Capital Southwest Corp Q4 FY2021 Earnings Call

Thank you for joining today’s Capital Southwest Fourth Quarter and Fiscal Year 2021 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP, Finance. I will now turn the call over to Chris Rehberger.

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management’s expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest’s publicly available filings with the SEC.

Thanks, Chris, and thank you, everyone, for joining us for our fourth quarter and fiscal year 2021 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation which can be found on our website at www.capitalsouthwest.com. We are pleased to be with you this morning to announce our results for the fourth quarter and fiscal year ended March 31, 2021. I want to first say, I hope everyone, their families and their employees continue to be safe and well. We are hopeful that the economy will continue to take steps forward as businesses and communities continue to return to pre-pandemic levels. While the aftermath of the pandemic continues to impact certain parts of the U.S. and world economies, we are grateful for all the work done by our employees as well as the sponsors, owners and employees of our portfolio companies. I am pleased to report that this year was another stellar year for Capital Southwest as we continued to steadily grow all aspects of our Company, including investment assets, capital availability and flexibility, and investment income. As we reflect on the year and the unprecedented storm that hit the economy, vis-à-vis the COVID pandemic, we noted some fundamental decisions made in prior years, reflective of our full economic cycle management philosophy that allowed us to perform well during the unprecedented black swan event that we all experienced in 2020. First, we have been intent to always have ample liquidity, which in our case means ample revolver availability and a prudent amount of outstanding unfunded portfolio company commitments. Second, we maintained a flexible leverage structure on our balance sheet with over 50% of our liability structure in the unsecured covenant-light bonds going into the pandemic. And third, and perhaps most importantly, we have maintained our discipline in building a high-quality, almost exclusively first lien credit portfolio with diversity in industries and the granularity of hold sizes. As a result of these decisions, we were able to do three important things this fiscal year. First, we had more than ample liquidity to support portfolio companies that needed it while also continuing to fund new deals that were able to be underwritten in the pandemic environment. Second, we were able to more than cover dividends to our shareholders. And third, when the inevitable stock market volatility presented itself, we were able to repurchase a material amount of our stock.

Thanks, Bowen. Specific to our performance in the March quarter, as summarized on slide 18, we earned pretax net investment income of $8.9 million or $0.44 per share. We paid out $0.42 per share in regular dividends for the quarter, an increase from $0.41 regular dividend per share paid out in the December quarter. As mentioned earlier, our Board has again this quarter increased the quarterly regular dividend, declaring a dividend of $0.43 per share, up from $0.42 per share last quarter to be paid out during the June 30 quarter. Maintaining a consistent track record of meaningfully covering our regular dividend with pre-tax net income is important to our investment strategy. Over the past 12 months, we maintained our strong track record of regular dividend coverage with 108% for the year and a 107% cumulative since the launch of our credit strategy in January 2015. During the quarter, we maintained our supplemental dividend at $0.10 per share. And again, our Board has declared a further $0.10 per share supplemental dividend to be paid out during the June quarter. As a reminder, the supplemental dividend program allows for shareholders to meaningfully participate in the successful exits of our investment portfolio through distributions from our UTI balance. As of March 31, 2021, our estimated UTI balance was $0.92 cents per share. Our investment portfolio produced $17.2 million of investment income this quarter with the weighted average yield on all investments of 10.2%. Investment income was $1.9 million lower this quarter due primarily to last quarter’s investment income, including significant nonrecurring dividend and fee income.

Thanks, Michael, and thank you, everyone, for joining us here today. Capital Southwest continues to perform very well and consistent with the vision and strategy we communicated to our shareholders over six years ago. Our team has done an excellent job building a robust asset base, deal origination capability as well as a flexible capital structure that prepares us for all environments throughout the economic cycle. We believe that our performance through difficult times like we all experienced during 2020 truly demonstrates the investment acumen of our team at Capital Southwest and the merits of our first lien senior secured debt strategy. We feel very good about the health of our company and the portfolio, and we are excited to continue to execute our investment strategy going forward. Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders’ capital by continuing to deliver strong performance and creating long-term sustainable value for all our stakeholders. This concludes our prepared remarks. Operator, we are ready to open the lines for Q&A.

Thank you. Our first question comes from Devin Ryan with JMP Securities.

I guess, first question here. Clearly, as the credit backdrop stabilized, I’d love to maybe get some more color on appetite for growing assets in the I-45 senior loan fund. And also, if you can just remind us how you guys are thinking about kind of target leverage and target leverage profile in that portfolio.

Yes, this is Bowen. Thank you for the question. I’ll comment on the market, and then I’ll let Michael address the leverage target. The I-45 fund is performing well and has improved from a market quote perspective. Its main asset class is in the syndicated market, where we collaborate closely with Main Street. They are excellent partners for us, and we likewise support them. As we look ahead, the growth rate of that fund is mainly determined by the assets we encounter in the syndicated market and, to a lesser degree, in the large club market. I'll let Michael discuss the leverage targets, but we are managing leverage in the fund, and we certainly have capital available to grow it. Main Street also has the capital to contribute to the fund's growth. Ultimately, it’s all about the outlook for the market and the opportunities we can capitalize on.

I think from a leverage perspective, I think on a steady-state basis, we’re probably going to be running leverage between 1.3 and 1.5. I think what you saw during the pandemic, leverage rode up over 2 times, and we put in equity capital to deleverage down to closer to 1 times. So, we thought that was a prudent thing to do at the time. So, right now, we have about $165 million in assets. I think we’re going to look to grow that to about $200 million in assets, which would get us closer to really 1.5 times. We probably have a pathway to do that in the next two quarters.

Just a follow-up on the liability side, continue to make progress. And you kind of alluded to this a bit in the prepared remarks. But, can you just remind us kind of the pathway from here to kind of that investment-grade rating? And in your view, maybe what else needs to happen to achieve that?

It's a good question, and we've been discussing it for some time. Right now, I believe there's a size bias. We are nearing $800 million in assets, and as we approach $1 billion, that's when we would begin to engage with the rating agencies. Over the past six years, we've focused on diversifying our sources and products on the liability side. This journey began with increasing our credit facility from 3 lenders to 11, implementing a baby bond, completing two institutional deals, and now adding the SBA, which we believe solidifies our position, along with trading above book and the ability to raise equity through the ATM program. Additionally, the rating agencies consider repayments and liquidity in relation to our portfolio. Now that we are a stronger, larger, and more mature company, we see our portfolio in a steady state. Given all this, I think we just need a bit more time to continue performing and ensure our leverage levels remain prudent.

One of the things on that, Michael had me in front of each of the rating agencies six years ago, five, six years ago when we started, and my goal was not to be an investment-grade company five, six years ago. But my goal was to solidify in our mind very thoroughly what our resume needed to look like when we did get to the size and we were a candidate. And so, we’ve been thinking about that for years. And Michael just articulated kind of the resume, but we think we’ve built that resume. Of course, it’s all based on track record as well, as Michael alluded to. But we think we have the resume to be an investment-grade rated candidate and a strong one, but there is a size kind of fair way that you need to be on, so.

I appreciate the process and can see the progress being made. I’ll leave it there, but thank you for answering my questions.

Our next question comes from Kyle Joseph with Jefferies.

Just given where we are in the second quarter or your fiscal first quarter, just kind of want to get a sense for investment activity quarter-to-date as well as repayment activity.

Yes. I would say the pipeline is very strong right now. Our activity has been robust, and we expect a solid quarter from an origination standpoint. It may be later in the quarter in terms of average closing timing. Therefore, while I think this quarter will be positive, it will likely also bode well for the September quarter due to that timing. We are pretty pleased with the activity and expect it to be solid. Is there anything you'd like to add?

Yes. From a net growth perspective, we anticipate around $30 million to $35 million in prepayments returning over the next 60 days. We have been aware of these deals for the last approximately 120 days. They appear to be concluding their processes, but we are not seeing much following them. Therefore, on a net basis, you can get the general idea.

Yes, very helpful. Thanks for that. And then, with the SBIC, obviously, that’s excluded from regulatory leverage calculations. Any change to your sort of target leverages in terms of how we should think about total versus BDC leverage?

So, from an economic perspective, you can expect us to really be in really the 1.2% to 1.35% economic leverage. And I think as we ramp the SBIC, I think regulatory leverage will inevitably be around 1 times, and I would say 0.9% to 1.0% as it’s fully deployed. So, nothing really changed there. I think you’ll see continually a conservative stand?

Got it. And then last one for me. Obviously, no NPAs, it sounds like the portfolio performance has been really strong. But, can you give us a sense for maybe rev and EBITDA growth trends, and how those have trended kind of into the quarter, particularly as we start to comp against COVID impacted…?

Yes. It raises an interesting point. Looking at the current run rate EBITDA and revenue growth across the portfolio, I would say it's positive because the portfolio and the economy are opening up. Businesses are growing and returning to pre-pandemic levels. From a last twelve months perspective, particularly this quarter when we assessed the period ending in February 2021, it encompasses the COVID impact with much less of the recovery effect. I'm distinguishing between run rate and last twelve months. I think the last twelve months has been down across the portfolio, although there are a few companies that managed to thrive during the COVID pandemic due to their business models. However, the current run rate is clearly on an upward trend across the portfolio, with only a handful of companies still struggling.

Got it. Thanks very much for answering my questions. And congrats on a solid year.

Our next question comes from Bryce Rowe with Hovde.

Thanks. Good morning. I have a couple of questions for Bowen and Michael regarding market pricing. We have heard from several BDCs that pricing has returned to pre-COVID levels, and in some instances, it may even be tighter. It appears that this quarter, you achieved a weighted average yield of around 8.8% on new investments, with a spread of 7% to 10% from a yield perspective. I am interested to know if you anticipate pricing to remain in this range or if you foresee potential for further movement beyond pre-COVID levels.

Thanks for the question, Bryce. First of all, there’s a lot of liquidity in the market. We all know that. Activity levels have returned, and pricing is also back to nearly pre-pandemic levels. While leverage might be slightly lower post-pandemic, pricing has definitely rebounded. Regarding our 8.8% yield, I would suggest you be cautious; I think our portfolio yields might decrease slightly, perhaps by about 50 basis points over the next 6 to 12 months, considering what we're observing with LIBOR trending down. However, our cost of capital has decreased significantly. As we start incorporating the SBIC, I believe our net interest margin will remain quite strong, even with this minimal expected retracement in yields. If you analyze the 8.8% in context, excluding the 7.1% from the first out loan at approximately 1.3 times leverage, the adjusted figure is closer to 9.5%. Our pricing varies by deal and mix from quarter to quarter, with historical lows around 9.5% and highs reaching 10.5%, indicating fluctuations within that range. Therefore, we don’t anticipate the sustainable yield being just 8.8%; it tends to shift from quarter to quarter. As a first lien lender, there is always part of our portfolio that may underperform, which is typical for any lender, especially nonbank lenders. The advantage of being a first lien lender is that when companies face difficulties, many of our loans have grids that allow interest rates to float higher, providing us additional interest in cases of default. This economic enhancement helps maintain our overall portfolio yield in the mid-10s. So, relating the 8.8% yield, I don’t believe the fairway has shifted from 10.5% to 8.5%; it’s certainly not even close. We expect our cost of capital to decline faster than the yields, which has been beneficial for us.

Right. And so, if you think about it from margin, right, it will be fixed rate draws on the SBA, but you also look at what we’ve done to date, we have two-thirds of our liability structure that’s fixed rate. So, as rates rise over the next maybe that takes 12 to 18 months before you start seeing that, you’ll see our net interest margin actually start improving as well as the impact on the assets as well.

It's important to understand our business primarily focuses on the lower middle market. This market has two segments: a deeper end with higher yields and a shallower end with lower loan-to-value and safer credits. The shallower end offers lower yields, while the deeper end provides higher yields, resulting in a portfolio that encompasses a mix of both. As our cost of capital decreases, we can achieve better net interest margins on the safer side of the market. Consequently, you might see a decline in overall portfolio yield as we lower our cost of capital. Our role as credit managers is to ensure we do not apply shallower end pricing to deals that belong in the deeper end. This task is crucial, and it underpins our strategy to build a solid track record, diversify our sources of capital, and ultimately reduce our cost of capital to maintain or improve net interest margins with a safer asset portfolio. This strategy holds significant importance for us.

And not to revisit the issue, but another factor is our cost structure. You’ve seen our operating leverage decrease from 4.9% years ago to our current trailing twelve-month run rate of 2.4%. In this particular quarter, our operating expense was 2%. This indicates that our expenses are growing at a slower rate than our assets. This also plays a role in our net interest margin.

That also gives you the ability to get net interest margin at the shallow end of the pool, if you will. So that’s how we think about the world, so.

Yes. That’s a perfect perspective and maybe leads into the next question. So, you’ve seen a nice bump in your stock price and then your price to NAV valuation, obviously, took advantage of it, the last couple of quarters with some more active use of the ATM. So, I guess my question is, do we think about this pace of ATM usage being kind of more normal now that you’ve got the multiple that you have or have you tried to be more opportunistic the past couple of quarters in anticipation of the SBIC license coming online and having to get ready to capitalize that?

I’d like to make a general comment before Michael adds his thoughts. We consider the ATM to be an excellent tool for an internally managed BDC like ours. It helps us maintain a strong track record, and we're all aware of the advantages of the internally managed model. We've discussed the operating leverage in various areas. If we can raise equity capital based on our originations, this equity serves to moderate and control the leverage of our vehicle. The leverage is influenced by asset quality, particularly the differences between first lien and second lien loans. We believe that a first lien portfolio can sustain a slightly higher leverage ratio compared to a second lien portfolio. The ATM helps us manage that leverage effectively. We're not just taking advantage of opportunities; we're strategically considering leverage in our pipeline. The ATM allows us to raise equity at a relatively low spread to market trading rates while aligning the investment of those funds closely with our deployment of capital. If we maintain an appropriate multiple—dependent on our track record and consistency, which we value highly—this ATM program can enhance our net asset value per share. Additionally, if used in line with our pipeline, it minimizes or theoretically eliminates net investment income dilution, as long as we deploy the raised capital effectively. Michael, do you have anything to add?

Yes, I would say that over the next 12 months, you can expect us to raise an average of $15 million per quarter. However, as Bowen mentioned, we view this as a balance between being cautious and proactive in maintaining our leverage range. Given our earnings timing related to quarter-end, we have an idea of what our pipeline looks like. When the ATM opens in two days, we’ll have a clearer sense of where we want to position ourselves based on our originations and the amount of equity we aim to raise. For this quarter, you might anticipate a higher amount due to the strong performance, but in other quarters, if originations are lighter or prepayments are higher, we would be closer to the lower end of the range.

Our next question comes from Sarkis Sherbetchyan with B. Riley Securities.

I wanted to quickly discuss the SBIC license. You mentioned an initial $80 million capital commitment for the next six to nine months and a plan to draw $175 million on the debenture. I would like to understand how quickly you plan to utilize the SBIC side compared to the rest of the BDC based on net originations.

We expect to begin contributing assets to the FDIC in the coming weeks, likely starting with the first asset in the next two or three weeks. Initially, we will invest equity. We are currently awaiting approval for the leverage application, which is simply a matter of completing paperwork. Once approved, we will fund our first $40 million and draw an additional $20 million of capital, making it a half tier. At that point, we will request an examination by the FDIC to review our financial records, after which they will release the extra $20 million. We project this will total $80 million. In terms of asset allocation, we plan to divide approximately 50% of the originated asset into our credit facility and 50% into the SBIC. Regarding the overall program, we expect to deploy the first $80 million over the next six to nine months, while fully utilizing the $175 million will likely take three to four years. We will also be replenishing as repayments are received throughout the 10-year duration.

Thank you for that. In the last quarter's call, you mentioned net origination growth of around $20 million to $30 million per quarter. It seems like you had a strong performance this past quarter, and that may continue into this quarter. Is that the right range to consider for growth, or do you expect originations and prepayments to return to more normalized levels? Any thoughts on this?

Yes, I believe we should revise our expectations based on the team we have in place. We have experienced professionals and have expanded our staff. We've established a presence in various markets across the country. I would suggest that for the lower end of the quarters, we might expect around $40 million to $50 million in originations, while the upper end could exceed $75 million. We anticipate approximately $10 million to $20 million in repayments each quarter, so the net should fall somewhere in between. Bowen, do you have anything to add?

Yes, I think that's correct. The net may be slightly higher than what we mentioned last quarter, but it's not significantly different.

Our next question comes from Robert Dodd with Raymond James.

Hi, guys. A couple of questions, first of all on I-45. You mentioned, I think, Michael, that you amended the agreement. Does that bring basically your economic share into line with your ownership share, or is there some other delta in terms of amending that agreement with Main now?

Yes, that has moved in that direction, as you mentioned, Robert. We adjusted the relative economics to align with the growth of our firm. It's not more complicated than that. It went quite well; it's essentially what we did, and it was the right time for that.

Yes, understood. Just one more question on that. You amended the revolver, and it's now down to 250 basis points. Were there any one-time expenses or anything like that in this quarter? It seems like the lowest dividend from the JV since probably 2016. Was there anything unusual? Also, I noticed your comments about expecting higher returns in the future, so this quarter…

Yes. For I-45 this quarter, I can tell you that the repayments were substantial and occurred early in the quarter. However, we have some originations that we have closed but have not yet settled, as the settlement process for these credits takes some time. We're looking at around $15 million to $20 million in originations that are expected to settle in the June quarter. There seems to be a bit of a mismatch between the activity and the dividend. In response to your second question, we do anticipate a rebound in the next quarter.

That’s a good question, Robert.

Thank you for your question. In the conference, you mentioned that equity ownership is at 60% of the portfolio companies. Is the goal to increase that percentage over time, or are you comfortable maintaining it at 60% in the long term? Any insights you can share on this would be appreciated.

It's an interesting question. I want to clarify that we don't have a specific target percentage of our portfolio companies that we want equity in. Our approach is more about two things. From a high-level perspective, we prefer that equity makes up 8% to 10% of the overall portfolio, as that generally aligns with our business model. As for individual deals, we evaluate the equity story and whether we find it compelling. We don't always love the equity story, and while we don't dislike it, it doesn't always meet our expectations. Additionally, if a larger private equity firm is involved and only contributes a smaller amount, there can be challenges regarding equity sharing, which might affect our view of the equity story, especially if they expect a substantial carry. There are various factors at play, but my estimate is that about 60% to two-thirds of our portfolio loans will often include an equity component. This is just a rough estimate, as anything above 75% might seem high, and I think around two-thirds is more reasonable over time. Yes, I think that’s probably true from a theoretical perspective. Also, remember, we’re lending to the lower middle market, which consists of smaller businesses. The good news is that many of these smaller businesses are experiencing significant growth. Unlike large companies that aim to capture just a couple of percentage points of market share, these smaller businesses often have innovative ideas and business models that allow them to capture market share at a remarkable rate. The private equity firm implements essential institutional practices, such as ERP systems that generate KPIs, which help founders manage and grow their businesses more effectively. For example, if a small company has two marketing personnel, it’s clear they should have ten. These enhancements are substantial growth drivers that are less commonly observed in larger companies, but are frequent in the lower middle market. Therefore, equity plays a crucial role in our business model and certainly enhances returns over time.

Yes. I would also point out, Robert, that in some of the companies that faced challenges during COVID, such as AAC, Delphi, or CDK, we will have the opportunity to acquire equity during their restructuring. We are actively pursuing these assets, which could lead to significant recoveries in equity as well. So that’s...

Yes, the reality is that’s recovering former principal. But if you think about it from where NAV is today, that’s all upside. So, look at it both ways, right? And so, we think that’s something that we’re pretty bullish on, honestly.

Understood. I have one final housekeeping question. Regarding the tax situation, there was a one-time write-off last quarter, but this quarter the tax seems higher than I would expect for excise tax. It appears there is more included in the tax on the NII line than just the size factor. Can you provide any insights on this?

Sure, Rob. You're correct that the excise tax is actually $50,000, which is the run rate moving forward. As part of the write-off of CSMC, most of it occurred last quarter; however, there was an additional $425,000 in this quarter because the previous figure was based on a provisional return, and the final tax return was completed in April. This resulted in another $425,000. Additionally, we had another one-time expense related to cash dividends paid by our portfolio companies. This impacts the tax basis, reducing our cost basis and increasing our unrealized gain, leading to an increased income tax accrual of $375,000. Overall, $800,000 of the $850,000 is one-time in nature, and both are non-cash.

Thank you. Our next question comes from David Miyazaki with Confluence Investment Management.

Good morning. First, I want to express my appreciation for your commitment to transparency over the years. It’s great to see that you have followed through with what you promised. This industry often sees a disconnect between intentions and outcomes, so I genuinely value your consistency. Your approach to credit underwriting, the establishment and growth of your joint venture, and your management of liabilities, especially your ATM usage and how you relate it to your leverage, has made it much easier for us as shareholders to avoid unexpected surprises and dilution of net interest income after issuing equity. It’s all very beneficial. Congratulations on successfully completing the SBIC.

Thanks, David.

You all have done an excellent job. One common observation as Business Development Companies grow is that the lower middle market tends to be less efficient, with more stable pricing and consistent terms. In contrast, the upper middle market is influenced by fluctuations in public markets and significant capital movements. This is typically discussed in relation to the size of a BDC, with managers often promoting their strategies as the best approach. Your situation is distinct because you operate across both the upper and lower middle markets. There’s a notable difference in EBITDA size, with lower middle market exposure around $10 million and upper middle market around $70 million. I’m interested in your perspective on the prevailing idea that larger upper middle market borrowers present lower credit risks compared to the opportunities in the lower middle market, considering that you engage in both areas. How do you perceive the characterization of these two segments within the middle market?

Well, first, thank you for the question, David. I would say that there is definitely a prevailing belief in the financial markets that bigger is better. We are aware of that, and so there’s just...

So, the rating agencies say that too, right?

Yes, there is more capital available because of the presence of larger insurance companies. Everyone is willing to invest, but they have certain expectations, such as a minimum EBITDA threshold. This situation leads to increased competition for larger deals, resulting in narrower profit margins despite those companies being larger. It's important to note that while they are bigger companies, they are not necessarily superior credits. As there’s less capital available for smaller deals, the documentation, leverage, and other factors that are crucial for our credit group are significantly stronger. Leverage tends to be lower, covenants are stringent, and documentation is tight. We haven’t encountered any covenant-light loans in our sector. Although these are smaller companies, the risk-adjusted returns appear more favorable when considering the company's quality, growth potential, credit structure, and documentation integrity. This is why most of our portfolio is focused on the lower middle market, which we find appealing. We appreciate the opportunity for equity co-investments in this space, something less common in larger markets. That said, we acknowledge that there are occasionally promising credit opportunities in the upper middle market. In the lower middle market, we originate and lead over 80% of the credits, which is significant. Being part of a larger bank group in the upper middle market can limit decision-making and complicate responses if issues arise. In our segment, we manage the loans directly, allowing us to make concrete decisions, which greatly enhances our comfort level.

That's helpful. When you observe the trend in your cost of capital, it's declining for both equity and debt, which is great. This can help offset any decline in asset yields, allowing your net interest margin to remain stable. I find it beneficial to hear your perspective on the upper middle market. If your liability costs and cost of capital decrease, there might be an incentive to venture into the upper middle market where yields are lower, but the reduced cost of capital makes it doable. However, it seems this isn't part of your strategic plan. Some larger business development companies that are internally managed, such as Main Street and Hercules, have maintained their focus. As you continue to grow and concentrate on the lower middle market, how do you plan to scale your team and resources to keep focusing on smaller loans, even with a larger capital base?

I think it's important to remember that our focus isn't just on scaling for the sake of scaling. There's no management incentive tied to increasing the size of our assets. Our real goal is to grow for specific reasons, such as achieving an investment-grade credit rating and attracting additional parties. We want to become a sole lender on more of our own loans, which will make our closing process more reliable. Ideally, we can secure better deals without the closing risks that come from involving others in our loans. So, our intent to grow is driven by these factors, not merely to expand. As for the cost of capital tempting us to enter the upper middle market, that's not our strategy. We won't pursue a range of upper middle market deals where we lack control over loans and have many competing participants just because our capital cost decreased. That wouldn't make sense. Your question is valid, and I'm just emphasizing that our motivation is to enhance the quality and effectiveness of our vehicle. Regarding operating costs, while we will increase costs as our portfolio enlarges, we see that growth as necessary for maintaining efficiency, not merely scaling up in numbers.

Well, I greatly appreciate that answer. It’s certainly what I wanted to hear. I like the focus that you have. But I also like the fact that you have the ability to take advantage of the opportunities that episodically seem to come about in the upper middle market. So, I appreciate your answers. And congratulations on a good year.

Thanks, David.

This concludes the question-and-answer session. I’d now like to turn the call back over to Bowen Diehl for closing remarks.

Thank you, operator. Thanks, everyone, for being with us here today. We love talking about our business, and we look forward to giving you guys updates in the quarters to come. We appreciate your support.

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