in fair value of our core debt holdings, strong contribution from our REIT portfolio and appreciation of certain equity positions. The largest of which are shown on the right side of the page. Going forward, assuming solid operating performance and a supportive valuation environment, we believe these equity positions could continue to increase in value. Page 16 addresses NMFC's long-term credit performance since its inception. On the left side of the page, we show the current state of the portfolio where we have $3.2 billion of investments at fair value with $30 million or less than 1% of our portfolio currently on non-accrual. On the right side of the page, we present NMFC's cumulative credit performance since our inception in 2008, which shows that across $9.4 billion of total investments only $276 million have been placed on non-accrual. Of the non-accruals, only $79 million have become realized losses over the course of our 13-plus year history. As we will discuss on the next page, these default losses have been offset by realized gains elsewhere in the portfolio. Limiting losses over a long period of time is perhaps the most important metric for a credit manager. We remain committed to transparently disclosing these metrics to our investors. The chart on Page 17 tracks the company's overall economic performance since its IPO in 2011. As you can see at the top of the page since our initial listing, NMFC has paid $962 million of regular dividends to our shareholders, which have been fully supported by $969 million of net investment income. On the lower half of the page, we focus on below-the-line items, where we show that since inception, highlighted in blue, we have a cumulative net realized gain of $2.3 million, which is a $17.6 million improvement compared to last quarter as a result of the partial sale of the Arctic Glacier position from our real estate portfolio. This cumulative realized gain is offset by $19.2 million of cumulative unrealized depreciation in our portfolio, which nets to a cumulative net realized and unrealized loss of just $16.9 million. This aggregate loss stands at the lowest level since 2018 and remains a fraction of total dividend payouts to-date. As we look forward, our team remains very focused on reversing this small cumulative loss, while maintaining credit quality throughout the remainder of the portfolio. Page 18 shows a stock chart detailing NMFC's equity returns since its IPO nearly 11 years ago. Over this period, NMFC has generated a compound annual return of 10.4%, which represents a very strong cash flow oriented return in an environment where risk free rates have averaged less than 1%. NMFC's performance has materially exceeded that of the high yield index as well as an index of BDC peers that have been public at least as long as we have. Additionally, in recent months during a challenging environment for risk assets, NMFC has performed very well compared to the equity and fixed income markets that we track. Finally on Page 19, I would like to provide a brief update on NMFC's REIT subsidiary, which invest in mission-critical commercial properties with long-term tenants. We entered the asset class with the thesis that net lease offered a very nice complement to our corporate debt portfolio given the critical nature of the properties, long lease duration, attractive cap rates and annual rent escalators. Additionally, one of the key aspects of the investment process involves a detailed credit analysis of the property's tenant, which represents a core competency of the New Mountain platform. Overall, the real estate portfolio has performed very well, as we have experienced both attractive current cash yield and principal appreciation aided by the strong commercial real estate environment since the date of our first investment in 2016. Given the very low cap rates on certain seasoned assets in Q4 of 2021, we made the strategic decision to sell a meaningful portion of the portfolio, which has yielded sales in Q1 and Q2 and of approximately $67 million creating a realized gain of approximately $43 million. Depending on market conditions, we may sell a handful of incremental net lease assets with an aggregate fair value of approximately $50 million. The remaining portfolio valued at $120 million consists of more recent originations, which we plan to hold for the foreseeable future. While we continue to like this asset class, we have decided to reduce overall exposure with the goal of reinvesting sales proceeds into our core strategy of a floating rate defensive growth oriented private credit. I will now turn the call over to our COO, Laura Holson to discuss more details on our recent originations and current portfolio construction.

Thanks John. As Steve previewed, Q1 was a seasonally slower origination quarter for our direct lending platform overall. Page 20 aligns the diverse origination within NMFC in our core defensive growth verticals, including two veterinary services businesses and add-on for an existing software business and a health care technology business. $154 million of gross originations less $74 million of repayments and sales effectively deployed the ATM proceeds, keeping us fully invested and within our target leverage range. We continue to have great success targeting and sourcing high-quality deals, within niches of the economy, where we have the highest conviction. Since quarter end, deal activity has picked up and we have committed to several larger deals that we expect to fund over the course of Q2 and Q3. We expect to remain fully invested in our target leverage range, as our deal flow absorbs any proceeds from ordinary course loan repayments, as well as any incremental capital raised through our ATM programs. Turning to page 21, we show that in Q1, our originations were heavily weighted towards first lien loans, due to continued sponsor adoption of the unitranche product. We plan to maintain an asset mix that is consistent with our quarter end portfolio, or slightly more than two-thirds of our investments, inclusive of the first lien SLPs and net lease are senior in nature. Page 22 shows that the average yield of NMFC's portfolio increased from 9.1% in Q4 to 9.8% for Q1, largely due to the benefit of the increasing for LIBOR curve. While the environment is competitive, the market spreads for high-quality deals remain supportive of our net investment income target. Turning to page 23, we show detailed breakouts of NMFC's industry exposure. The center pie chart shows overall industry exposure, while the surrounding pie charts give more insight into the significant diversity within our software, services and health care sectors. We believe these sectors are well positioned in an inflationary environment, given the pricing power and margin profile that comes along with the largely tech and services nature of these industries. The sectors we focus on have neatly attractive cash flow characteristics such as high EBITDA margins, minimal CapEx, and working capital needs, and flexible cost structures. As a result, as interest rates rise, we believe most of our borrowers have sufficient free cash flow to cover the increasing interest burden. As further protection, it is important to note that for our top 20 borrowers, the incremental interest expense associated, with a 1% increase in rates, represents on average just approximately 1.5% of the sponsored cash equity check. We have successfully avoided nearly all of the most troubled industries, while maintaining high exposure to the most defensive sectors within the US economy that we believe can perform well in more volatile macro environment. Finally, as illustrated on page 24, we have a diversified portfolio. Our largest single obligor Edmentum now represents 4.4% of fair value as the company continues to appreciate in value due to the strong underlying business performance and secular tailwinds in the education technology space. The top 15 investments, inclusive of our SLP funds, account for 36% of total fair value. With that, I will now turn it over to our CFO, Shiraz Kajee to discuss the financial statements. Shiraz?

Thank you, Laura. For more details on our financial results and today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now, I'd like to turn your attention to slide 25. The portfolio had approximately $3.3 billion in investments at fair value at March 31, and total assets of $3.4 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.3 billion or $13.56 per share was up $0.07 from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.23:1, and net of available cash on the balance sheet, the pro forma leverage ratio would be 1.21:1. On slide 26, we show historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. Consistent with our goal of minimizing credit losses and maintaining a stable book value over the long term, you will see that current NAV adjusted for special dividends has surpassed NAV from our IPO, almost 11 years ago. On slide 27, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. For the current quarter we earned total investment income of $68.6 million a slight decrease from the prior quarter. Total net expenses were approximately $39 million a slight increase quarter-over-quarter. As discussed investment adviser has committed to a management fee of 1.25% for the 2022 and 2023 calendar years. We have also pledged to reduce our incentive fee if and as needed during this period to fully support the $0.30 per share quarterly dividend. It is important to note that the investment adviser cannot recoup fees previously waived. This results in quarterly NII of $29.6 million or $0.30 per weighted average share, which covered our Q1 regular dividend of $0.30 per share. As a result of the net unrealized depreciation in the quarter we had an increase in net assets resulting from operations of $36.2 million. Slide 28 demonstrates 94% of our total investment income is recurring in nature. We believe this consistency shows the stability and predictability of our investment income. Turning to slide 29. The red line shows our dividend coverage. While NII fully covered our Q1 dividend, our dividend protection program could have provided an additional $0.04 of coverage if needed. Based on preliminary estimates we expect our Q2 NII will be approximately $0.30 per share. Given that our Board of Directors has declared a Q2 dividend of $0.30 per share which will be paid on June 30 to holders of record on June 16. On slide 30, we highlight our various financing sources. Taking into account SBA guaranteed benches we had almost $2.3 billion of total borrowing capacity at quarter end with over $330 million available on our revolving lines subject to borrowing base limitations. As a reminder, both our Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time. Finally on slide 31, we show our leverage maturity schedule. As we've diversified our debt issuance, we've been successful at laddering our maturities to better manage liquidity and over 75% of our debt matures after 2025. To address our $55 million unsecured note maturing in July, we recently priced $75 million of additional unsecured notes at 5.9% to maintain a stable mix of secured and unsecured borrowings. Furthermore, our multiple investment credit ratings provide us access to various unsecured debt markets that we continue to explore to further ladder our maturities in the most cost-efficient manner. With that, I would like to turn the call back over to Rob.

Thanks, Shiraz. In closing, we are optimistic about the prospects for NMFC in the months and years ahead. Our long-standing focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well. We once again thank you for your continuing support and interest wish you all good health, and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A. Operator?

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Rowan with Janney. Your line is open.

Good morning.

Hi, John.

So I appreciate the information you provided regarding your earnings sensitivity to the potential increase in base rates. I just want to make sure that's a parallel shift assumption, or I just want to make sure that that target that you provided does not account for slope shift of the yield curve?

So it's a function really of LIBOR right and increasingly SOFR which for now we'll assume broadly mimics LIBOR right? It's one and three month LIBOR. So we don't -- we're not sensitive to what happens further out on the yield curve. So the shape of the yield curve is not really relevant to us. It's really what happens on the short end and really the one month to three month LIBOR. Does that make sense?

Sure. And then lastly is there any potential volatility in noncontrolling interest given market volatility. Does that -- does market volatility impact noncontrolling expense at all?

I'm sorry. Does it impact?

The noncontrolling interest?

The noncontrolling interest in our equity positions?

In the lease corp.

Oh okay. I'm sorry. Hey John do you want to?

So we value the full net lease program and we report that value on the financials. And then we -- that's the value of the full net lease subsidiary. And then we put note that there is a noncontrolling interest, I think of approximately 10% and that would be noted in the footnote. So, what you see in the financials would be the 100% and then of that 100% NMFC owns 90% of that. Shiraz, correct me if that's wrong.

That's correct John. Yes.

Does that answer your question? Okay. Thank you.

Sure. Yes.

Thank you. The next question comes from Bryce Rowe with Hovde Group. Please proceed.

Great. Good morning. Thanks for taking the question here. Rob. Let's see -- interesting to see the action taken on the real estate portfolio. Curious if that's going to trigger some level of, let's call it special dividend that we might see either later this year or early next year. Just trying to get a feel for how you might try to manage those gains?

Yes. I mean it's a good question, obviously, we'll have to see how the rest of the year plays out and what if any losses we might have to offset against that. But that is something very much on our radar screen. I think we'll have a better sense of it as we get a little later in the year August and certainly on our November call. But it is something we're focused on and it's a great point.

Okay. That's helpful Rob. And then maybe one for Laura. Laura you made reference to increase in rates on -- the impact on your borrowers and how it kind of -- and how it relates to the size of the equity checks sponsors are writing. Could you kind of run through that again? And just help us think about that a little bit?

Sure. Yes. I think the statistics that we looked at was what does the 1% change in rates, how does that compare to the overall cash equity check that sponsors have in top 20 borrowers. We thought that it was a relevant statistic because fundamentally, if the business is performing well and obviously given the very attractive loan to values that John talked about in the market section, sponsors are not going to walk away in our view generally speaking of hundreds of millions or billions of dollars of cash equity over what is a relatively small dollar amount for 1%, 2% change in interest burden. So we thought that was a relevant analysis. So the statistic that I quoted was that for the top 20 borrowers, a 1% increase in rates represents on average about 1.5% of the overall sponsor cash equity check. So, it was kind of one component of the analysis and then we've obviously run some sensitivities on free cash flow coverage etcetera. And again, given the attractive cash flow characteristics of our borrowers we think we're relatively well positioned there as well.

Okay. Okay. And when you look at that coverage interest coverage, where does it sit maybe right now? And if you think about the analysis that you're running how does an increase in rates kind of impact that statistic?

Yes. So the weighted average interest coverage today is kind of a little bit above 2.5x across the portfolio overall. And we think that we continue again for most of the borrowers to be well covered as we took up rates 1%, 2%, 3%, etcetera.

Okay, all right. That's good information. I appreciate it. And then, maybe one more for me, as you think about being fully levered here and maybe increase in volatility, slowing some level of repayment activity. It sounds like you've got a decent pipeline behind you. Can you talk about, being able to stay fully levered, not go too much higher here from a leverage perspective and possibly deal with slowing level of repayment activity?

Yeah. Sure. So it's a balance, we're always striving to maintain. And in the end right where we will size our commitments, relative to our available resources right, which is a function of the repayments which are inherently volatile and difficult to predict. Although, we have some decent forward visibility because, we have multiple businesses in the portfolio that are currently under definitive agreements to be sold. So we do have some visibility on proceeds coming back to us in the near-term. And then, of course, that's supplemented by the ATM proceeds. So the sum of those two things is really what, -- where we size our commitments on. And we're just committed to managing within the leverage profile that we've established. So I think the good news from our perspective is, there's more than enough deal flow to cover any conceivable, repayment and ATM proceeds paradigm. So we're in an enviable position of being frankly long deal flow relative to capital and that allows us to continue to be incredibly selective. So I think we'll have no problem maintaining our fully leveraged position, but we do not anticipate it to exceed that. And the other part of the equation of course is the NAV, which drives the leverage calculation. And we obviously track that very much during the quarter particularly in times of high periods of volatility.

Hi Bryce, this is John. The only thing I'd add is, while we're fairly fully invested in NMFC which we consider our flagship credit fund, we do have multiple other funds that are private funds and are active in raising more capital. So, even if NMFC is fully invested, we remain open for business and open to support our clients in pursuing transactions that they want to pursue. So we feel comfortable holistically, just about our ability to be in business and be very relevant in the financing market.

Got it. Thank you all for your time this morning.

Yeah. Thank you.

Thank you. The next question comes from Ryan Lynch with KBW. Your line is open.

Hey, Ryan.

Hey, good morning. I had a couple of questions. First, you've gotten this complement in the past, but I really appreciate your guys' slide deck. And I also appreciate you guys, I think updating your rating system to kind of reflect kind of the environment we're in today with less focus on COVID and just more focus on overall business strength. So thanks for providing that update. I did have a question on some of your commentary on the net lease update. You obviously talked about selling some of those assets which have been incredibly successful, but I was interested to hear that you said a lot of those proceeds are going to go back into your core lending strategy. So to me, that feels like, you're pulling back a little bit from that strategy, which has been incredibly successful. Obviously you get high cash returns on it. You've exited those investments at very nice gains, and it seems like you may have some nice gains in the future. So, it would be helpful if you could just educate me on, why you guys are pulling back, because I'm just not as familiar with the whole net leasing space. I'm not sure, if rising rates has something to do with, the decision to kind of pull back some of the air, because again it's been so successful in the past?

Yeah. And it's a great question and you put your finger on it Ryan. It's a rates issue primarily. And as we think about -- we love this space and we have a very successful private fund dedicated to the space, where in the private fund you don't have to worry about beginning to end market volatility. I think in the public entity, when we came in, in the context of a very reasonable cap rate where we could as easily project a compression of cap rates, which is what did in fact happen and has helped us we do feel that we're not trying to necessarily predict rates, et cetera. But I think we feel there's certainly a lot more volatility around rates going forward. And we just don't want to introduce that degree of volatility into the public vehicle from a movement in NAV perspective. And so we opportunistically took a -- and then we feel a little bit better to be lucky than good category that we did it frankly before rates started moving, which we didn't predict. We didn't have our crystal ball last November, but we were able to enter into some very successful exits. And now as rates become increasingly volatile, we just -- we want to -- we're still going to have a decent sized net lease portfolio, but we just didn't want to necessarily double back down in that sector given the rate volatility. It's the only place right where we have any real duration and we feel comfortable with probably a little bit less duration rather than more duration given where we stand today and the uncertainty around the inflation and interest rate outlook from here.

And Ryan, the only thing I -- this is John. The only thing I'd add is, as Rob said, we do like the asset class. We are building our net lease capabilities overall at New Mountain. But Rob, I think really articulated the timing aspect that plays a role in our thinking. And we really do feel like at this moment in time being long floating rates in NMFC is really in the interest of our shareholders and that's what we're really inclined to do at this time.

That's helpful. Makes sense the explanation and nice timing on some of those exits that you guys have. Then the other question I had is, there's certainly a revaluation of purchase price and valuation of businesses today. You're certainly seeing in the public side, I know you focus on high-quality businesses, but in the public markets those businesses have been hit fairly hard as well and it primarily has to do with the higher valuations. I think high-quality profitable businesses like tech-focused businesses, enterprise businesses that you guys focus on like Adobe or Salesforce or ServiceNow these companies have -- the multiples have come down significantly. So I think that's going to trickle down into the private markets. There already has or is coming in the future. So I'd love to hear your commentary on what have you seen in the private market valuations for some of these high-growth defensive oriented businesses? This is obviously what you focus on at NMFC, but broader New Mountain Capital does that on the private equity side. And then what does it mean if you have a business that you've made a loan to, it's a really strong business performing really well, but multiples come down 20%, 30%, 40%. What does that mean for you as a lender? I know you've made investments with fairly low loan to values. That's been one of the benefits. But what does that mean when those multiples have come down for the ability for them to service debt and then ultimately actually repay you back years down the road?

Yes. It's another very good question and something we talk a lot about particularly as we look at new underwriting commitments, but just trying to take it in pieces. It's funny that the public markets, obviously, have adjusted very rapidly. And we have not yet seen that flow-through on our private equity side in a material way. We expect it to happen. Ultimately, those two markets can't stay radically disconnected for long periods of time, but right now the private markets continue to be quite ebullient. And in fact there have been some very high profile recently announced large transactions at quite interesting multiples in the -- from a public to private standpoint. But that said, I think, we have to assume that there's likely to be material multiple compression in the private market, which we frankly always assume, because that speaks to why we kind of scratch our head sometimes when a business is bought for 25 times EBITDA, but we feel pretty good lending at six or seven times, because that allows for that compression. If 25 times like you say it goes down by 20% or 30%, it's 18 times or it's 16 times, but that still leaves a very large cushion against our last dollar attachment point on our average dollar attachment point and our last dollar attachment point to allow for that ultimate repayment. It's not really a debt service issue because that's a function of cash flows, it's not asset values. But you're right, the repayment is critical, right? So, I think the basic answer to the question is, we always contemplate this as a possibility because we don't think like we've now swung to some super cheap environment. We were in a very fully priced environment, and maybe now we're repricing to a normalized environment and the pendulum may swing even further. So that's why, particularly on the higher multiple businesses, we're typically looking at loan to values in the 20s or 30s, which just gives that tremendous amount of cushion to deal with the environment that we're in today and that may extend, even more dramatically in the future we don't know.

Yes, that's helpful commentary and color. And obviously, it's a lot of unpredictability and tough to really see, how it all plays out but that's helpful. The other question I had was, your business is built on a lot of the defensively positioned characteristics of your borrowers. I'm just curious, have you gotten any feedback on, how your overall portfolio is dealing with and managing through the inflationary and labor pressures. Or is it really even too early to really know, because they just really started kind of late last year early this year. I'm sure you don't have financials, yet probably even for Q1, for a lot of these companies. So do you have a sense of that, yet, or is it just too early in the process to really know?

Sure. I can take that one, Ryan. This is John. In some cases, it's too early to know. And in some cases, we have great visibility. So in many cases, we've seen budgets. In many cases, we've seen Q1 results. And so we can start to get information, on how the companies are dealing with the various challenges in the economy right now. In general, I think we've been pretty pleased with our direct lending portfolio. And we like to talk a lot about, how we don't want to be -- we don't want to invest in companies that are slaves to their input costs, or have margins that if labor moves on them just a little bit, the businesses don't work. So when we think -- really long and hard about our core positions, we think they're really well set up in an environment of input inflation, labor inflation, et cetera. So in general, we feel good but it's certainly something that we're very mindful of and we're watching closely.

Yes. And the only thing, I'd add to that and Laura touched on this in her comments, but I think a critical component in an inflationary environment, is pricing power. And when we think about one of our core defensive growth hallmarks, is this concept of niche market dominance in a well-defined market where the company is a dominant player that typically, does lead to pricing power as well as having some type of technology or skill set that's not repeatable or competitive. So we have seen, as we start looking at budgets at Q1 numbers, monthly numbers, the ability to take price and keep up with what really is our key input, which is the wage side. And wage inflation is definitely there. But again we're seeing margin preservation through pricing power, which is a function of competitive positioning ultimately. So early days but I think we do feel -- we feel quite good about how the portfolio is positioned. Not to say, I'm sure there'll be some bumps along the road, but as a portfolio it's positioned really, really well.

Yes. Okay. Understood. John, Rob I appreciate the insights and dialogue today. Thank.

Yes. Thank you.

Thanks, Ryan

Operator, are there any other questions? Well, we're not sure what happened to our operator, but we don't see any questions on our board. So I think, we're going to go ahead and thank everybody as always, for their time and interest. And look forward to speaking with you all in the weeks and months ahead. So thank you.