SLR Investment Corp. (SLRC) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Solar Capital Limited Earnings Conference Call. My name is Denise and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Mr. Michael Gross, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you very much and good morning. Welcome to Solar Capital Limited’s earnings call for the quarter ended June 30, 2015. I am joined here today by Bruce Spohler, our Chief Operating Officer and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start off by covering the webcast and forward-looking statements?

Of course. Thanks, Michael. I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today’s conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of the number of factors, including those described from time-to-time in our filings with the SEC. Solar Capital Limited undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670. At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. We are pleased with our strong results for the second quarter of 2015. Origination engine is operating on all cylinders supporting our thesis that a thoughtful strategic approach increasing our proprietary sourcing channels, with more additive long-term than rushing to reinvest the proceeds from the prior two years, heavy repayments into less attractive transactions. Against the backdrop of a modest uptick in newest activity from the first quarter, we originated approximately $203 million of senior secured floating rate loans. Net of $79 million of repayments, our portfolio grew by $124 million or 12.4% to approximately $1.2 billion. Importantly, this portfolio expansion was comprised of senior secured loans, with the attractive risk reward characteristics we targeted during the strategic expansion of our origination platform. Crystal Financial and our life science lending business, provides us with important sources of returns that are less correlated with the liquid credit markets. As a result of our larger average portfolio, net investment income for the quarter increased to $0.38 per share. Our net asset value at June 30 was $21.92, which was slightly higher than the prior quarter and our portfolio is over 99.8% performing on a fair value basis. In addition, we have no direct energy exposure. Through our core business lending of sponsor back middle-market companies, we made direct investments for which we are able to negotiate attractive terms compared to liquid credit markets. Our life science lending platform originated additional senior secured first lien loans bringing our total life science investment portfolio to approximately $90 million. Furthermore, we currently expect to distribute assets into the SSLP unitranche joint venture over the next few months. With approximately $233 million of new investments in the first half of this year and our incremental activity to-date in the third quarter, we believe we are on pace with our origination target of approximately $500 million of new investments for 2015. Additionally, we anticipate relatively modest repayments in the current quarter. At the end of Q2, Solar Capital’s net debt to equity ratio was 0.23 times. At June 30, the total current available debt capital was $490 million subject to borrowing base limitations. Off balance sheet, we have access to another $500 million of investible capital bringing our total capital available for investment in our platform to approximately $1 billion. Thus far in the third quarter, we have begun drawing on our revolver to fund new investments. Given that we anticipate repayments to be relatively light for this quarter, we expect to further increase our leverage as we fund additional investments. As banks have been exiting the middle-market lending sector due to regulatory constraints and capital requirements, BDCs have emerging as a dominant subset of the shadow banking system. One of the major competitive advantages that the BDCs with available capital have over alternative asset managers in this nascent industry is their permanent capital. Our long-term investment horizon and ability to be patient is conducive to illiquid nature of private middle-market loans. Also our ability to recycle capital rather than raising serial funds enables us to have a lower cost of capital over long-term. When we are evaluating the best uses of our available capital, we take into consideration the intangible benefits of our permanent capital base. Due to our decision to not aggressively invest in the frothy liquid credit markets of the past 3 years, we currently have the scale and available capital that those who are peers were fully levered do not, that scale, available capital, and our permanent capital base, are three competitive advantages that should enable us to succeed in either a continued low rate capital-rich environment or if credit markets dislocate. And finally yesterday, our Board of Directors declared a quarterly distribution of $0.40 per share that should be paid on October 2, 2015 to shareholders of record as of September 24, 2015. At this time I would like to turn the call over to our Chief Financial Officer, Rich Peteka to take you through the financial highlights.

Thanks, Michael. Solar Capital Limited net asset value at June 30 was $930.8 million or $21.92 per share, compared to $930 5 million or $21.81 per share at March 31, 2015. At June 30, our investment portfolio had a fair market value of $1.17 billion in 50 portfolio companies across 30 industries. This compares to the fair market value of $1.04 billion in 42 portfolio companies across 26 industries at March 31. At June 30, the weighted average yield on our income producing portfolio decreased slightly to 9.9%, measured at fair value versus 10.0% at March 31, 2015. The three months ended June 30 gross investment income totaled $28.0 million versus $25.6 million for the three months ended March 31. Expenses totaled $12 million for the three months ended June 30 compared to $11.2 million for the three months ended March 31. Accordingly, the company’s net investment income for the three months ended June 30, 2015 totaled $16.0 million or $0.38 per average share versus $14.4 million or $0.34 per average share for the three months ended March 31, 2015. Net realized and unrealized gains for the second quarter of 2015 totaled approximately $1.3 million versus a net realized and unrealized loss of $3.5 million for the first quarter of 2015. Ultimately, the company had a net increase in net assets resulting from operations of $17.3 million or $0.41 per average share for the three months ended June 30, 2015. This compares to a net increase of $10.9 million or $0.26 per average share for the three months ended March 31. At this time, I would like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. The credit quality of Solar’s portfolio remained very strong. Overall, our issuers are experiencing stable to modest EBITDA growth and the fundamentals are healthy. We continue to have no direct exposure to the oil and gas sector. Our predominantly senior secured floating rate portfolio should provide protection if the economic environment declines and/or interest rates rise. At June 30, the weighted average yield on our income producing investment portfolio when measured at fair value was 9.9%. The weighted average investment risk rating of our portfolio remained at approximately 2, when measured at fair market value based on our 1 to 4 risk rating scale with one representing the least amount of risk. Our one investment on non-accrual, direct buy accounts for less than one half of 1% of the portfolio fair value, with the other 99.8% in the portfolio performing at or above our expectations. Again, the credit fundamentals are strong across the portfolio. At the end of Q2, our portfolio consisted of 50 different companies operating across 30 industries. When measured at fair value and including Crystal Financials’ full portfolio, over 91% of our investments were in senior secured loans, including 57% in direct senior secured loans and 34% in Crystal’s directly originated portfolio. The remaining 9% of the portfolio was comprised of 6% of sub-debt, 1.5% for equity and just under 2% in common equity and warrants. At June 30, approximately 90% of our income producing investment portfolio was floating rate when including Crystal’s full portfolio at fair value. At June 30, Crystal Financial had a diversified portfolio consisting of approximately $455 million of funded senior secured loans across 24 issuers with an average issue exposure of approximately $19 million. During the quarter, Crystal funded new loans totaling approximately $68 million and experienced repayments totaling approximately $104 million. All of Crystal Financial’s investments are floating rate senior secured loans. At the end of Q2, Crystal had a net debt to invested equity ratio of 0.7 times. Crystal paid Solar Capital a cash dividend of $7.9 million, which is equivalent to 11.5% annual cash on cash yield, consistent with the prior quarter. During Q2, Solar originated approximately $203 million of senior secured floating rate loans. Investments prepaid during the quarter ended June 30 totaled approximately $79 million, resulting in net originations of $124 million. I will now highlight some of our second quarter investments which were sourced via our strategic channels. Specifically, our sponsor focus direct origination business with its unitranche capabilities and our life science lending platform. We sourced and invested in the unitranche loan for LegalZoom, which is majority owned by Premier Partners. LegalZoom is a leading provider of online legal services for small businesses and consumers in the U.S. Solar funded $50 million of $156 million unitranche, which was jointly underwritten by a small club of investors. The loan has an attractive covenant package as well as call protection. The investment carries an all-in yield of 8.7% and total leverage approximates 4.2 times. During the quarter, we also led the underwriting of the second lien tranche for IHS, Interactive Health Services in conjunction with FFL’s acquisition of the company. IHS is the nation’s largest independent provider of corporate wellness and health management services. With regards to this transaction, Solar leveraged our historical relationship with the company and knowledge of the credit. As a reminder, we have previously underwritten a unitranche loan for IHS back in 2011, when it was owned by CI Capital Partners. Solar is currently holding $25 million of the $60 million second lien loan. And investment carries it all-in yield of just under 10%. Additionally, we reinvested in a second lien loan to EMC, Emerging Market Communications which is a global provider of satellite communication services to remote locations in conjunction with an add-on acquisition the company which is owned by ABRY refinanced its capital structure. We repaid at a premium to par on our original $27 million second lien investment, which resulted in IRR of just under 13%. Due to our close relationship with both ABRY and the company’s management we played an active role in determining EMC’s new capital structure. The company’s EBITDA has grown from $26 million at the time of our initial funding to $67 million today pro forma for this acquisition. EMC is one of many examples where Solar works actively with top tier financial sponsors to be a value added solutions partner, providing both capital, as well as advice on new opportunities and refinancing existing portfolio companies. Our $26.5 million investment in this new second lien loan carries an all-in yield of 11%. Moving to life sciences, the life science team underwrote three new transactions during the quarter, which totaled approximately $26 million of new investments, the largest of which was a $16 million first lien term loan to Rapid Micro Biosystems. Rapid Micro is a life science company focused on products for detecting the bacterial contamination during the manufacturing process of consumer goods. The company is backed by a syndicate of venture capital firms, including TPG, Longitude Venture and Quaker Ventures. The loan has a full covenant package, call protection, as well as success fee. When excluding the success fee, our all-in yield on the investment is 10.5%. At the end of Q2, our life science portfolio has grown to approximately $90 million of first lien senior secured loans across nine different borrowers with an average position size of $10 million and an average all-in yield, including our warrant values, but excluding any success fees of just over 11.5%. The team is running hard since arriving late Q1. And given their strong current pipeline, we expect further growth in this portfolio in Q3. Now, let me touch on our realizations. We are repaid at a premium to par on Blue Coat Systems in conjunction with Thoma Bravo’s sale of the company. The IRR in this investment is just under 12%. We were also repaid at a premium to par on our $19 million second lien investment in Ikaria in conjunction with Madison Dearborn’s sale of the business. Our IRR for this investment was just under 11%. Thus far in the third quarter, we had visibility on approximately $25 million in total redemptions and are currently not expecting any additional material repayments in Q3. As Michael mentioned, we expect continued portfolio growth in the second half of the year. Now, I will turn the call back to Michael.

Thank you, Bruce. In conclusion in the second quarter, we began to see the fruits of our efforts to expand our sourcing engines and we anticipate further growth in the coming quarters. We believe that our prudent approach to investing during the frothy credit market conditions of the past three years is paying off. Today, not only do we have approximately $1 billion of capital that we will invest which places us in a select group amongst the BDCs, but we have multiple attractive investment channels to which we deploy it. In Solar’s core underwriting businesses, sponsor back middle-market companies, we offer both breadth of product and depth. Additionally, Crystal Financial and our life science lending businesses with our current ROEs in low-teens provide us with diversified earnings streams with growth potential. Based on current visibility, we expect continued strong net portfolio growth in the second half of this year. On a relative value basis, we believe Solar is a very compelling investment opportunity. At the close last night, Solar is trading at 0.81 times book value, with a current distribution yield of 9% compared to the Barclays U.S. corporate high unit index yield towards of just 6.9%. On an absolute basis, we view Solar as highly attractive as well. Spread compression has been a recent theme in the BDC industry. For Solar’s diversified sourcing engines, we anticipate this trend reversing itself over the coming quarters. The waiver repayments of our high-yielding older vintage subordinated debt investments, has ended. And as we fund more investments through our strategic initiatives, which carry expected return on equities in the low to mid-teens, we anticipate increases to our portfolio weighted average yield, which in turn should boost our net investment income. We believe that we are one of the only of a few BDCs, which have this capability. At 11 o’clock this morning, we will be hosting an earnings call for the first quarter results of Solar Senior Capital, or SUNS. Our ability provides additional middle-market senior secured financing through this vehicle continues to enhance our origination capability to meet our clients’ capital needs and we continue to see benefits of the value proposition in Solar Capital’s deal flow. Thank you for your time. Operator, would you please open the line for questions?

[Operator Instructions] Our first question comes from Ryan Lynch with KBW. Please proceed.

Good morning. Thank you for taking my questions. You guys mentioned dropping some assets into the SSLP potentially over the next few months, have you guys originated any assets on your balance sheet that would make sense and fit into dropping into the SSLP in the future? And how big would that portfolio have to be both in terms of amount and number of portfolio companies that you would like to get before you drop assets into the SSLP?

We have as we just touched on couple of assets on balance sheet, one of which is LegalZoom that we would consider dropping in as the unitranche. Another one that we originated during the quarter is something called Salient, which is unitranche to straight first lien into an asset manager. I think – and we have additional deals we are working on this quarter that we would drop in. As you know, the credit provider likes to see certain amount of equity come in prior to allowing you to tap into the leverage facility, not different from some of our other facilities on the platform. So, I think that generally they would like to see four or four investments in there prior tapping into the leverage.

Okay. And then it looks like you guys are also making some really nice progress in building your life sciences portfolio and it looks like that’s going to continue into Q3, maybe just looking a little bit further out, can you maybe just give us some color on what size do you see that portfolio ultimately getting to call like 2 years to 3 years down the road?

I guess what I would say is that at its peak the team, in their prior life at GE had taken the portfolio as large as $500 million. We have been sort of targeting $250 million plus, but are optimistic based on the early returns.

Okay. And then one last one, you mentioned that you guys have no direct energy exposure in your portfolio, given some of the disruption we see in the energy markets, is that an area you guys would look to explore making some investments in?

Probably pretty unlikely I mean the fact that we have no energy exposure today kind of speaks to the fact that we don’t view ourselves as having expertise in that sector. And so for us kind of different too on the market when things are under stress as opposed to doing new issues is probably unlikely.

Alright. Thanks for answering my questions.

Thank you.

Our next question comes from Rick Shane with JPMorgan. Please proceed.

Thanks. I would actually just like to follow-up on the last question related to SSLP. Two things, one it sounds like the reason you are putting things on balance sheet from now really has more to do with pool diversity, is the expectation once you achieve full diversity that loans will be funded directly through SSLP and not through the Solar balance sheet?

Yes.

Okay, great. And then the second is just as we think about dropping – in your words dropping those loans into the SSLP, is there anything that we need to think about from an economic perspective, that would change?

Nothing really material, I think as we drop them in and incur leverage you will see our return on equity go up off of unitranche assets we originate. And we would own – we effectively sell 12.5% of the loan to our partner there. But to Michael’s point as we ramp ROE on the invested capital will drive towards the low to mid-teens.

Got it. And when you talk about your overall origination guidance for the remainder for the year, what is expectation between the mix that will go on to the Solar balance sheet and what will go into the SSLP?

It’s really tough to read as you know this business is very lumpy, so it’s hard to predict for how much will be life science is, how much will be Crystal, how much will be unitranche, how much will be just direct originated loans upon the book value. It’s really hard for us to kind of give you that guidance.

Yes. I think as we just talked about on the life science side, we are with $90 million portfolio at June, marching towards $250 million over the next call it 18 months could be more. And so there we have some visibility. And then the issue as to Michael’s point, the core sponsor business whether they choose unitranche option in financing their companies versus the second lien. So that product mix is tougher for us to predict.

Fair enough. Okay, thank you, guys.

Thank you.

Our next question comes from the line of from Doug Mewhirter with SunTrust. Please proceed.

Yes. Good morning. Just two questions. One on the SSLP and one on your life science lending business, so just maybe educate me a little bit on what the mechanics might look like in your financial statements when you sort of move your existing unitranche loans off the balance sheet to the SSLP, I would take that you would record 12.5% of the value of those loans in the sort of the sales or exits portion in that financial statements might artificially increase that piece of it or also because it’s you are technically changing it to part of that to an equity investment I don’t know if – will that show up differently as well, just wondering sort of how that your financial statements would change as you shift the assets around?

Hi, Doug. What you should expect is the sale of the asset off the balance sheet and the purchase of the asset into the SSLP, so it’s the way we did solid senior if you look at our 10-Qs. And it is effectively scheduled investments and summary financial statements and notes within that, so very similar to the other joint ventures that you see in the industry.

Okay. Thanks for that. Maybe a question, its more of a hypothetical on your venture lending, obviously the biotech or life sciences industries can be very volatile on the public markets and I know that one purpose of venture lending is to provide sort of a bridge to the public markets and what is your team’s contingency plans and how would we see your behavior change if there is extended volatility in the public life sciences biotech markets in the IPO window may be close, would you slowdown lending, would you change the terms of the loans, would that really change the behavior of your venture lending team and how you do business?

I would say it’s important to note that the venture lending team has been doing this for close to 15 years. So across cycles, substantial dollars invested with de minimis losses. So we have incredible faith in their track record and ability to navigate both strong and weak public markets. The other point I would make is that, where we play in the life science venture lending tends to be in the late stage later innings where they have proven out some technology or some drug efficacy, they are through Phase 2 and are deep into Phase 3 may have been fast-track for FDA approval. So generally speaking, what we find is we have multiple exits, it’s not just to the public market, it’s also to strategics who are often part of the venture or investing community in these deals that we have been looking at. So we know we have an obvious buyer. It may not be at the price that the VC firms think they can take it public at, but we know as a lender where we are in at de minimis loan to value. And that there would be strategic interest or alternatively the VC funds, we are also confident that when we go in they have substantial capital to continue to fund the development through commercialization. So we look at multi-path to get out and really do not rely honestly on the IPO window.

Okay, great. Thanks that’s all my questions.

Our next question comes from David Chiaverini with Cantor Fitzgerald. Please proceed.

Hi thanks, good morning. So a couple of questions for you on Crystal Financial, so you mentioned during the quarter that the net portfolio declined by about $35 million when netting out the repayments. First question is and its nice having this business being less correlated with the overall business that saw a very strong net portfolio growth, but first question is just is the $455 million size of Crystal, is that right in the sweet spot of where you would like to keep it or would you – or is it a bit higher or a bit lower what’s the range that we should expect there?

Yes. I think the answer is we are happy to see it grow. It has been as high as low-500s, as low as high-300s. It is a short duration asset class and so there is a fair bit of churn, which drives a fair bit of recognition of fee income both upfront fees and exit fees as well as amendment fees along the way. So that’s just the way that business flows. It’s not a direct or straight line to growth, but generates as you can see very consistent ROEs. They paid us 11.5% for the second quarter in a row. And so I think we would be very happy if they grew that business, but like us they are prudent in picking their times and their opportunities for growth.

Thanks for that. And the nature of the borrowers for that business, would you say that it’s countercyclical and that you could see additional growth if the environment were to get a little bumpy?

Yes. Because generally the companies are lending to our companies going through some kind of transition that could either be something because of their base business just from having do the economy. So in a more difficult economy, there will be a greater demand for this type of capital.

Great. Thanks very much.

Thank you.

Our next question comes from Andy [indiscernible] with JMP Securities. Please proceed.

Good morning. Thank you for taking my question. Can you update us on your investment easy financial services, we have noticed fair value has trended down in the last few quarters and want to get a sense for your comfort with the performance of this credit?

Yes, that’s really just reflecting currency hedges. It’s a Canadian dollar denominated and the loony has not performed well and we are fully hedged.

Great, that’s helpful. Thank you.

Thank you.

Our next question comes from Casey Alexander with Gilford Securities. Please proceed.

Hi, good morning and thanks for taking my questions. First of all, it’s great to see you out there originating again how late in the quarter did the originations come? I mean was there much income recorded in the quarter from the originations that you did or was it fairly back-ended?

I would say it was middle to end. So, you will see more of a full quarter’s run-rate this quarter.

Okay. And you did say that you expect to have positive originations in this quarter as well, would it be your expectation then that in the current quarter that we are in that it’s likely that you will cover the dividend with net investment income?

Yes, I would say that first of all just as a regulated investment company, we have taxable income unlike other investment companies, BDCs, we recognized income for tax upfront, but we amortized it as an adjustment to yield. So, taxable income in covering the dividend is sometimes definitional, but from our perspective, you will see some net growth and how that plays out in the yield in those assets, time will tell, but we feel very comfortable with our run-rate dividend right now.

Okay, great. And lastly just from a cleanup note, the senior secured portion of the portfolio. Is it possible, I checked the queue and I couldn’t find it to break that into percentages of first and second lien?

Yes, it’s not broken out. What happens is you see things like these unitranches that we are talking about and others is first dollar as there is attachment points. When you look across the industry, it’s not necessarily clear. So, we are really breaking them out by just secured and also unsecured and we would point you to the average rating yields in our portfolio. And so you get a really good perspective on the risk that the portfolio has relative to others in the space.

Right, okay great. Thank you very much for taking my questions.

Thank you.

[Operator Instructions] Our next question comes from Jonathan Bock with Wells Fargo Securities. Please proceed.

Hi, good afternoon and thank you for taking my questions. Just curious with the – with one of the larger investments of the lot, particularly in LegalZoom, can you talk about how that was sourced and who was the lead originator of that unitranche, because I know you mentioned a partner, I was just curious if this was an item where you were brought in as they syndicated down at credit due to the fact that they are somewhat capacity constrained or not?

No, I would say this was horse race between us and other entities, who is public, so I won’t release their name.

I will look at the Street.

Okay. So, this is a horse race. And at the end of the day, it is sponsor assets to share.

Very nice. Okay, that’s excellent. And then as we think about it originations going forward, obviously this is great as it continues to push positive inertia and momentum for earnings, I am just curious about two employees at the external manager, namely Brian Gerson and Bill Eckmann that I believe left for Lone Star and left for Macquarie. And Michael what I am trying to understand is one, can you talk about why these folks chose to leave given that you have a significant amount of origination capacity for growth? So, there seems to be no constraint on their ability to conduct transactions? And does that limit your origination ability to fund assets kind of in the future trying to understand those two departures as important and how we look at that in the entire ecosystem of your ability to grow the portfolio?

Sure. I think it’s important to note just as soon as, sorry Jonathan that both of these individuals left over a year ago, but so I just haven’t really talked about it of late other than seeing them socially. You might also recall that at the beginning of last year prior to their departure, we hired the senior originator from Apollo across their entire credit platform. And I think that was meant to bring a different type of energy to our origination efforts. And so you have those two individuals as to their motivations, but we were in the midst of again sort of diversifying and growing our origination capabilities. As you saw, we also brought on the life science business early last year, which strategically is something that those two individuals were not going to be involved in because it’s obviously a different asset class. But we club together with them. We have some deals in common and I think it’s great to have like-minded partners out there. Go ahead Michael.

Without [indiscernible] on the two of them, because they are both great friends of ours and we seem to bindle them, I would just say that our origination engine and our due diligence engine are the strongest they have been since our history. So we are very comfortable with the team ability to put to work the capital that we are doing so.

And again understanding the timing, I guess we are just, the view did that and somehow impede kind of the efforts to deploy capital early on, but now that you have folks in place with the machine running and kind of humming if you will, not only have you beat but also exceeded your – exceeded where you were according to plan and it sounds like you definitely have so great?

I think Jonathan it’s important that note that timing too, right. Our unitranche capabilities didn’t tick off until after those two left. And so that just was not an opportunity that existed for the team. That was here last year and the life science effort really ramped up this year when we brought on three additional individuals as well as we brought on a couple of individuals from GE on the sponsor side. So I think the capabilities are different than when those individuals had been here, don’t know that would have changed their thinking, but we are to Michael’s point clearly thrilled with the additions.

Got it. And I guess kind of cat and mouse, you have got some assets that you could onboard into SSLP, but you are kind of waiting to build the portfolio so one can get some leverage from your leverage provider, I guess the only question kind of remains is with substantial amounts of unitranche product out there, folks just trying to understand the risk return of the asset class or is it also possible guys what people talk about unitranche could you somehow choose to fund this facility with BSL, which I would imagine would please the liquidity providers given the liquidity of that asset and allow you to eat out some levered returns as you slowly sell those down into more proprietary assets. Can you maybe talk about the ability to start generating ROE in that vehicle with liquid assets versus maybe the time lag that takes to start really close in a significant unitranche assets in the fund?

Sure. And look that is the strategy. I will say that if you look over at SUNS where we have the joint venture with Voya and we have been ramping there. We are really stuck to our knitting. Not surprising as you know, Michael in my DNA [ph] to be focused and to be disciplined, the risk and strength from middle-market illiquid assets into more liquid collateral is liquidity dries up as we know and what we don’t want to do is be unable to get out of the assets at the time that we are trying to build into our core investment class.

And I said the other thing to add is this is really utilizing one of our competitor advantages and that we have a lot of capital available to us. So we are not capital constrained, there is no need to buy temporary assets to get temporary return. We are comfortable finding these assets at our balance sheet funding with L+2 and change bank debt and getting the net investment for ourselves until we drop it in there.

Yes, it makes total sense. And I guess to your point and this was always a big item that you outlined about the unitranche program you started, what we haven’t maybe dropped an asset in there, the fact that you were at the table offering the product in LegalZoom that the sponsor wanted obviously led to an attractive asset being booked alongside another partner, so understand and then look forward to next quarter? Thank you so much for taking my questions.

Thank you, Jonathan. I appreciate it. Thanks.

We have no further questions. I will now turn the call back over to management for any closing remarks. Please proceed.

Thank you for all your time and support and your patience. We look forward to talk to you again. In a few months, we will talk about our successful third quarter. Thank you.

This concludes today’s conference. You may now disconnect. Have a great day everyone.