Saratoga Investment Corp.
Q1 2022 Earnings Call Transcript

Published: 8 Jul 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal First Quarter 2022 Financial Results Conference Call. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

[Henri Steenkamp:]

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s fiscal first quarter 2022 earnings conference call. Today's conference call includes forward-looking statements and projections. 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 these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law.

[Chris Oberbeck:]

Thank you, Henry, and welcome everyone. Reflecting on this quarter versus the challenges of the same time last year, this quarter has underscored the resilience of Saratoga and our portfolio companies. Despite the unprecedented impact of COVID-19, which we all felt so strongly over the past year, we feel very fortunate, given the devastation of this tragic pandemic, from a financial perspective, to have demonstrated our ability to weather and overcome the challenges, as well as to capitalize on the financial recovery opportunity and transition aggressively to the substantial ramp up in market activity. This quarter, we grew our assets under management to $678 million, with $119 million of originations, both reaching their highest levels. While maintaining our credit quality and extremely high credit bar we set for all new originations. The performance of our existing portfolio also grew our NAV per share by 5%, this quarter, to $28.70 also a record. Our latest 12 months return on equity as of this quarter was 19.4%. We look forward to presenting our most recent results in reviewing our financial and portfolio performance and the solid structure of our capitalization. To briefly recap the past quarter on slide 2. First, we continued to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality, with 93% of our loan investments continuing to have our highest rating at quarter end, generating a return on equity of 19.4% on a trailing 12-month basis in Q1 ahead of the 17.6% BDC industry average. As of Q1 registering a gross unlevered IRR of 13% on our total unrealized portfolio with our current fair value 3% of our total cost of our portfolio, and a gross unlevered IRR of 16.5% on total realizations to date of $573 million. Second, our assets under management increased to $678 million this quarter, a 22% increase from $554 million as of last quarter, and a 40% increase from $483 million as of the same time last year. We originated the record $119 million of new investments offset by $15 million of repayments this quarter. Importantly, our new originations included four new portfolio company investments, as well as nine follow-ons with existing portfolio companies and the current pipeline is robust.

[Henri Steenkamp:]

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended May 31, 2021. When adjusted for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $6.3 million was up 8% from $5.8 million last quarter and as compared to the same amount for last year's Q1. Adjusted NII per share was $0.56, up $0.5 from $0.51 per share last year, and up $0.04 from $0.52 per share last quarter. Across the three quarters, weighted average common shares outstanding remained largely unchanged at 11.2 million shares for each quarter. The increase in adjusted NII from last year and last quarter primarily reflects the higher level of investments and results in higher interest and other income with AUM up 22% from last quarter and up 40% from last year. Our effective yield and our core BDC portfolio have remained relatively unchanged at 9.5% during whole three periods. Adjusted NII yield was 8.0% when adjusted for the incentive fee accrual. This yield is up 10 basis points from 7.9% last year and up 30 basis points from 7.7% last quarter. For this quarter, we experienced a net gain on investments of $18.5 million or $1.66 per weighted average share, resulting in a total increase in net assets from operations of $21 million or $1.88 per share. The $18.5 million net gain on investments was comprised of $16.8 million in net unrealized appreciation on investments, and $1.9 million in net realized gains offset by $0.2 million of net deferred tax expense on unrealized appreciation in Saratoga Investments Blocker subsidiaries. The $1.9 million net realized gains were generated from the sale of our Village Realty investment. The $16.8 million net unrealized appreciation was driven by a 3.4% increase in the total value of the remaining portfolio, primarily related to improvements in market spreads, EBITDA multiples and/ or revised portfolio company performance. This number includes a $4 million increase in the fair value of our CLO investment, as well as a $14.6 million increase in fair value across the rest of the portfolio, excluding the Village Realty realization. We have more than recovered the net reduction in the value of the non-CLO portfolio during May 31, 2020. Our portfolio fair value is now 3.2% above the total cost. Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 19.4% for the last 12 months ahead of the industry average of 17.6%. Total expenses excluding interest and debt financing expenses, base management fees and incentive management fees increased from $1.4 million last year Q1 to $1.9 million for this quarter, but remained unchanged at 1.1% of average total assets. We also again included the KPI slide starting from slide 27 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet matrix for the past nine quarters and the upward trends we have maintained.

[Mike Grisius:]

Thank you, Henry. I'll take a couple of minutes to describe our perspective on the current state of the market. And then comment on our current portfolio performance and investment strategy. There is only been two months since our last update. And we see market conditions continue their return to where they were pre COVID-19. Liquidity conditions remain exceptionally robust. We are seeing increasing transaction volumes, tightening credit yields, and greater leverage multiples and an aggressive capital deployment posture overall. With current pricing and leverage at such aggressive levels, there is increasing pressure for investors to compete in other ways, such as accelerated timing to close and looser covenants restrictions. That said, lenders in our market are still wary of thinly capitalized deals and for the most part are staying disciplined in terms of minimum aggregate base levels of equity and requiring reasonable covenants. Deals volume in the first half of the year was quite robust. And there appears to be a positive outlook in this regard for the remainder of the calendar year 2021. Our underwriting bar remains high as usual. Yet we are actively seeking and finding opportunities to deploy capital. We believe that compelling risk adjusted returns can be achieved by deploying capital and supportive businesses that have demonstrated strength and durability throughout this COVID environment. Follow on investments with existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment, as demonstrated with nine follow-ons this past fiscal quarter. Most notably, we have invested in 16 new platform investments since the onset of the pandemic, including four in this past calendar quarter. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies. We have found that they have generally taken the right steps to help mitigate both the near and long- term effect of COVID-19 on their businesses. All of our loans in our portfolio are paying according to their payment terms. Taco Mac, which has a cost basis of $2.3 million, is now the only investment on nonaccrual. With my alarm through bankruptcy, restructuring and completely written off this quarter. There have been no new nonaccrual prior to and through COVID. We also recognize an additional $16.8 million in unrealized appreciation this quarter, which means that our overall portfolio has more than recovered the unrealized appreciation in Q1 of last year. And the fair value of Saratoga is overall an asset now exceeds its cost basis by 3.2%. We believe the strong performance reflects certain attributes of our portfolio that bolster its overall durability. 76% of our portfolio is in first lien debt, and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue, and have historically demonstrated strong revenue retention. Our approach has always been to stick to our strategy and focus on the quality of our underwriting. And as you can see on slide 13, this approach has resulted in our portfolio performance being at the top of a BDC list that has had only seven BDCs with a positive net realized gains as a percentage of portfolio cost over the past three years. A strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to appear as deeply as possible into the business in order to understand accurately its underlying strengths and characteristics. We always have sought durable businesses and invested capital with the objective of producing the best risk adjusted accretive returns for our shareholders over the long term. Our internal credit quality rating reflects the impact of COVID and shows 93% of our portfolio at our highest rating as of quarter end. A part of our investment strategy is to selectively co invest in the equity of our portfolio companies when we're given that opportunity and when we believe in the equity upside potential. It has been our experience that there are significant overlap between those businesses that meet our strict underlying writing requirements, and those that possess attributes that make them attractive equity investments. This equity co investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns. We intend to continue this strategy. Looking at slide 14, the total leverage for the overall portfolio for investments underwritten using EBITDA was 3.82x, up slightly from 3.63x the previous quarter, reflecting an increase in leverage of certain new deals. Now that said, our leverage is below the average year-to-date market leverage multiples, which are all about 5x across our industry. Through past volatility, we have been able to maintain a relatively modest risk profile throughout. Although, we never consider leverage in isolation, rather focusing on investing in credits with attractive risk return profiles, and exceptionally strong business models where we are confident the enterprise value of the businesses will sustainably exceed the last dollar of our investment. In addition, this slide illustrates our strengthening ability to generate new investments over the long term. During the first six months of calendar year 2021, we have added six new portfolio companies and made 16 follow-on investments. This success underscores the ongoing emphasis on deepening our relationships and broadening our origination capabilities. This strong origination pace has continued since our fiscal quarter ends. However, we are also seeing significant repayments resulting from change of control transactions and acquisitions. Subsequent to quarter end, we have executed approximately $85 million of new originations in three new portfolio companies, and three follow-ons, with repayments of approximately $106 million in four exits and realizations for a net reduction in investments of $21 million. Moving on to slide 15; our team's skill set, experience and relationships continue to mature. And our significant focus on business development has led to new strategic relationships that have become sources for new deals. Our number of deals source has dropped, reflecting the difficult sourcing environment during much of the last 15 months. Although, we are actively seeing healthy and increasing volume of new loan inquiries. Most notably, the 55 term sheets issued during the last 12 months is markedly up from last year's pace. Similarly, the first half of calendar year 2021 is up as compared to the first half of calendar year 2020, showing that we are generating more shots on goal. What is especially pleasing to us is that almost 1/5 of our term sheets issued over the past 12 months, and four of our 11 new portfolio company investments are from newly formed relationships, reflecting notable progress as we expand our business development efforts. There are a number of factors that give us measured competence that we can continue to grow our AUM steadily in this environment, as well as over the long term. First, we continue to grow our reach into the marketplace as is evidenced by several investments we have recently made with newly formed relationships. Second, we have developed numerous deep, long-term relationships with active and established firms that looked to us as their preferred source of financing. Third, we continue to see plenty of investment opportunities in industry segments that are experiencing long-term secular growth trends, and within which we have intentionally developed expertise. As you can see on slide 16, our overall portfolio credit quality remains solid. The gross unlevered IRR on realized investments made by the Saratoga Investment management team is 16.5% on approximately $573 million of realizations. The single Village Realty repayments on Q1 had an IRR of 24% and a realized gain of approximately $1.9 million. On the chart to the right, you can also see the total gross unlevered IRR on our $621 million of combined weighted SBIC and BDC unrealized investments is 13% since Saratoga took over management. The two largest unrealized appreciations remaining due to COVID are in our Nolan Group and C 2 Education investments, both of which are more dependent on in person human interaction. We do not believe the remaining unrealized appreciation changes our view of their fundamental long-term performance. Even with those current markdowns, our overall portfolio fair value is now 3% above its total costs. Our inverse investment approaches yielded exceptional realized returns. Moving on to slide 17, you can see our first SBIC license is fully funded, with $225 million invested as of year end. Our second SBIC license has already been funded with $84 million of equity, of which $138 million of equity and SBA debentures have been deployed. There are still $1.1 million of cash and $124 million at the ventures currently available against that equity. We still have $3.5 million of unfunded equity, which when dropped down into the SBIC would increase our debenture availability by $7 million. When comparing this quarter to the same time last year, the way the portfolio has proven itself to be well constructed and resilient against the impact of COVID-19 really is underscored, demonstrating the strength of our team, platform and portfolio and our overall underwriting and due diligence procedures. Credit quality is always our primary focus, especially at times with such high activity levels. And while the world has changed significantly since Q1 of last steer, we remain intensely focused on preserving asset value, and remain confident in our team and the future for Saratoga Investment. This concludes my review of the market in our portfolio. I'd like to turn the call back over to our CEO. Chris?

[Chris Oberbeck:]

Thank you, Mike. As outlined on slide 18, the Board of Directors declared a $0.44 per share dividend for the quarter ended May 31, 2021. This reflected a $0.01 increase from last quarter, the fourth sequential quarterly dividend increase. Board of Directors will continue to reassess this on at least a quarterly basis, considering both company specific and economic factors. Moving to slide 19, our total return for the last 12 months which includes both capital appreciation and dividends, is generated total returns of 68% beating the BDC index of 54%. Our longer term performance is outlined on our next slide. Our one, three and five year returns places at the top end of all BDCs for both time horizons. Over the last three years, our 38% return exceeded the 35% return of the index. Over the past five years our 139% return exceeded the index's 65% return. On slide 21, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We remain above the industry average across diverse categories, including interest yield on the portfolio, latest 12 months return on equity, regulatory debt to equity ratio, latest 12 months NAV per share growth, dividend coverage and year-over-year dividend growth. We continue to focus on our latest 12 months return on equity and NAV per share outperformance which are both at the top of the industry and reflect the growing value for our shareholders are receiving. Not only are we one of the few BDCs to have grown NAV, we have done it accretively by also growing NAV per share. Moving on to slide 22; all of our initiatives discussed in this call are designed to make Saratoga Investment a highly competitive BDC is attractive to the capital markets community. We believe that our differentiated characteristics outlined in this slide will help drive the size and quality of our investor base, including adding more institutions. Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 15% access to low cost and long-term liquidity, which should support our portfolio and make accretive investments. Receipt of our second SBIC license providing sub 2% cost liquidity. A BBB plus investment grading was recently upgraded in active public and private bond issuances. Solid historic earnings per share and NII yield, strong industry leading historic and long term return on equity accompanied by growing NAV and NAV per share, putting us at the top of the industry for both high quality expansion of assets under management and an attractive risk profile. In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries including the oil and gas industry. We remain confident that our experienced management team, historically strong underwriting standards and tested investment strategy will serve as well in battling through the challenges in the current and future environment. And that our balance sheet, capital structure and liquidity will benefit Saratoga shareholders in the near and long term. In closing, I'd like to again thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

[Operator:]

Our first question will come from the line of Bryce Rowe from Hovde.

[BryceRowe:]

Hi, good morning. I wanted to ask about the composition of the portfolio really interesting to see the equity piece of it go up and certainly you made some comments around that in your prepared remarks. So I guess first question around that is just can you talk about why that level of equity investment and do you anticipate future equity investment levels, I guess, coming in that strong or was it more kind of opportunistic this quarter in terms of being able to make those equity investments.

[HenriSteenkamp:]

So that's a good question, especially noting that some of the portfolio companies that have performed particularly well, and you see that evidenced in the valuations this past quarter, were ones where we have meaningful equity investments. The thing I would say, Bryce is that it has always been part of our playbook to co invest in the equity of our portfolio companies when we're given that opportunity. Now, we're very selective in that respect, we're not just doing that broad net and doing that indiscriminately. We're very careful to underwrite the equity upside as well. But as I indicated in my prepared remarks, we have found that the number of businesses that meet our very strict debt underwriting requirements tend to overlap very well with businesses that have very good equity upside. So the things that we look for strong management teams, businesses that have good tailwind in very good industries with a differentiated business model run by good management and strong ownership, tend to also be businesses that have good equity upside potential. And so that's worked out well for us, the one thing I would emphasize is that this has been a playbook that we've had throughout our management of Saratoga. So if you look at many of our investments over the years, whether it be Easy Ice, or HMN, or Expedited, or most recently, Village Realty and some other businesses that we've invested in over the years, we've established a playbook where we look for businesses that are at our end of the market, and we can put an initial amount of debt capital in those businesses and then support their growth. And we support their growth, not only with debt capital, but equity investments, and in the cases of some of the portfolio companies that are experiencing nice appreciation and have good potential as well. Their businesses that fit that playbook, which is something we've been doing. But it's something I've just highlighted most recently, because you can see, continuing evidence of that strategy bearing fruit.

[MikeGrisius:]

And this quarter was really an example, Bryce, so we sort of both those things came together in the same quarter as well. Thus, the increase you're seeing.

[BryceRowe:]

Right, yes, that's -- it was interesting to see for sure. And I guess a follow up to that is your portfolio, overall portfolio yield came down on a kind of calculated basis because of this prefer, or because of that increase in equity composition of the portfolio. So trying to understand kind of how to think about maybe dividends coming off of those equity only types of investments and what we might see within that other income line on the income statement and you look through the schedule of investments, and there's very little detail in terms of what that income could be. So I think that would be helpful for us to understand.

[HenriSteenkamp:]

Typically, when we're making an equity investment, most of the time, nearly all the time. We're investing equity alongside debt securities that have a current return attached to them. So certainly, and we've been doing that throughout our management. So certainly, that will have a near term impact on what the blended current return is on our portfolio. But we're careful to balance that. And on occasion, if we really see a terrific opportunity to make an outsize equity investment with measured caution, we'll upsize that amount and that certainly can affect our near term yield when we make those investments. But over the long term, we do have confidence that that strategy will augment our overall returns on our portfolio. Now, I think to answer your question, hopefully a little bit more specifically, if you look at our investment activity this past quarter, there were a few investments that had preferred equity securities attached to them, two were just standalone preferred equity securities and one was in combination with a debt and common equity investment. Those two straight up preferred equity investments somewhat unusual and opportunistic for us. I wouldn't as you are thinking in the future. I mean not that we won't avail ourselves to that opportunity and wouldn't welcome it in the future. I wouldn't say that that's going to be ordinary course as much. Those are investments that we made with relationships that we have that are really strong, and there was an opportunity to put some preferred capital to work in somewhat of a unique opportunity. And so we're excited to have that. But I wouldn't say that that's core to what we'll be doing. I think what you see in some of our other deal activity through the quarter where we're making an equity investment alongside a more sizable debt investment would be kind of standard operating procedure for us.

[MikeGrisius:]

And you all correct, Bryce, so those standalone preferred equity positions, they are paying dividends. But dividends, of course, presented not in interest income or net interest margin, it's presented in the other income line, partly why you see that other income line growing this quarter. And so therefore, not included in the overall yield on the overall portfolio the 8.6 because that doesn't include dividend.

[BryceRowe:]

Right. Okay. So I mean, so Henry, part of that -- part of the increase in other income is tied specifically to those two standalone equity investments.

[HenriSteenkamp:]

Correct. This quarter, other income, obviously, as I noted, jumped quite a bit. And the two main reasons was one, obviously, a big origination quarter. And as we've spoken in the past, we put the structuring fee, the 1% fee, we generally receive we put in other income. So that's obviously one of the reasons and then the second reason absolutely is dividends received on those standalone preferred equity positions.

[Operator:]

Our next question will come from the line of Casey Alexander from Compass Point.

[CaseyAlexander:]

Yes, hi, good morning. I did want to ask about the structuring advisory fee income, because it has become a growing portion. And I'm seeing that you've broken it out. How recurring is that? For instance, when I look at you said, you done $85 million in new originations. I mean, should I be baking in already $850,000 structuring and advisory fee income into my model because of that?

[HenriSteenkamp:]

Yes, so the way I would think of it is Casey, we generally received between 75 bps and 100 bps of structuring and advisory fee income on debt. So, again, generally, that would be the right way to sort of view it somewhere between 75 and 100 bps. And obviously, it's been growing, as you noted, because of the last couple of quarters have been almost, back to back record quarters on originations for us. So, yes, there's definitely interplay and a linkage there with our originations. Absolutely.

[CaseyAlexander:]

Okay. All right. Thank you, in looking at what Mike described as this subsequent to quarter end information, but also noting that a significant amount of your originations usually comes nearer to the end of the quarter, expect that net repayment of $21 million to arguably probably balance itself out by the time we get to the end of the quarter with additional new originations to generally come at the end of the quarter.

[HenriSteenkamp:]

Oh, gosh, that's -- that would be just tough question to answer. I think, as we've said, Casey, our business is so lumpy and unpredictable in terms of, it is predictable in the long run, right? You can sort of look and we feel very confident that we can continue to grow the portfolio, but the exact timing of exits and payoffs versus originations is just really hard to gauge. I haven't really, it's an interesting observation you make. I haven't really thought about our business in terms of the origination pace happening closer to the end of the quarter. And especially given that our quarters don't sync up with calendar quarters like they do for most people. I would say that at the end of the typical calendar year, we certainly see a lot of motivation for people to try to get something done within a calendar year and we have that experience. To answer your question directly in terms of how we see the rest of the quarter shaping up. We feel good about our pipeline, is reflective of a lot of the investments that we're making in business development, as well as the strength of the relationships that we have, and we've invested a lot of businesses that have an appetite for more capital too, so we do feel good about our pace of investment. Where that's going to exactly shake out to the rest of the quarter is still undetermined.

[ChrisOberbeck:]

Hey, Casey, I would like to just jump in, and maybe state what's fairly obvious, but I think, what Henry and Mike are saying that it's fairly random, the way these deals land on our plate one way or the other. And to the extent we have the ability to influence things; obviously, we try and close the deals that are coming our way as soon as we can. And we some time delay the repayments as long as we can. But that's probably a matter of days or a week or something, that we might be able to have some influence there. But it's pretty much, it's not really in our hands, the timing of all this.

[CaseyAlexander:]

Okay, great. Thank you. And fortunately, we're not here, Mike to ask easy questions, we're here to ask the hard one so.

[MikeGrisius:]

Always guys. That's okay.

[CaseyAlexander:]

And I have one for you, here, Chris, I'm looking at a portfolio and assets under management, that is the largest that it's ever been by a step function larger than it's ever been. You're looking at a quarterly dividend that is $0.12 below where it was in the third quarter of 2020. Given the growth in the portfolio, should we reasonably expect some acceleration in the pace of dividend increases to sort of work its way back towards the prior level?

[ChrisOberbeck:]

That's a very good question, Casey, and something that we consider at the board level actively. I mean, as you can appreciate that the most recent two quarters have had a very substantial origination flow like, more than we've ever had before. So we're really just sort of like a quarter and a half into really substantial growth in our assets. And then we're really sort of maybe two, three quarters into what looks like a pretty solid recovery from what looked like a pretty horrible outlook a year ago. I mean, if you and I don't know how many years look like the last 12 months, but it's pretty amazing, the differences and scenarios that have occurred. And so, as you know, we took a very cautious approach to our dividend last year, and we've been increasing it, at a pace that's, has not been commensurate with the increase in earnings. But we did not necessarily weren't able to project exactly what our earnings were going to be, because all this stuff has come to us. So yes, we're sitting on a $0.12 substantial outperform -- out earnings of our dividend. I think as we've discussed in prior calls, there's this spillover situation where, ultimately whatever earnings, out earnings we have, we're going to have to distribute, right. There's the tax laws are what they are, and so within any given periods of time, and there's some flexibility we have, but we have some hard tax deadlines where we have to pay out our taxable income. So in a sort of multi quarter forward look, we're going to have to reconcile our taxable income, with our dividend payout, and we're looking at that very actively, and then spill over, the amount of spillover you're allowed to have is also part of that equation. And as you know, and as we've mentioned last year, I mean we were at a zero spillover, most of our peers, I may have not the statistics at my fingertips right now, but most of our peers have pretty heavy spillover levels. And our spillover level right now is quite modest relative to what it could be. So there's not an enormous pressure right now, this quarter, next couple quarters to rebalance. And so we have a little bit of time to see how this plays out, right. And obviously, if we continue to have robust performance, like we have, we're going to need to address that in our dividend.

[Operator:]

Our next question comes from the line of Sarkis Sherbetchyan from B. Riley.

[SarkisSherbetchyan:]

Hi. Good morning and thank you for taking my questions here. Just wanted to kind of do a little comparing and go back to Bryce's question regarding the equity interests, going up even on an amortized cost basis, right. So was it predominantly driven off of the new preferred security investments, which will kind of, leave you a dividend? Or was there some other opportunistic investment there? And then also, part and parcel to this question would be, when do you expect to, let's say, monetize those interests, or if you can give us some historical examples to that.

[ChrisOberbeck:]

I haven't -- Henry you could comment on the exact numbers in terms of how much of it was the preferred investments, but the approach that we're taking in equity co investments is consistent with what we've done in the past. And I think the only thing that would drive that in an outsize way would likely be those two preferred investments.

[HenriSteenkamp:]

Yes, to give you some more color, Sarkis. So if you sort of think of the absolute dollars, that our equity sort of increased from February to May, about two thirds of it was because of additional equity purchase or investments by us. And about a third of it was just because of our existing equity positions that increased in value and were marked up. And then if you think of the two thirds, that is the new investments, probably, I would say just over half of it related to those preferred equity investments. And then the remainder was sort of, again, that's the standard playbook we always do, which is just sort of bite sized, small equity, little pieces that we do as part of debt investment. I hope that's helpful.

[SarkisSherbetchyan:]

Yes, super helpful. Thanks for that. And --

[ChrisOberbeck:]

And if I could just describe, thank you just -- sort of just an overlay, and I'm kind of repeating what-- some of what I think Mike had said earlier, there's no real strategic change in what we're doing relative to our equity. As Henry said, about a third of it is just sort of regular way, investing equity, as we always have, we always get equity; we kind of always want it in conjunction with our debt investments. And that's been important for the accretion in our NAV and our NAV per share. A third of it is from appreciation in our underlying equity. So that's very positive, right. So this other third, as Mike said earlier was, is really just opportunistic, and we want to remain opportunistic. Those are we think they're called preferred or called equity, but because of the structure of what we're doing, they're kind of debt like in terms of, guaranteed or, agreed return, if you will, and credit quality of that return, and nature of duration, so those really -- they are in the equity bucket, but they're not like a pure raw common equity type exposure.

[HenriSteenkamp:]

I think you also have a question -- you had a question on the duration I mean, typically, we're not in the driver's seat in terms of an exit. We may be influential in that respect, but we're not in the driver's seat, typically, as a co investor, in most of the companies that we have in our portfolio. So the pace of realization is sort of consistent with what you see in our debt portfolio. If we're supporting a sponsor, typically, that sponsors investing capital at a certain pace, and then they're going to go look for realizations and look to exit that business. And alongside that exit, we would exit at the same time, if it's a business where we're directly supporting a management team, or maybe it's an independent sponsor, different ownership structure. Some of those are a little bit more long dated investments. I think, for instance, Easy Ice was one that was in that category; some of the other ones that were in today are also in that category. And those ones tend to be a little bit more long dated, but generally, the pace of, the way you should think about the pace of realization, it's fairly consistent with the pace of realization on our debt.

[SarkisSherbetchyan:]

No, thanks for that. And I guess I'm kind of coming to this in a roundabout way. Because if I look at your second lien and unsecured loans on the book on a cost basis, it hasn't really budged much, kind of even in recent quarters, and now obviously, you're making a more concerted push into first lien. So I just wanted to understand if the average loan duration is about let's call it three years with a single to low double digit coupon, this preferred investment must have been much more attractive in some way shape or form for you to deploy capital there. Is that kind of a right summation of the thought process or is there something different that you'd kind of like to increase more first lien and second lien and unsecured paper out there, it's just not attractive? Just want to get some more color around the other categories there.

[ChrisOberbeck:]

Yes, that's a good observation. I mean I think first to just address the standalone preferred investments. Those are pretty unique circumstances; we'd love to have the opportunity to make more of those investments. But I wouldn't look at our business strategy and think that you're suddenly going to see lots of that that's directionally what we're intending to do is what we've done historically, which is co invest in equity alongside debt investments that we make. Now by and large, the approach that we've taken just on making any investments in debt securities is really just trying to find out where the best risk adjusted returns present themselves. Sometimes that's in the second lien. There have even been times historically where we've done unsecured debt as well, as the market has marched on, and where we are presently in the market, we think that there's a much greater percentage of real solid risk adjusted return opportunities in first lien positions. And that's why you see the majority of the deals that we're doing in first lien positions, and fewer of the junior capital positions. Now, that could change in a different marketplace, sometimes when there's a correction in the market, the opportunities will shift as well. But by and large, investing at the top of the capital stack, and then augmenting those returns with an opportunity to invest in the equity has been a really good formula for us. And that's generally what we intend to continue to do.

[HenriSteenkamp:]

Yes, and Sarkis, if I just add one thing, Mike and I were actually in his office this morning. And we were just looking at the mix together of our portfolio for this quarter. And when you look at it, you obviously, look at this quarter, and it was a big total dollars value, $119 million, which we've obviously overjoyed at. And you asked me about the two preferred equity -- our preferred investments, obviously, which are a little different maybe than we've done in other quarters. But other than that, if you take a step back, and you just look at the quarter as a whole, two thirds of our originations this quarter would follow ones. And one third was for portfolio companies, new investments. And if you think of that sort of mix, or as Mike called earlier a playbook that is exactly consistent with the way we've originated, not just many quarters back, but over the last years, so much of our growth has come from follow on and this quarter is no different.

[ChrisOberbeck:]

Just to add to that part of that is, has worked out well for us, because where we play in the middle market, we will do the work to get close to and underwrite very thoroughly a business that's been on the smaller side and make a less substantial investment than what maybe some of the bigger BDCs would bother with. The benefit of that though is it allows us to get close to the company do really thorough diligences have real covenants in our structure. And then as those businesses grow, they can be a source of capital deployment for us. And many of our debt best deals fall right into that category where we made a relatively small investment initially, and hopefully an equity co investment. And then as the company's either acquisitive, or they need growth capital, we've been there to upsize our investment. And as we've grown, our capacity to upsize our investment has also grown, which extends the duration of the debt, but also allows us to enjoy the lift in enterprise value if we're co investing in the equity and that's something that we're intending to continue to do. And I think this quarter you can see some of the benefits of that particularly in a handful of our portfolio companies that are performing quite well.

[Operator:]

Our next question comes from Matt Julian from Raymond James.

[MattJulian:]

Hey, all, good morning. And appreciate you taking my questions. Kind of first one for me on the unrealized appreciation during the quarter. It looks like a bulk of it came from three names primarily Passageways, Netreo and GreyHeller. Anything you can give us on whether or not those write-ups, were they a function of improved performance in EBITDA or expanding market multiples? Any color there would be of interest?

[ChrisOberbeck:]

Yes, good question. So Passageways was reflective of unexpected exit. And so that's just a write up reflecting that valuation of that exit. And then the other two are a mix of both. So there's definitely multiple expansion that has increased the value of those portfolio companies, both of which we have substantial equity investments in. But the reason that the multiple expansion has occurred is because the portfolio -- both of those portfolio companies have performed quite well. And as they've grown, they've gotten to a different level of scale, where at that scale it's natural for the multiple valuations to grow as well. So it's a combination of performance. And some of that strong performance and grow to up to a higher size business has expanded the enterprise value multiple as well.

[MattJulian:]

Okay, kind of a different term for me on the second question then. So obviously, a stronger origination quarter looks like originations are continuing to be strong. Any high level commentary on what you're seeing in originations is kind of elevated levels, there's still some pull forward from COVID levels. Are private equity sponsors or management teams looking at potential tax changes? Anything high level, you guys are seeing.

[ChrisOberbeck:]

The only thing -- the observation I would make is that deal activity was down quite a bit last year, as everyone knows, and I think there were some deals that didn't happen because people wanted to wait and see how the COVID experience would play out. And so there were deals that were on the sidelines, even companies that we're going to get sold some of them in our portfolio. Now that we're getting to a better place in that respect, you're seeing transaction volumes come up quite a bit. So I think some of that slower pace from last year is spilling into the current environment. Fortunately, there's what comes with that even though it will result in some payoffs in our portfolio. We're also seeing a tick up in potential to deploy capital in new opportunities as well. And you're seeing that in our origination activity.

[Operator:]

We have a follow up from Bryce Rowe from Hovde.

[BryceRowe:]

Thanks for taking the follow up, wanted to ask about the structure of the debt capital on the balance sheet. And how you all are thinking about future funding from a debt capital perspective in the context of some of the baby bonds being callable here next month in the context of market pricing, being as attractive as it is right now. And then kind of in the context of where you are in terms of using the revolving credit facility. I think you look back you haven't really used that revolving credit facility in a couple years. And you obviously use that here. As Casey was talking about your portfolio has grown quite a bit. So I'm just -- I'm wondering if it's time for some bit of evolution from I guess the use of the credit facility, if you start to use it more, if you'll look for another source to add on to that credit facility, so you can kind of better manage the puts and takes from a origination repayment perspective. Thanks.

[ChrisOberbeck:]

Sure, Bryce, that's an excellent question. And something that we are constantly evaluating and working with. And as you can see, in the last couple quarters, we've been diversifying our sources of capital, we have the most recent foreign bond issuance, which was a new low level of fixed rate financing for us. And those markets are still open to us. We do have these call dates on baby bonds, and we do have those markets are also open to us. We do have our revolver and possible modifications to our revolver and in addition, so all those things you mentioned. So we're looking at all of them. I think, obviously, we need to be careful on forward looking statements here on this call. So it's very hard for us to give you specific answers right now as to what we're exactly planning but I think it's fair to say that, yes, we are an incredibly robust credit environment and we are actively considering and all those -- on all those fronts, I would also point out that in terms of our, the amount we've drawn on our revolving credit for which you, accurately point out that, that's kind of been a swing line for us, and we haven't had to use it that often. A lot of our investments have been in our SBIC fund, where we can draw on those credit facilities as needed kind of like a revolver, if you will, recently, we've had more that have been outside of our SBIC investments that have been attractive outside of our SBIC qualifications, what investments are required to be liked, to be able to be in and SBIC fund. And so, and then also, the lower rates that we were able to get on some of these institutional bonds, opens up a new environment for us for lending in terms of cost of capital, so all those are sort of high, top of mind. But I think it's also, again, important to realize that, you look at the growth in our assets under management has been very rapid, in the last two quarters, I think in our subsequent quarter end I think you'll see that there was significant repayments, the current kind of right after quarter end, but then we've also had significant reinvestment. So we are keeping an eye on our pipeline, and our net asset addition, right, and that's driving a lot of this. And so sort of our revolver is a very important element, because it allows us to do what we were able to do, bridge over the quarter, but that snapshot is not necessarily completely reflective of, sort of the ongoing ebbs and flows of how our capital needs are required. So, overall, just to try and give you a better than a non answer to your pointed question about what we're exactly going to do, we can't say what we're exactly going to do, but we are very specifically looking at all those markets. And what's available in those markets, as well as our pipeline, and how much of our pipeline goes into our SBIC versus not into our SP IC. Because as you know from our presentation, right, we have a tremendous amount of capital, $124 million of SBIC debt that's available right now. So anything that qualifies for SBIC fund, we can put in there with 100% debt financing, because we've already funded the equity there. So it's really, the incremental capital need is really about outside the SBIC right now, and how we manage that relative to capital markets availability, and revolver pricing, that type of thing.

[BryceRowe:]

That's helpful, Chris, and I appreciate that was a good non answer. But a good answer for sure. And I think the market kind of loses sight to a certain extent of how you all are positioned not only from a debt capital perspective, but from an opportunity to continue to reduce the cost of your debt. So thanks for taking the question.

[Operator:]

And we have another follow from Casey Alexander from Compass Point.

[CaseyAlexander:]

Yes, mine was asked and answered. Thanks very much.

[Operator:]

Thank you. And I'm not showing any further questions in the queue at this moment.

[Chris Oberbeck:]

Okay, well, we'd like to thank everyone for their time and attention and support of us and for joining our call today. And we look forward to speaking with you next quarter.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.