Prepared remarks
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's First Fiscal Second Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp. Chief Financial and Chief Compliance Officer, Mr. Henri J. Steenkamp. Please go ahead.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2026 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. Today, we will be referencing a presentation during our call. You can find our fiscal second quarter 2026 shareholder presentation in the Events and Presentations section of our Investor website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to results reflects our August end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year and NAV per share growth from the previous quarter. A strong return on equity beating the industry net originations of $22.4 million and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment, including the return of our Zollage to accrual status, thereby reducing our nonaccrual investments to just one representing only 0.2% of portfolio fair value.
Continuing our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for 2026. Our annualized third-quarter dividend of $0.75 per share represents a 12.3% yield based on the stock price of $24.41 as of October 6, 2025, offering a strong current income from an investment value standpoint. Our Q2 adjusted NII of $0.58 per share continues to reflect the impact of the past twelve-month trend of decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets and the continued effect of the recent repayments. Which has contributed to the buildup of $201 million of cash as of quarter-end available to be deployed accretively in investments or to repay existing debt. During the quarter, we continue to see very competitive market dynamics. These macro factors, our portfolio again saw multiple debt repayments in Q2 in addition to solid new originations. We originated $52.2 million including three follow-ons and new investments in multiple double B and triple B CLO debt securities. Our strong reputation and differentiated market positioning combined with our ongoing development of sponsor relationships continues to create attractive investment opportunities for high-quality sponsors. Which continued post quarter-end with three new portfolio company that are closed or in closing in Q3 so far. We continue to remain prudent and discerning in terms of the new commitments and the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our $995.3 million portfolio in the current environment. With all four historically challenged portfolio company situations resolved. One of these restructurings, Zollage, is seeing improved financial performance and has been returned to accrual status this quarter. Our current core nonportfolio non-CLO portfolio was marked up by $3.9 million this quarter, and the CLO and JV were marked down by $300,000. We also had $200,000 of net appreciation in our new double B and triple B CLO debt investments and a further net realized gains of $100,000 from an escrow payment on our modern campus investment, resulting in fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter-end, our total portfolio fair value was 1.7% below cost, while our core non-CLO portfolio 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the second quarter, our net interest margin decreased from $15.1 million last quarter to $13.1 million driven by a $2.1 million decrease in non-CLO interest income. This decrease was due first, average assets decreased $11 million or 1.1% to $954 million. Second, the timing of originations and repayment closings during the current and previous quarter with repayments more fully reflected in earnings and the full impact of new originations still having to flow through. And third, the absolute yields on the non-CLO portfolio decreasing from 11.5% to 11.3% as a result of SOFR rates resetting from earlier reductions combined with the impact of lower-yielding new originations during the quarter. In addition, the full period impact of the 200,000 shares issued to the ATM program in Q1 and the partial impact of the additional 400,000 shares issued in Q2 resulted in a $0.02 per share dilution to NII per share. Our overall credit quality for this quarter remains steady, with 99.7% of credits rated in our highest category, with now just one investment remaining on nonaccrual status. Pepper Palace, which has been successfully restructured representing only 0.2% of fair value and cost, respectively. With 84.3% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and the volatility seen in the broader underwriting and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure, and disciplined underwriting standards to continue to steadily increase the size, quality, and investment performance of our portfolio in the long term and deliver attractive risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us. At a quarter-end, we maintained a substantial $407 million of investment capacity to support our portfolio companies. With a $136 million available to our existing SBIC three license, $70 million from our two revolving credit facilities, and $201 million in cash. This level of cash improves our current regulatory leverage a 166.6% to a 186.5% net leverage. Netting available cash against outstanding debt. Moving on to Saratoga Investment's fiscal 2026 second quarter. Key performance indicators as compared to the quarters ended 08/31/2024, and 05/31/2025, are our quarter-end NAV was $410.5 million, up 10.3% from $372.1 million last year, and up 3.6% from $396.4 million last quarter. Our NAV per share was $25.61, down from $27.07 last year and up from $25.52 last quarter. Our adjusted NII was $9.1 million this quarter, down 50.1% from last year and down 10.5% from last quarter. Our adjusted NII per share was $0.58 this quarter, down 56.4% from last year and down 12.1% from last quarter. Adjusted NII yield was 9% this quarter down from 19.7% last year and 10.3% last quarter. And the latest twelve months return on equity was 9.1%, up from 5.8% last year and down slightly from 9.3% last quarter and above the industry average of 7.3%. While last year saw markdowns due to a small number of credits in our core BDC, slide three illustrates how our recent results have delivered an ROE of 9.1% for the last twelve months. Above the industry average of 7.3%. Additionally, our long-term average return on equity over the past eleven years of 10.1% is well above the BDC industry average of 7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry eight of the past eleven years and consistently positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC fifteen years ago despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter. The recent AUM decline over the past year does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, and with just one recently restructured investment remaining on nonaccrual, Pepper Palace, our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline. While at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio. Thank you, Chris. Slide five highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 15.8 million, increasing from 15.3 million and 13.7 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $9.1 million this quarter, down 50.1% from last year and 10.5% from last quarter. This quarter's decrease in adjusted NII as compared to the prior quarter and prior year were both due to lower AUM and base interest rates. The decrease from the previous year's second quarter was also largely due to the non-recurrence of the $7.9 million Noland investment interest recognized last year that was previously on nonaccrual. The weighted average interest rate on the core BDC portfolio of 11.3% this quarter compares to 12.6% as of last year, 11.5% as of last quarter. The yield reduction from last year primarily reflects the SOFA base rate decreases over the past year. Total expenses this quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, increased $300,000 to $2.5 million as compared to $2.2 million last year and decreased $300,000 from $2.8 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and up from 0.7% last year. Also, we have again added the KPI slides, 26 through 30 in the appendix at the end of the presentation that show our income statement and balance sheet metrics for the past two years. Slide 30 is a new slide we added last quarter, comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.3% of cost is significantly lower than the industry average of 3.4%. This decreased from 0.6% last quarter due to our Zollage investment returning to accrual status. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to Slide six. NAV was $410.5 million as of fiscal quarter-end. A $14.1 million increase from last quarter and a $38.4 million increase from the same quarter last year. During this quarter, $11.4 million of new equity was raised at or above net asset value respectively through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased in 23 of the past thirty-two quarters, including by $0.9 this quarter. Over the long term, our net asset value has increased since 2011 and grown by $3.64 per share or 16.6% over the past eight years. On slide seven, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.8 in Q2, primarily due to, first, the decrease in non-CLO net interest income during the quarter up $0.10 due to recent decreasing AUM and base rates, and second, dilution from the increased DRIP and ATM program share count of $0.2. This was partially offset by both the decrease in operating expense of $0.2 and increases in the CLO and BB debt investments interest income of $0.2. On the lower half of the slide, NAV per share increased by $0.9 primarily due to net realized gains and unrealized appreciation of $0.27 including deferred tax benefits, partially offset by the 17¢ under earning of the dividend and a $0.1 net dilution from the ATM and DRIP programs. Slide eight outlines the dry powder available to us as of quarter-end, which totaled $406.8 million. This was spread between our available cash undrawn SBA debentures, and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 41% without the need for external financing, with $201 million of quarter-end cash available and thus fully accretive to NAV to NII when deployed, and $156 million of available SBA debentures with its low-cost pricing. Also very accretive. In addition, all $296 million of our baby bonds, effectively all our 6% plus debt is callable now, creating a natural protection against potential continuing future decreasing interest rates which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet, that most of our debt is long-term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times. Especially important in the current economic environment. Now I would like to move on to slides nine through 12. Review the composition and yield of our investment portfolio. Slide nine highlights that we have $995 million of AUM at fair value, and this is invested in 44 portfolio companies one CLO fund, one joint venture, and numerous new double B and BBB CLO debt investments. Our first lien percentage is 84.3% of our total investments, of which 22% is in first lien last out positions. On Slide 10, you can see how the yield on our core BDC assets excluding our CLO investments, has changed over time, especially this past year reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 11.3% from last quarter's 11.5%. Reflecting further core base rate reductions. The CLO yield decreased to 11.8% from 13.7% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield in the eight to 10% range. Slide 11 shows how our investments are diversified through primarily the US. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents. Spread over 39 distinct industries, in addition to our investments in the CLO, JV, and BB and BBB CLO debt securities, which are included as structured finance securities. Moving on to Slide 13, 7.9% of our investment portfolio consists of equity interest. Which remain an important part of our overall investment strategy. This slide shows that for the past thirteen fiscal years, had a combined $43 million of net realized gains from the sale of equity interest, or sale or early redemption of other investments. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV, and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our chief investment officer, Michael Joseph Grisius, will now provide an overview of the investment market.
Thank you, Henri. Today, I will give an update on the market since we last spoke in July, and then comment on our current portfolio performance and investment strategy. Year to date, deal volumes in our market have been down significantly as compared to 2024 and are down further still as compared to 2021 through 2023. We believe that M&A activity will invariably revert to historical levels, but that pickup in deal volume appears to be postponed for the time being. Although the commencement of decreasing rates might help with that. The combination of historically low M&A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full as lenders compete to win deals, especially premium ones. Market dynamics are at their most competitive level since the pandemic. We've also experienced repayment activity in some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods. And with some viable concerns about the longevity of the current issuer-friendly environment due to both market-driven and macroeconomic factors. We remain vigilant in our underwriting. As we noted on last quarter's call, this may naturally prompt the question of what is our approach to operating in this difficult deployment environment? In summary, first, stay disciplined on asset selection. Second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us. And third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace combined with our ramped-up business development initiatives give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Additionally, during this past quarter, we continued to invest in multiple different CLO BB and BBB securities across eight different CLO managers for a total notional amount of $26.3 million. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates. While also providing enhanced yields relative to comparably rated corporate debt securities. We anticipate third-party managed CLO BBs, and to a lesser extent, CLO junior BBBs will play an increased role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets. Now our underwriting bar remains high as usual. In a very tough market. Yet we continue to find opportunities to deploy capital. As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 13 follow-ons in calendar year 2025 thus far, and we have invested in three new platform investments this calendar year as well. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. During the quarter, our Zollage investment returned to accrual status, reflecting its improved financial performance leaving just Pepper Palace on nonaccrual, although we are still actively managing both, as discussed in previous quarters. This is a significantly positive development as now only 0.2% of the portfolio at fair value and cost, respectively, are on nonaccrual status. In general, our portfolio companies are healthy, and the fair value of our core portfolio, our core BDC portfolio, is 2.1% above cost. 84% 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. Looking at average leverage on this slide, you can see that industry debt multiples move closer to six times with unitranche in the mid-fives. Total leverage for our overall portfolio is 5.34 times. Excluding Pepper Palace. Now Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 despite the current M&A activity in the lower middle market remaining low. This recent increase of deal sourced is a result of our recent business development initiatives with 20 of our 51 term sheets issued over the last twelve months being from deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this quarter totaled $52.2 million consisting of three follow-on investments totaling $25.9 million and double B and triple B CLO debt investments of $26.3 million. Subsequent to quarter-end, we closed or currently have in closing in our core BDC portfolio approximately $42.7 million of new originations in three new portfolio companies and two follow-ons, including delayed draws. Two of the three new portfolio companies are with new relationships. As you can see on slide 16, our overall portfolio credit quality remains solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. At the same time, since our management team began working together fifteen years ago, we've invested $2.34 billion in 122 portfolio companies, and have had just three realized economic losses on these investments. Over that same time frame, we've successfully exited 84 of those investments, achieving gross unlevered realized returns of 14.9% on $1.29 billion of realizations. The weighted average return on our exits this quarter were consistent with our track record at around 14%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equals 13.5%. Total realized gains year to date were $3 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we have now only one investment on nonaccrual, although Pepper Palace has been restructured, we're still it as red with a fair value of $1.8 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $3.9 million of net appreciation including Zollage and Pepper Palace, reflecting the strength of the overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remains strong as seen by our track record on this slide. Now moving on to slide 17, you can see our second SBIC license is fully funded and deployed. Although there is cash available there to invest in follow-ons. We are currently ramping up our new SBIC three license with $136 million of lower-cost, undrawn debentures available allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market. And I'd like to turn the call back over to our CEO. Chris?
Thank you, Mike. As outlined on slide 18, our latest dividend of $0.75 per share in aggregate for the first quarter ended 08/31/2025 was paid in three monthly increments of $0.25. Recently, we declared that same level of 75¢ for the quarter ending 11/30/2025, marking the third quarter of our new dividend payment structure. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors including the current interest rate macro environment's impact on our earnings. Moving to slide 19. Our total return for the last twelve months, which includes both capital appreciation and dividend, has generated total returns of 22%, beating the BDC index's 4% for the same period by over five times. Our longer-term performance is outlined on the next slide, 20. Also, our five-year and three-year returns both place us above the BDC index. And since Saratoga took over management of the BDC in 02/2010, our total return has been almost three times the industry's at 862% versus the industry's 291%. On slide 21, you can further see our last twelve months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield, and dividend growth and coverage. All of which reflect the value of our shareholders are receiving. While NAV per share growth and dividend coverage are lagging this past year, this is largely due to last year's two discrete nonaccrual investments previously discussed. In addition, we've had significant recent repayments of successful investments that have reduced this fiscal year's NII thus far and thus resulted in healthy levels of cash available for deployment. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term, and we will also continue to be one of the few BDCs that have grown NAV accretively over the long term, with our long-term return on equity at 1.5 times the industry average and the latest twelve-month return on equity also beating the industry by 180 basis points. Moving on to slide 22. All of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 10.8%, ensuring we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we are encouraged by the health and resilience of our portfolio and the continued strength of our pipeline. Backed by our experienced management team, disciplined underwriting, and solid balance sheet, we are well positioned to further expand the size and quality of our portfolio, drive consistent investment performance, and deliver attractive risk-adjusted returns for our shareholders over the long term. Recognizing the challenges posed by the ongoing tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure, and liquidity places us in a strong position to successfully address these types of uncertainties. In closing, I would again like to thank all of our shareholders for their ongoing support. And I would now like to open the call for questions.
Questions and answers
Thank you. As a reminder, to ask a question, please press 11 on your telephone. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Erik Edward Zwick from Lucid Capital Markets.
Thanks. Good morning, everyone. Wanted to first say, I appreciate the slides 19 through 21 where you showed some comparisons between your performance and peers. In looking at five twenty-one, you know, one metric that kind of stands out or maybe you're currently, you know, a little bit below the peer mean is just on the dividend coverage. And I know, Chris, you kind of addressed some of the commentary there. About, you know, some of the factors that have impacted that. So just kind of curious from your perspective, given the outlook for some additional headwinds from the outlook for lower short-term rates, what levers and strategies you know, do you feel are, you know, the easiest for you to pull at this point? To potentially improve the dividend coverage and then how much of a priority is that at this time?
Well, I think that's a very important question, something that we're evaluating at all times here. I think, you know, there's a longer-term and a shorter-term perspective on everything in life and this in particular. And I think if you look at the dynamics of our portfolio, I think one thing that we've done, you know, we're proud of doing well is the solidity of their portfolio performance. And now we're back on an increasing NAV trajectory. And I think that contrasts with a lot of what's going on in private credit generally. There's a lot of deterioration. And I think if you look at macro discussions of private credit these days, there's lots of concern. There's sort of like a grinding, you know, different numbers are out there, four or five percent losses grinding through the system. You know, higher interest rates, all that type of thing. So we've been able to construct a portfolio that's kind of, you know, avoided those major problems. And so that has been project number one for us was making sure we have a super strong portfolio, consistently strong credit underwriting. I think in terms of other macro factors, I think everyone's quite aware that the M&A environment has been quite muted for the last few years. And so the supply of private credit opportunities is just not as large as it has been. Now the backlog of future M&A has increased a lot, but it just hasn't happened. Right? And so a lot of the, a lot of so there's been a lot of refinancing activity. There's a lot of new money coming into the business. And so we have found that, you know, putting money to work at our credit standards and underwriting standards, has been a little more challenging than it has been in other years. But that doesn't deter us from maintaining our standards. And, I think, you know, we've got an enormous pipeline, and we're looking at lots and lots of deals. And our ability to deploy capital could turn very quickly. I mean, we have a slightly higher hit rate and we could deploy a fair amount of capital given all the things that we see right now. So, and I think as Mike had mentioned, we are seeing an increase in deal flow and an increase in M&A and all those type of things. So we may be coming out of this highly muted M&A environment. And so we feel confident that we will be able to deploy our capital, and we do have $400 million plus available. So we can grow, you know, 40 plus percent of our assets know, inside the four corners of our current financial capability with don't have to raise any outside money to be able to do that. So we're very well positioned but we don't want to, you know, for short-term considerations, to compromise our underwriting standards when we feel like we're gonna get there. You know, we're gonna get to the right.
Yeah. Let me just more broadly address your question as well just to add to what Chris had mentioned. The marketplace right now is incredibly tough, and it's mostly driven by the fact that M&A volume is down considerably relative to historical levels at the very same time that there's a lot of capital on the sidelines. And so what happens is when the quality asset comes to market, people clamor to provide capital to those businesses. And there's three things that we're witnessing there. And, historically, two of them are kind of naturally the case. The third one is more concerning. But the first two are that pricing comes in, so we're certainly seeing competition for price and therefore, spreads are compressing. The other thing that people are doing is they're pushing leverage a bit more. Not changing so much relative to the percentage of debt in the capital structure because the PE firms are also having to pay more for quality assets. So that's a little less concerning, but nonetheless, we are seeing more aggressive leverage profiles. But the third thing that we've seen and we've passed on some deals as a result of this more recently is that we're seeing some larger market participants coming down into our market. I don't think they understand the market that well, and they're offering terms and structures that you tend to see more in the larger market. So you see, you know, less restrictive covenants or even much fewer covenants. And we're not gonna do those deals. So we're passing on deals that have those features to them while others are investing capital. It'll be interesting for a person like the senior management team here has been through a lot of markets. It'll be interesting to go back and look at how this vintage performs over time. As Chris mentioned, we're gonna stay very disciplined in terms of what our investment bar is. So how are we responding to that? We're doubling down our business development efforts. And I think as we've discussed in the past, one of the things that's so great about residing in the lower end of the middle market is there literally are hundreds of thousands of businesses out there. We know that our market presence is still very greatly underpenetrated in that market. So by investing in more business development efforts, really taking a concerted effort to get greater outreach in the marketplace, you can build your pipeline quite a bit. So to what Chris' point is, you can see that in our term sheets issued, especially the number of term sheets we've issued to newer relationships. And that is very encouraging to us. We've invested in expanding our team. We've added a new managing director who's got a very strong track record as a very successful originator in our space, as well as augmenting our team with other investment professionals, which has freed us up to really get out there and drive that pipeline. And then importantly, as I mentioned in the prepared remarks, we've got presently three new portfolio companies that are in closing and two of those three are new relationships that we didn't have just six months ago. So lots of reasons for us to feel despite how challenging the market is, to feel confident that in the intermediate to long run, we'll get the capital deployed, and we'll bridge that gap between where our earnings are and where our dividend is.
That's fantastic color. Thank you. Both of you. Maybe a quick follow-up Michael, one of your comments about some of the larger competitors moving down market. Do you feel like that's likely a kind of shorter-term trend? And once M&A comes back and there's more activity and, you know, not everyone's chasing all of the smaller deals, but that they kind of go back up to where they're historically have operated.
I would expect that. I can't say that with certainty. But it doesn't make sense for some of the platforms that we see chasing $20 million deals or even $30 million deals when you look at their size. It'd be like us running around chasing 2 or $3 million deals. It just doesn't work. But I'm I think when there's a dearth of deals in the marketplace, you'll see people sort of reach down into a lower end of the market. I've seen that historically. So I wouldn't expect at least my judgment would be, I wouldn't expect to see them permanently residing in our end of the market.
Got it. And one last one for me, and then I'll step away. You know, I I think slide 13 is a very powerful slide that shows kind of the cumulative gains that you guys have been able to record over time. I guess looking over kind of the near term with the 8% common equity portfolio now, any near-term opportunities that you guys potentially see for additional gains? Or I I would think, you know, M&A coming back would potentially help that prospect as well.
Well, I think the valuations that we have take into account what we think the appropriate valuation is. So I think what you see in our valuation, which we're very proud of. I don't know how many BDCs actually have their core portfolio above their cost basis. Ours is deal above its cost basis, but I wouldn't say, you know? I I would say the valuations we have now are are the appropriate reflection of fair value.
Yeah. The other covers So any just the other comment I just make on that. Excuse me, is is the yeah. This has been sort of a feature of being in the small or middle market. And what we've been able to do, which is we we often take equity co-investments when we when we do a loan, and we do it kind of as systematically as we can. Now not every deal allows us in and not every deal do we want to be in in a very large scale. But in general, systematically, we're taking equity positions in many of the companies that we're underwriting. And, and so over time, you know, obviously, number one is not losing money on the basic loan. But over time, those equity gains have contributed quite a bit to our NAV and NAV per share growth, and we're just gonna continue that.
Thank you. Thanks for taking all my questions.
Thank you. One moment for our next question. Our next question comes from the line of Casey Alexander from Compass Point Research and Trading.
Hi. Good morning. And thanks for taking my questions. Mike, I'm kind of fascinated by slide 15, which you alluded to. You know, term sheets up 143% but deals executed down 36%. I almost feel like I feel a level of frustration related to those two statistics. In that you're finding deals to bid and the old story used to be that that, given lack of small differences in deal terms, people would go ahead and go with you guys because of certainty of close, reputation, knowing what you would do, in distressed situations. But I guess the difference between deal terms is large enough now that that's kind of been put off to the side, and people are just taking deals away from you because the price differential is just too much. I mean, am I reading that wrong?
Well, I think it's there's two things. I think it still is very much the case that we win many opportunities because of our reputation in the marketplace. People are impressed with the quality of the work that we do to understand their businesses so they get confident that we're gonna be very good financial partners to them, that wins us a lot of deals. It also gets us a lot of repeat business. We still have confidence in that core feature to our business model, which is reflective of really the team that we have here, which we think is best in class in the industry. Having said that, when the market gets really competitive, and you start seeing at some level, competitors offering much cheaper pricing, really relaxed covenant levels, things of that nature. You know, those things aren't gonna win the tie any longer. It so you do see certainly see some deals go away from us. Now I would add this though. The work that we've been doing, especially more recently in, you know, let's call it the last six or or nine months, doubling down our business development efforts and really investing significantly in growing our presence in the lower middle market. We are seeing a lot more quality opportunities. And our objective is to stay away generally from more commoditized scenarios i.e., the ones that you're referring to where it's just somebody gets a pricing grid out and a terms grid, and they just choose the person that's offering the best terms. Where we really shine is when we're getting a chance to interact with the ownership and the management team and do a lot of things that I just mentioned. We feel confident that we'll continue to find plenty of opportunities in our market to differentiate ourselves in the way that we described. We, of course, need to be competitive. And pricing has come down, and we need to be able to, you know, respond to that. But we're not gonna take the one place that we're not gonna lower our bar is on credit quality. And we think that that's reflective of how our portfolio has performed historically as well as where it's sitting today. Okay. Thanks for that. We're encouraged. I should we're encouraged. I've mentioned that we've got three new portfolio companies that are in closing right now. Two of the three of those are new relationships. So know, that's, I think, indicative of a lot of the efforts that we've undertaken to grow our reach in the marketplace.
Alright. Thank you. Chris, this is for you. I have, you know, been doing this for a long time, and I've never had an investor come to me and say, 'Gee. I wish my BDC owned a bunch of structured CLO securities.' And in fact, the history of them in BDCs is not that great. And so I really want to understand the thought process that makes you believe that this is what your investors want.
I guess I'd be interested in understanding maybe at another time, if you could share with us the bad experience in CLO structured securities. You're aware of? Are you talking about equity investments in equity of CLOs? When you say that?
There have been several BDCs that have had multiple different tranches of CLO securities. And over time, it has not improved their valuation. It hasn't necessarily been that great for their returns. And again, I don't know that that's what the mandate is that investors give you as a BDC.
Okay. So, again, Casey, we can go through the details at another time, but I think it's fair to say that most of those, and we are familiar with that because we do manage CLOs, so we're very familiar with securities. But most of those are equity investments in CLOs. And we would agree that the record there is not very good. The securities that we're investing in are very different than that. They're way up the scale. And, you know, we're investing in double B rated and even triple B minus rated. So they're either investment grade or just below investment grade securities. And because we've been in the business, we happen to know a lot about it, a lot about the data. We have better research. And at some point, you know, we're happy to spend time with you on how we do the research. But we have a tremendous amount of insight and data on the managers and their portfolios. And as a result, we're investing in the absolute cream of the CLO manager crop, and we're investing in these structured securities. For a whole host of reasons, these securities are investment grade or just below investment grade. But they have absolute returns, that are consistent with our absolute returns across our portfolio. In an interesting niche, investment area for a whole host of reasons. There's very few parties that are in it. And a number of them are hedge funds, for example, that have come in and out of it. And so we've noticed, you know, sort of an outsized return. So we're basically getting a return level that's consistent with what we're looking for in our private credit, and what we're able to get in the private credit marketplace we're able to do it on a highly diversified basis. And then another feature of this market is they often sell through BWICs. On a daily basis. And so there's a level of liquidity that can be achieved. In other words, if we wanted to get out of these positions, we could probably get out of these positions in a matter of days or weeks. Because of the way that we're obviously not in a severe, like, COVID or 2008 environment. But in a general environment, there's a fair amount of liquidity in these names. So you get not only the portfolio return levels, they're consistent with what we do. We have very specific research on it. And we also have a level of liquidity that we don't have with the rest of the portfolio. And we think at a time when we have a lot of cash available, this is a very interesting place to invest. Now should our pipeline all of a sudden, we start putting a lot more money to work in our base business, we, our core, you know, senior, first lien senior secured debt securities, that's our preferred place to be. And then we can also unwind some of these investments without any real penalty to help fund that, you know, should that business grow.
I appreciate the clarification between equity tranches and the tranches that you're investing in. My last question, and you know, I think this has been addressed, but I think it's worth approaching again. I mean, you know, NII this quarter was 17¢ below the dividend. And if you do the math, I mean, you're a long way away from getting there. And so I'm curious, especially given the trajectory of base rates, which may make it even more difficult by the time you get to a more fully invested position. You know, why not more appropriately set the dividend? Because your credit is great. And yet you look at the stock, the stock's down a buck and a half over the last two days. What's that telling you? It's telling you that the market doesn't understand the dividend relative to your earnings power. Why not get to a more appropriate level and then if you get fully invested, you can start to take it back up from there.
Well, Casey, I think, you know, obviously, the question of the dividend earnings is something that we evaluate at all times, and I think your question is a very good question. Again, I think that we are looking at a, you know, we kind of wanna balance the short-term with the long run. And we feel that, you know, yes, rates may come down, but deal volumes may be going up. And we have had periods where we've deployed what we've had quarters spike. We've been well over a hundred million dollar quarters. Yeah. Sure. Yeah. I mean, we've had quarters where we've deployed a hundred million. And then the question, what does the net investment look like? So we feel like we're not that far off of being able to get close that gap. And for a variety of reasons. But, you know, obviously, it's something we evaluate at all times, and we also have spillover. And so, as a result of the spillover, there's really, you know, no particular need to cut the dividend relative to our spillover requirements. Right now. And so, all those things considered, we think we're kind of in a moment where it makes sense to hang in there. And I think, depending how deal volumes play out going forward, we think we have a very good chance of closing that gap. And then, you know, all things being equal, you know, we'd prefer to maintain our dividend.
Hi guys. Following up from some of Casey's questions. I mean, the comment I think that Mike made was you expect these CLO debt tranches to be a more significant part of the investment strategy going forward. I mean, how much of the overall portfolio should we contemplate that strategy reaching over the next, you know, twelve months, give or take?
Well, I think that, you know, again, we're very cautious about predicting in calls like this. I think when Mike said that, I think he was referring to the fact we find it a very attractive investment category. And so we're so, you know, we're open to deploying significantly more. We're not projecting doing more than that. I think right now, Henri, we're like around 5%. You know? And we would be comfortable being larger, maybe twice that much. I we don't know. But, I mean, we haven't made those determinations. We as with everything, we make our investments, you know, individual credits at a time. There's some seasonality, I guess you'd call it, with the marketplace. Like, you know, at certain types of the year, there's relatively more supply than others. And then depending on the demand versus the supply, there can be some very attractive purchases like we had in the July time frame. And so we're trying to be opportunistic with regard to this strategy. We feel very comfortable that it's a very solid, proven strategy, maybe not so much in the BDC landscape as we discussed with Casey.
Got it. Got it. Yeah. I mean, just one additional thing. I don't think I double B CLO tranche necessarily classified as a first lien on scheduled investment. Since it's well above the equity, but it's well down from the top of the stack. But that's neither here nor there. The other question, and we and and and, Robert, yeah. Sorry. This is Henri. And we obviously disclose it as part of our structured finance products category. So we do clearly separate it in all the disclosures.
The most, Rob, I can't help but add this one thing because we don't wanna get into too much of a sales pitch around it. But just as we've evaluated, as you can imagine, one of the things that makes us really attracted to those securities is that they've held up historically very well even in stressed environments.
Yeah. On the CLO, just to I mean, the prior history of CLO equity has obviously been a disaster in the space. There are other highly credible players that do invest in the debt tranches, and I don't think it's been viewed too unfavorably so long as it's not too big a piece of the portfolio. But that's, that's so I appreciate all the color there. On the one concern I have not about you guys, but, Mike, on your comment that the large market participants coming down and they're essentially offering large market covenants to small company deals. Know, if the M&A market picks back up, you know, maybe to your comments, maybe they move back up market. What's the risk in your view that these small companies now and their advisers have now gotten a sniff of those simpler, easier covenants? What's the risk they hold out for those even if the large market participants move back up, and you end up with a fight with some of your normal competitors but some of them cave on the covenant side.
Well, I think there's always risk that you have a competitor who offers irrational terms and under prices risk or poorly structures risk. We've managed through that historically. I've been in this market for so long through so many cycles. I've seen this movie before, and usually what happens is they get they stub their toe or worse than stub their toe. And I could tell you that being at this end of the market, the way we structure deals, the way we underwrite deals is, you know, we're very confident is the right way to do it. So know, I think in the intermediate to long run, we'd feel like, one, it doesn't make a lot of sense for much larger balance sheets to be trying to deploy capital that inefficiently. So it's not likely that they'll stay there. We've certainly seen that pattern in prior cycles. Then the second thing is, you know, if you structure deals that way aggressively in our end of the market, it's generally not gonna work out well.
I totally get you that. I agree it usually leads to stubbed toes, but that can take a while for people to realize that. You know, obviously I think.
Yeah. We're gonna hold the line. I think the more important thing that we think about is just that as I mentioned before, it's such a massive market. Every time you go to kind of second tier city and you get to meet some of the accountants there or some of the brokers or business investment bankers that are kind of living in that market. There are new sources of deals that you find in businesses that you otherwise wouldn't. And we're really doubling down our efforts there. So we feel confident that we'll find plenty of opportunities to do what we do best. And as I said, we'll try to avoid those commoditized, overbanked processes and instead kind of do what we've done historically, and we're starting to see that in our pipeline and with some of the deals that we've closed recently.
Got it. Thank you.
Thank you. That concludes our call today. I want to thank everyone for your participation. If you have further questions, please feel free to reach out to us via our Investor Relations contact.