Medley Management Inc.
Q4 2014 Earnings Call Transcript

Published: 31 Mar 2015

[Operator:]

Welcome and thank you for joining Medley Management Incorporated Fourth Quarter 2014 Conference Call. I’d like to remind everyone that today’s call is being recorded. Please note that the call is the property of Medley Management Incorporated and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and pin provided in the company’s earnings press release. At this time, all participants are in a listen-only mode but will be prompted for question-and-answer session following the prepared remarks. And now, I would like to hand the call over to Sam Anderson, Medley's Head of Capital Markets and Strategy, who will host this call today. Mr. Anderson, you may proceed.

[Sam Anderson:]

Thank you, operator. Good morning everyone and thank you for joining us today for the Medley Management fourth quarter 2014 conference call. I’m joined today by Brook and Seth Taube, our Co-CEOs; and Rick Allorto, our Chief Financial Officer. Before we begin, I want to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. And today’s conference call may include forward-looking statements and projections, which are subject to risks and uncertainties. Any statement other than the statement of historical fact may constitute a forward-looking statement. Please note that the company’s actual results could differ materially from those expressed by any forward-looking statements for any reason such as those disclosed in our most recent filings with the SEC. We do not undertake to update our forward-looking statements unless required by law. And during this conference call, we will refer to certain non-GAAP financial measures including fee earnings assets under management, pretax core net income and core net income per share. We use these as a measure of operating performance, not as a measure of liquidity and these measures should not be considered in isolation from, or as a substitute for measures prepared in accordance with generally accepted accounting principles. In addition, these measures may not be comparable with similarly titled measures used by other companies. Please refer to our earnings release and our Form 10-K for definitions and reconciliations of these measures to the most directly comparable GAAP measures. We’ve posted our fourth quarter 2014 investor presentation, which is available in the Investor Relations section of the company’s website at www.mdly.com. I would now like to turn the call over to Brooks.

[Brook Taube:]

Thanks, Sam and welcome everyone to our fourth quarter conference call. We’re pleased to be here today. I’d like to thank you all for taking the time to join us. Last night, we announced the financial results for the quarter and fiscal year ended December 31, 2014. The company’s core net income per share for the fiscal year ended December 31 was $0.79 per share, which is a 76% increase from the prior year. We also reported core net income per share of $0.21 for the three months ended December 31st. And at 12/31 fee earning assets under management were $3.1 billion, which represents a 52% increase, compared to the prior year. On March 29, the Board of Directors approved a dividend of $0.20 per share for the quarter ending today March 31, 2015. This dividend will be paid in May. As you’re aware, the dividend for the 12/31 quarter was actually paid in January of this year and the announcement of this March quarter dividend earlier than normal will result in our dividend payments returning to a normal schedule for the remainder of 2015. Please refer to page 27 of our investor presentation for a dividend schedule for the balance of the year. Quickly an agenda for the call this morning, we’re going to provide first a business update on Medley, second a summary of fee earning asset under management growth, third an overview of a current investing environment, fourth a review of recent business developments, and fifth the financial review of the fourth quarter and full-year 2014 from Rick, and then we’ll open the call up for Q&A. We continue to build the business around a combination of permanent capital, long-dated private funds and separately managed accounts, combine the sources of capital will continue to provide steady and cash rich earnings to shareholders at MDLY over time. In the fourth quarter, our fee earning AUM in permanent capital vehicles continue to rise. We finished the quarter with permanent capital vehicles representing 67% of total fee earning assets under management with the remaining 33% in long dated private funds and separately managed accounts. We remain focused on our core credit strategy, which drives attractive returns through direct origination, conservative underwriting. We’re focused on protecting capital, floating rate assets and active asset management. We’ve remained well positioned to capitalize on the significant opportunity that exists today in direct lending to the middle market in the United States and two powerful secular trends continue to support this. First, assets continue to migrate off of traditional bank balance sheet; and second, investor demand per yield remained strong. Our team at Medley continues to grow. We currently have over 80 people of which 45 are investment professionals and we’re excited about the opportunities presenting themselves in the market today and we’ll continue to seek ways to enhance shareholder value in the quarters and years ahead. On a year-over-year basis, permanent capital and institutional capital of fee earning AUM experienced growth of 91% and 8% respectively. During the fourth quarter, permanent capital and fee earning AUM grew 4% while institutional capital fee earning AUM decline by 5%, compared to the prior quarter. The quarter-over-quarter decrease in institutional fee earning AUM was primarily a result of the roll off of the assets of a legacy private fund. This was partially offset by the initial close we had for our most recent private fund in late December. We expect growth in institutional fee earning AUM will meet or exceed historical growth in that segment over the coming year. The quarter-over-quarter growth in permanent capital fee earning AUM was primarily driven by continued capital raise for Sierra Income Corporation. We’re pleased to see the daily and monthly fund raising numbers for Sierra rising and look forward to growth for the Sierra platform for the balance of this year. We did not raise equity at Medley Capital Corporation in the fourth quarter, as we start with our commitment to not raise capital below book value. However, we have the liquidity and intend to increase the regulatory capital at SBIC subsidiary to $75 million, which would give MCC access to an additional $20 million of SBIC leverage. And as we announced last night, MCC and Sierra both have partnered with the high quality insurance company on a senior loan strategy. This is a joint venture that will allow for origination capacity and drive shareholder value at both MCC and Sierra. On February 9th of this year, we announced that MCC had received board approval to implement a $30 million share repurchase program. We are implementing this share repurchase currently and expect to complete the program in the quarters ahead. We have and will continue to balance the timing and amount of shares repurchased at MCC against liquidity to cost of financing and the overall market environment. I would now like to turn the call over to Seth.

[Seth Taube:]

Thanks Brook. So the fourth quarter and early 2015 brought increased volatility in overall markets. In our view, this will provide great opportunities for our middle market direct lending strategy. So our spreads widened in the market resulting for movements in energy and commodity prices as well as overall market and geopolitical developments. A quick comment on energy, well the decline in oil prices has had an impact on our portfolios. Our exposure is diversified across end markets and geography, it’s primarily first lean senior secured and with sensible leverage levels were observed – we also observe that the management teams in this sector are reacting quickly and appropriately to these market developments. As we’ve mentioned previously, a two decade long trend of consolidation of banks overlaid by increasing regulatory burdens has continued to drive traditional lenders from the middle market in the United States. At Medley, we’ve continued to benefit from this trend. We’ve maintained our disciplined underwriting approach, kept loan to value ratios at sensible levels and maintaining strong covenant packages throughout. We continue to focus on senior secured loans that are predominantly floating rates, combined this provides [indiscernible] into our capital and also allows us to benefit from the potential rise in interest rates in the future. On balance, while competition has been increasing in the middle market, we continue to see very attractive lending opportunities and we remain active in the market through our various investment vehicles. During the fourth quarter, we continue to strengthen the balance sheets across our platform. We upsized commitments on Sierra in senior secured revolving credit facility with ING by $20 million, in addition, in February, Sierra received $150 million increase in commitments under its senior secured credit facility provided by JP Morgan. We continue to grow AUM in Sierra and continue to expand our distribution network. During the fourth quarter, we added nine new broker dealer selling agreements, bringing the total at Sierra to 125 active selling agreements around the country. Sales of Sierra are accelerating and we ended this month, March 31st, having raised over $37 million in the month. I’d like to now turn the call over to Rick Allorto, our CFO, to review the fourth quarter and full year 2014 results. Rick?

[Rick Allorto:]

Thank you, Seth. Our standalone results of operations for the year ended December 31, 2014, consisted as the following. Management fees increased by 42%, or $19.4 million, to $65.8 million, as compared to $46.4 million for the year ended 2013. Performance fee revenue and other income and fees increased by 26% or $3.4 million to $16.7 million as compared to $13.3 million for the year ended 2013. Total revenues increased by 38%, or $22.8 million, to $82.5 million, as compared to $59.7 million for the year ended 2013. The growth in management fees was due to a 52% increase in year-over-year fee earning AUM. Total expenses increased by 5%, or $1.5 million, to $35.1 million as compared to $33.6 million for the year ended 2013. The increase was due primarily to a $6.6 million increase of compensation and benefits and a $3.7 million increase in general and administrative expenses, partially offset by a decrease of $8.7 million in performance fee compensation. Total other expense net increased by 282%, or $5 million, to $6.7 million as compared to $1.8 million for the year ended 2013. The increase was due primarily to a $4 million increase in interest expense. Pretax core net income increased by 76%, or $18.1 million, to $42 million, as compared to $23.9 million for the year ended 2013. Core net income per share increased by 76%, to $0.79 per share, for the year ended December 31, 2014, compared to $0.45 per share for the same period in 2013. Core EBITDA increased by 87%, or $22.3 million, to $48 million compared to $25.7 million for the year ended 2013. Our standalone results of operations for the three months ended December 31, 2014, consisted as the following. Management fees increased by 51%, or $6.1 million, to $18.2 million, as compared to $12.1 million for the same period in 2013. This increase was offset by a decrease in performance fee revenue and other income and fees to a negative $1.9 million as compared to $7.1 million for the same period in 2013. Total revenues decreased by 15%, or $2.8 million, to $16.4 million as compared to $19.2 million for the same period in 2013. Total expenses decreased by 39%, or $3.2 million, to $5 million, as compared to $8.3 million for the same period in 2013. The decrease is due impart to reversals in performance fee compensation of $3.8 million partially offset by an increase in compensation and benefits costs of $1.7 million due to higher headcount. Total other expense net increased by $1.9 million to $2.3 million as compared to $0.4 million for the same period in 2013. The increase is due primarily to a $1.7 million increase in interest expense. Pretax core net income increased by 6.5% to $0.7 million to $11.1 million as compared to $10.4 million for the same period in 2013. Core net income per share increased by 5% to $0.21 per share for the three months ended December 31st, as compared to $0.20 per share in the comparable period in 2013. Core EBITDA increased by 23% or $2.5 million to $13.4 million as compared to $10.9 million for the same period in 2013. That concludes my financial review. I will now turn the call over back over to Brook.

[Brook Taube:]

Thanks Rick. Before opening up the call to Q&A, I’d like to provide a few thoughts on fee earning AUM as we look forward in 2015. Regarding MCC, we publicly stated that we will not raise new equity capital until the stock is trading above book value. However, given the significant opportunity in middle market lending combined with growing institutional and retail demand for yield. We remain optimistic that MCC will resume growth in the future. And in the meantime, we’re focused on driving shareholder value at MCC as evidenced by the $30 million share repurchase program that we’re implementing as well as the joint venture we announced last night. With respect to Sierra, we’re planning for significant growth in fee earning AUM this year and pleased with the continued expansion of our broker dealer relationships and the overall growth in assets. Looking at institutional capital, we believe this channel will continue to grow through increased commitments to long-dated funds and separately managed accounts and we expect growth in institutional fee earning AUM to meet or exceed the historical growth rate for that segment of our business as we look forward in 2015 and beyond. We’re pleased with our full year 2014 performance and on behalf of the entire team I’d like to thank all of the shareholders for their support. We can now open the call for questions.

[Operator:]

[Operator Instruction] Our first question comes from Mickey Schleien with Landenburg. Please proceed.

[Mickey Schleien:]

Good morning, Brook and Seth. My first question relates to trends we might see this quarter. Last quarter, we saw spreads widen and price of oil decline and that obviously drove some of your results. But this quarter, we’re seeing spreads somewhat contracting and oils certainly not as volatile as it was last quarter. So what does that portend in terms of performance fee revenue given the quarters over today and performance based compensation?

[Brook Taube:]

It’s a good question, Mickey. I agree with your sentiment that spreads have stabilized and that obviously oil has not been as volatile in the downside direction, the prior quarter. We do value all of our positions on a quarterly basis using third parties. We have not completed the valuation process. So, it’s hard to project I think the magnitude of the impact last quarter is unlikely to repeat itself, but again and we have to go through evaluation process that’s not completed yet.

[Mickey Schleien:]

So, Brook, would it still be fair to say that this quarter maybe more of a typical quarter where you will have some performance fee revenue at MDLY?

[Brook Taube:]

I think that’s a fair – that’s our expectation. Again, we haven’t completed the valuations, but I think that’s our expectation sitting here today.

[Mickey Schleien:]

Okay, follow-up question regarding the new JV. What kind of assets is that going to invest and we’re talking broadly syndicated loan strategy or are you just going to leverage your existing platform and invest in better risk adjusted returns lower down in the middle market?

[Brook Taube:]

The later Mickey.

[Mickey Schleien:]

Okay.

[Brook Taube:]

This is an approach that’s going to target lower yielding we would assess lower risk assets it will use leverage but the intention is to provide us with a cost of capital that allows us to target that part of the market, we see the origination its in the channel its given the yield profile, we have not had the cost of capital to attack that and with this partnership which is a prototype and the first this gives us a very good entry point to those new as to use your words better risk adjusted return assets.

[Mickey Schleien:]

Brook, can you give us some guidance on the amount of leverage and sort of the ROE target for the joint venture?

[Brook Taube:]

I think that we would generally speaking looking at the market today again obviously things can change but our expectation is that we would be looking at approximately two turns of leverage that maybe up and down from that number and that would drive a mid-teens return on our capital.

[Mickey Schleien:]

Okay, my last question was the JV is where how is MCC going to fund its commitment given its capital constrained?

[Rick Allorto:]

Good question, look we have there is a couple of sources we have capacity, we have expected amortizations and we also have access that would qualify. So we’re going to do a combination we’re obviously constrained there at the moment how long that last is to be determined but we do have a plan as we look forward in the next several months and quarters at a way to focus on and deliver growth in that joint venture.

[Mickey Schleien:]

All right, I wanted to also ask about the dividend which was maintained to $0.20 can you help us understand how the board looks at the dividend is it a in-relation to core EPS or some other metric, if it is core EPS here at least for the last quarter you paid out basically all of your EPS some I would like to understand that. And last question is some guidance on MOF IIIs base management fee the rate?

[Rick Allorto:]

Sure. Specifically with regard to the dividend as I think you’re aware we paid the $12.31 dividend in January that’s 60 or 70 days earlier than it would normally have been paid and that is just a function of the IPO and the indication we gave coming out, one of the messages we had conveyed is that our visibility on growth allowed us to set a dividend that we reasonably expected to meet over the course of 2015 on average. Clearly we’ve experienced a couple of headwinds, credit-related markets et cetera MCC. However, we did set that at a level that we felt comfortable as we look out over 2015, we remain comfortable with that dividend. And the reason that we recommended to the board to announce or to approve the dividend on the 29th was so that we could announce the payment date of May and sequence the four dividends for 2015 in a manner that got us kind of back onto a normal dividend, no day count. So if you refer to Page 27 of the Investor, it shows you how we pay dividends for each of the quarters and we just laddered the payment dates to make up for the fact that December 31 dividend was in fact paid 60 days to 70 days earlier than a normal cycle. Does that answer the question?

[Mickey Schleien:]

Yes. And just my last question was sort of a modeling question. Is the base management fee at MOF III sort of at the higher end of your typical range the way MOF II was or is it a different?

[Brook Taube:]

The base management fee at this point is 1.5% of assets, we get – we have a relationship with the investors where we take 75 basis points on the commitment amount. And then it ratchets to 1.5% as they don’t have the full 1.5% on committed and uninvested capital and that partially to mitigate a J-curve effect and fees on uninvested capital.

[Mickey Schleien:]

So in the fourth calendar quarter you were – you had capital committed, but you hadn’t invested, is correct?

[Brook Taube:]

Correct and we had to close it late in December, so was not a meaningful number in December. As we look in Q1 the 3/31 quarter, we did have commitments, we have invested capital. So it will be somewhere between those two numbers for the quarter.

[Mickey Schleien:]

Okay. Thanks for your time.

[Brook Taube:]

Thanks Mickey.

[Operator:]

Our next question comes from Craig Siegenthaler with Credit Suisse. Please proceed.

[Unidentified Analyst:]

Hey, guys good morning. This is actual [indiscernible] filling in for Craig this morning. Just a quick question on private BDC distribution, given the issues that came out during 4Q which slowed some of the sales activity, especially one of the key distributors, can you just give us an update here? So we feel more comfortable with the story?

[Seth Taube:]

Yes, Ryan. This is Seth. We had two broker-dealers that had suspended distribution of Sierra. In the beginning of November on our last call, we had – we communicated we had the expectation that one of them would come back shortly, which they did. There is one broker-dealer that has still suspended activities but we’re optimistic that we will continue to work with them to get back on their platform. That’s going to offset by an overall optimism we have that increasing the number of wholesalers by 65. So we increased from 13, we added 65 wholesalers to the 13 that we had previously. So I think, in general we’ve seen that trend pick up. It was evidence by the $37 million that we raised in March. So I would say we are excited there does, however remains one that is still in suspension we are optimistic it will come back. We just can’t provide guidance on exactly when yet.

[Unidentified Analyst:]

Okay. Great. Thank you very much. And then just one quick follow-up here. Can you just comment on any type of new sales or RFP activity going on in the institutional side of the business? And just give us some color on what type clients are interested in the products, right now, and specific vehicles that they are most interested in? Thanks.

[Rick Allorto:]

Sure. What we’ve – we’ve actually recently added a senior person to augment our team. We now have, I think its five people dedicated to the institutional side. The interest level is increasingly from the insurance community. Whether that forms a – if the capital comes into a private fund or a managed account. In many ways, we are in fact in different. We are seeing the increased interest by the insurance companies in the managed account approach. And that’s partially because our type of assets may have a better capital charge treatment, if it’s effectively on their balance sheet, which is what a separately managed account accomplishes. So we are still in dialogue with our planned endowment and foundation folks. We expect continued commitments. The overall comment is that the institutional business which combines the commingled fund in the managed accounts we think of that as the same group is that we would expect to meet or exceed the historical growth rate there in 2015 and beyond.

[Unidentified Analyst:]

Great. Thanks a lot. I appreciate your time.

[Rick Allorto:]

Thanks.

[Operator:]

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

[Casey Alexander:]

Hi, good morning. Above the fee earning assets under management – the assets under management are just about $3.7 billion. Can you break that into how much is impermanent versus long-dated vehicles?

[Rick Allorto:]

Yes, Casey. Just give me us one second. Brook grab that number.

[Brook Taube:]

Casey?

[Casey Alexander:]

Yes.

[Brook Taube:]

That the details are on Page 27 of the investor presentation we have $1.5 billion in MCC, $800 million in Sierra, and then $1.4 billion in the long-dated private funds and SMAs.

[Casey Alexander:]

Okay, great, thank you. Secondly, would you asses that you will be likely to be deploying into the SLF of Sierra faster given the fact that it’s sort of less capital constrained at the moment?

[Brook Taube:]

I don’t think we would make that statement today, okay, because we have assets to dropdown and we have an expectation with liquidity that we see at MCC. If you look at the realistic expectation of origination, I think you’re going to see relatively balanced growth between the two, but to the extent that one does track a little bit faster, we’ll clearly keep you posted. We don’t have a plan for one to grow faster than the other at this point.

[Casey Alexander:]

Okay, but when I try to think of this in a normal BDC, you have one turn of leverage, having two turns of leverage on two $100 million SLFs, this sort of opens up about $200 million of fee earning AUM capacity to the company. Am I thinking about that right?

[Brook Taube:]

I think the way to think about it is we have $100 million roughly of capital that’s going in, that $200 million will be financing that $200 million is off the balance sheet on each vehicle. So it’s going to open up in effect $200 million of additional financing in each vehicle.

[Casey Alexander:]

All right…

[Brook Taube:]

Which will allow for more origination that’s going to – effectively the result is a higher return, if you will on the 100 of equity.

[Casey Alexander:]

All right.

[Brook Taube:]

Not more capacity – not more fee-pay AUM.

[Casey Alexander:]

All right, okay. Lastly, when MDLY did the IPO in September, the sort of presupposition was that the proceeds would be used to assist in creating new investment vehicles and/or looking for teams of new investment capacity to purchase. And thus far we kind of haven’t seen anything in that – I mean I know you just hired a guy who is a capital raiser, but that’s not – that’s for the vehicles that you already have so to speak. Can you give us some sort of color as to where the company’s head is at in terms of starting to deploy some of the proceeds of the IPO $87 million of cash on the balance sheet. Are there opportunities out there and what are we doing here?

[Brook Taube:]

Yes, that’s a good question. We have not changed the strategic plan. The capital at MDLY is intended to grow the platform and broaden product, I think in the five to six months that we’ve had since the offering. We’ve reviewed many opportunities. We continue to do that. The headwinds in the markets, the volatility in the BDC space, and the overall continued assessment of the non-traded distribution have impacted our thoughts, haven’t changed our strategy. We continue to evaluate opportunities and are open to any good ideas that people see out there. Please spread the word that we’re open for business in terms of that that approach. At this point, I have no – we don’t have any color to give you our guidance on the timing here on when we would expect to announce the first initiative.

[Casey Alexander:]

Okay, thank you.

[Operator:]

Our next question comes from Robert Lee with KBW. Please proceed.

[Ann Dai:]

Hi, good morning. This is actually Ann Dai filling in for Rob. So just seeing as we’re at the calendar first quarter, are there any updates you can give us on how fund raisings going with the opportunity fund or SMAs? And can you confirm whether there were any SMA wins in the fourth quarter?

[Brook Taube:]

We don’t have any specific guidance to give at this point. Again, the volumes will – aren’t really like the BDC at Sierra where you have real time ticketing. Again, I think our general guidance here is that we would expect that our fee earning AUM raises by at least the historical rate if not more and we have active dialogues across the board and with new efforts in place to cover even further ground, we would expect to be announcing on a quarterly basis, the growth in the AUM of each of the businesses.

[Ann Dai:]

Okay, thanks. And as for the target, are you still looking at about a billion for that fund? Has anything changed from that respect?

[Brook Taube:]

No our target is – was about $800 million. It could be as high as a billion. Again, as I commented previously, we think about that number from an institutional perspective, where we end up with the portion that becomes a managed account versus the actual co-mingled participation, we’re in different at this point. Given the dialogue, it’s hard to predict, which way that will tilt, but I think our idea is that 800 remains the target. It could flex up to $1 million and we’ll keep you posted on the combined institutional AUM growth over the balance of 2015 then into 2016, which is the target fund raising window.

[Ann Dai:]

Great, thanks. Just touching on your comment about accelerating sales at Sierra, are you guys seeing those sales mostly driven by brokers that had been selling Sierra for sometime or are you seeing a substantial amount of sales coming from the newer brokers from the RCS relationship?

[Seth Taube:]

This is Seth. We have seen consistent steady growth in our existing relationships as well as substantial growth from the RCS channel. Since inception, we’re up to approximately 60% – just under 60%, 59% of total sales, since inception with RCS has come from the RCS channel.

[Ann Dai:]

Great, thanks. And just a one quick thing on compensation, it’s more of a modeling question, but compensation is down quarter-over-quarter. I’m just wondering if there were any one-time items either in third or fourth quarter that had an impact or is there some kind of fourth quarter trip once you see where you are for the year comp wise?

[Seth Taube:]

Ann, are you including in that the performance fee compensation number?

[Ann Dai:]

No, I am not, just base.

[Seth Taube:]

Just base, no there were no one time items in Q3 or Q4.

[Ann Dai:]

Okay. Would you consider that level kind of a good run rate as you grow the business or anything to note there?

[Seth Taube:]

I mean, we do look at the compensation annually and we did experienced significant growth in headcount in 2014. All of that is not necessarily reflected in the year-to-date 2014 comp number. So, perhaps, Ann, we can follow-up after the call.

[Ann Dai:]

Sounds good, thanks for taking our questions.

[Operator:]

[Operator Instructions] Our next question comes from Christopher Nolan with MLV and Company. Please proceed.

[Christopher Nolan:]

Hi, thanks for taking my questions. Is it correct that the joint venture will not translate into higher base management fees, but can potentially add to incentive compensation fees? Is that the correct way to look at?

[Brook Taube:]

Yes, I think about the way we look at it is adds to the return on capital, which then obviously flows through the NII and effectively the incentive fee.

[Christopher Nolan:]

Great. And do you have any sort of timing as to when this could start impacting earnings?

[Brook Taube:]

Well, we’ve intended to launch the vehicle. We have final kind of approval that you need to go through this as more of an SEC issue. We don’t expect our structure and approach is consistent with all of them that are in the market. I think you’d start to see – realistically, you’ve see real volume in the end of Q3 – in kind of Q3, but Q4 context.

[Christopher Nolan:]

Great. And then on the performance compensation reversal, I’m just trying to find some details on it and then in case you commented on it earlier, I apologize if I missed it. But can you give us some detail on that for a second?

[Seth Taube:]

Yes, sure, Chris thanks. The expense or reversal basically represents a mark-to-market adjustment to the performance fee compensation liability. We granted profit interest in certain subsidiaries to select employees and the majority of those interests are fully vested. And for accounting purposes, we’ve recorded a payable on the balance sheet and that payable represents a total future payment liability. So, the fair value of the liability is we’re required to re-measure that each quarter and the adjustment is flow through in the current period income statement.

[Christopher Nolan:]

So is that mark-to-market related to MCC’s share price?

[Seth Taube:]

Not directly to MCC’s share price, some of those profit interests are attributable to Medley Capital Corporation, but they’re not directly linked to the share price.

[Christopher Nolan:]

Great. And my final question is – and it’s broader and I don’t know whether you can provide detail, but MCC has been trading at a discount to NAV since around mid-September and the overall BDC group have sold off, but MCC seems to be trading at a discount to peers. And I was hoping you might be able to provide some detail in terms of your thinking of strategies to improve the valuations that go beyond the share repurchases?

[Seth Taube:]

Sure, I think, the entire BDC sector has been under pressure since last summer. The comments that we’ve heard from analysts and investors regarding the sell off in the sector and MCC kind of include and range from the fact that the sector was pulled out of the Russell last summer, which caused some forced selling by index funds that we’re recalibrating effectively their holdings. Discussions about BDCs and correlation with yield stocks and interest rate peers and things like that. And that’s despite the fact that most of our BDC group provides a floating rate exposure. So ironically, if rates rise in a positive GDP environment, the BDC earnings will over time rise as a result of rates. Oil and energy was a big hit that obviously affected. We have an average exposure. And obviously credit risk and sort of general volatility fears of where we are in the cycle. I think there were discussions at the year-end about tax selling et cetera. But look, we continue to work hard at increasing shareholder value. As I said in the prepared remarks, we’ve commenced the share buyback. We are implementing that, that’s going to add value and we announced the joint venture which we expect to add value. And our assessment is that at today’s prices MCC provides an attractive return that’s why we are buying the stock and we are going to be out having discussions with shareholders in the next several weeks and months. To talk about that position which is the one we share.

[Christopher Nolan:]

Great. Thanks for taking my questions.

[Operator:]

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

[Brook Taube:]

Great. Well, thank you all for joining us. We are proud of the performance in 2014 as we look forward into 2015, we are optimistic again about continued substantial growth in the platform. And we look forward to keeping you posted in the quarters ahead. And as usual, we are available to take calls directly after this call. So thanks again, everybody and we look forward to speaking to you next quarter.

[Operator:]

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