Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp’s 2025 Fiscal First Quarter 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'll open the line for questions. At this time, I'd like to turn the call over to Saratoga Investment Corp's Chief Financial Officer and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's 2025 Fiscal First Quarter 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 first quarter 2025 shareholder presentation in the Events and Presentation section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. 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's adjusted net investment income per share for the quarter increased by 12% compared to last quarter, as stable interest rates have resulted in elevated recurring net interest margins on our portfolio relative to the past year. This quarter's earnings reflect elevated earnings power and quality versus a year ago with a 19% increase in recurring net interest margin, generated by the 9% increase in average assets under management and the sustained levels of increased interest rates and spreads on Saratoga's investments, largely floating rate assets, while costs of long-term balance sheet liabilities are largely fixed. This quarter's net investment income of $1.05 per share significantly exceeded our recently increased $0.74 dividend by 42%. In addition, our ongoing development of sponsor relationships continues to create attractive investment opportunities from high-quality sponsors, despite the constrained general volume of M&A over the last couple of years. We believe Saratoga continues to be favorably situated for potential future economic opportunities, as well as challenges. Saratoga's largely fixed rate interest-only covenant-free, long duration credit structure with maturities primarily two years to 10 years out positions the company well with the elevated levels of interest rates delivering substantially increased margins and industry-leading dividend coverage versus largely fixed credit costs and limits risks from creditors in crisis situations. Most importantly, at the foundation of our elevated level of net investment income performance is the high quality nature, resilience, and balance of our approximately $1.096 billion portfolio. Our core BDC portfolio fair value, excluding our CLO and joint venture, and our two restructured Pepper Palace and Zollege investments, exceeds its cost by 3.3%. We have taken decisive action with respect to Pepper Palace and Zollege, assuming full control over both investments through consensual restructurings with the prior sponsors and establishing a combined remaining fair value of $4.4 million. The Zollege restructuring was completed during the first quarter, and the Pepper Palace restructuring is imminent. We are actively implementing management changes, capital structure improvements, and business plan adjustments, which have the potential for future increases in recovery value. With these two restructurings substantially completed, we have resolved uncertainties related to two of the three portfolio companies on our watch list. The overall financial performance and strong earnings power of our current remaining portfolio reflect the strength of the underwriting in our solid growing portfolio of companies in well-selected industry segments. We continue to approach the market with prudence and discernment in terms of new commitments in the current environment. Our originations this quarter demonstrate that despite an overall robust pipeline, there are periods like the current one where many of the investments we review do not meet our high-quality credit standards. During the quarter, we originated no new portfolio company investments while benefiting from 16 smaller follow-on investments in existing portfolio companies we know well with strong business models and balance sheets. With originations this quarter totaling $39 million versus $76 million of repayments and amortization, our quarter-end cash position has grown to $93.3 million, improving effective leverage from 159.6% regulatory leverage to 171.2% net leverage, netting available cash against outstanding debt. Including the increase in cash since quarter-end through this week, net leverage improves further to 186%. Our credit quality for this quarter remained high at 98.3% of credits rated in our highest category, with three investments currently still in non-accrual, representing 1.6% of fair value. With 86% of our investments at quarter-end in first-lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stressed situations, we believe our portfolio and leverage are well structured for challenging economic conditions and uncertainty. Saratoga's annualized first quarter dividend of $0.74 per share and adjusted net investment income of $1.05 per share imply a 13.1% dividend yield and an 18.6% earnings yield based on a recent stock price of $22.59 per share on July 8, 2024. The over-earning of the dividend by $0.31 this quarter, or $1.24 annualized per share, increases NAV, supports the increasing dividend level and portfolio growth, as well as providing a cushion against adverse events. In volatile economic conditions such as we are currently experiencing, balance sheet strength, liquidity, and NAV preservation remain paramount for us. On March 27, 2024, we entered into a special purpose vehicle and a new three-year financing credit facility with Live Oak Bank, which provides for incremental borrowings in an aggregate amount of up to $50 million. We upsized this to $75 million in June and added two new banking relationships. Including this new facility at quarter-end, we maintained a substantial $299 million of investment capacity to support our portfolio companies with $136 million available through our newly approved SBIC III fund, $70 million from our two revolving credit facilities, and $93 million in cash. Saratoga Investments first quarter demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended May 31, 2023, and February 29, 2024. Our adjusted net investment income is $14.3 million this quarter, up 12% from last year and last quarter. Our adjusted net investment income per share is $1.05 this quarter, down 3% from $1.08 last year and up 12% from $0.94 last quarter. Adjusted NII yield is 15.5% this quarter, up from 15% last year and up from 14% last quarter. Latest 12 months return on equity is 4.4%, down from 7.2% last year, and up from 2.5% last quarter. Our NAV per share is $26.85, down 6% from $28.48 last year, and down 1% from $27.12 last quarter. And our quarter-end NAV is $368 million, up from $337 million last year, and slightly down from $370 million last quarter. While this past year has seen markdowns to a small number of credits in our core BDC portfolio, our long-term average return on equity over the last 10 years is well above the BDC industry average at 10.5% versus the industry's 6.7% and has remained consistently strong over the past decade, beating the industry eight of the past 10 years. Our management team is working diligently to continue this positive trend as we deploy our available capital into our pipeline, while at the same time being appropriately cautious in this volatile and evolving credit environment. With that, I would like to turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal first quarter ended May 31, 2024, most of which Chris already highlighted. Of note, the weighted average common shares outstanding of 13.7 million shares in Q1 and Q4 increased from 11.9 million last year. Adjusted net investment income increased this quarter up 11.6% from last year and up 12.1% from last quarter. The increases in investment income from higher average assets were offset by two factors: first, increased interest expense resulting from the various new notes payable and SBA debentures issued during the past year, and second, increased base and incentive management fees from higher AUM and earnings. Total expenses for this quarter, excluding interest and debt financing expenses, base management fees, incentive fees, and income and excise taxes increased from $2.3 million to $2.9 million as compared to last year and from $1.9 million for last quarter. This represented 1.0% of average total assets on an annualized basis, up from 0.8% last year and 0.7% last quarter. Increased expenses this quarter primarily related to legal expenses incurred with the restructuring activities, as well as increased general regulatory, accounting, and compliance requirements. Also, we have again added the KPI slides 26 through 29 in the Appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters, including a 36% increase in net interest margin over the past year. Moving on to Slide 6, NAV was $367.9 million as of this quarter end, a $2.3 million decrease from last quarter, and a $30.4 million increase from the same quarter last year. This chart also includes our historical NAV per share, which highlights how this important metric has increased in 21 of the past 27 quarters with Q1 down $0.27 per share and with this quarter and recent reductions primarily reflecting the specific asset markdowns already discussed. Over the long-term, our net asset value has steadily increased since 2011 and this growth has been accretive as demonstrated by the long-term increase in NAV per share. Over the past five years, NAV per share is up $2.79 per share, or 11.6%. We continue to benefit from our history of consistent realized and unrealized gains. On Slide 7, you will see a simple reconciliation of the major changes in adjusted net investment income and NAV per share on a sequential, quarterly basis. Starting at the top, adjusted net investment income per share was up $0.11, primarily due to the $0.04 increase in non-CLO NII from higher average AUM and a $0.05 decrease in operating expenses. On the lower half of the slide, NAV per share decreased by $0.27, primarily due to the $0.53 net realized loss and unrealized depreciation more than offsetting the GAAP NEI excess earned over the Q4 dividend. Slide 8 outlines the dry powder available to us as of quarter-end, which totaled $299 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities. This quarter-end level of available liquidity allows us to grow our assets by an additional 27% without the need for external financing with $93 million of quarter-end cash available and thus fully accretive to net investment income when deployed and $136 million of available SBA debentures with its low-cost pricing, which is also very accretive. We also include a column showing any call options on our debt. This shows that our $321 million of baby bonds, effectively all our 6% plus debt, are callable within the next year, creating a natural protection against potential future declining interest rates, which should allow us to protect our net interest margin if needed. Also new to our capital structure and liquidity is the Live Oak Bank three-year $50 million secured revolving credit facility that we closed in March this year and subsequently upsized to $75 million in June. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially considering the overall conservative nature of our balance sheet, the fact that almost all our debt is long-term in nature and with almost no non-SBIC debt maturing within the next two years. Our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we now have $1.096 billion of AUM at fair value, and this is invested in 53 portfolio companies, one CLO fund, and one joint venture. Our first-lien percentage is 86% of our total investments, of which 54% is in first-lien, last-out positions. On Slide 10, you can see how the yield on our core BDC assets excluding our CLO has changed over time, especially the past two years. This quarter, our core BDC yield remained the same at 12.6% with base rates relatively unchanged. The CLO yield decreased slightly to 12.4% from last quarter. The CLO is performing and current. Slide 11 shows how our investments are diversified through the US, and on Slide 12, you can see the industry breadth and diversity that our portfolio represents spread over 43 distinct industries in addition to our investments in the CLO and joint venture, which are included as structured finance securities. Moving on to Slide 13, 8.4% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy. The slides show that for the past 12 fiscal years, we had a combined $60.5 million of net realized gains from the sale of equity interests or sale or early redemption of other investments. This is net of the Zollege and Netreo losses this past quarter. This consistent realized gain performance continues to highlight our portfolio credit quality and has helped grow our NAV and is reflected in our healthy long-term return on equity. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our Chief Investment Officer, for an overview of the investment market.

Thanks, Henri. It's only been two months since we last caught up, so I'll focus on our perspective on the changes in the market since then and then comment on our current portfolio performance and investment strategy. The overall deal market continues to reflect slower deal volume and M&A activity than in historical periods, while liquidity among private equity firms remains abundant. High financing costs and elevated levels of inflation continue to constrain the private equity deal market, which drives much of the demand for new credits. At the same time, some lenders have re-entered the market as they've grown more confident in the macroeconomic climate. The combination of historically low M&A volume and an abundant supply of capital is causing spreads to tighten as lenders compete to win deals. As a result, we're anticipating some pickup in payoffs due to lenders offering extremely aggressive pricing on some of our low leverage assets. Now that said, we believe the risk-adjusted gross yields on first-lien assets remain exceptional, and capital structures for new deals continue to be supported by strong equity capitalizations. Overall, while new deal volume is modest as compared to our historical levels, it continues to be a favorable market for capital deployment, especially at the lower end of the middle market where we compete. The Saratoga management team has successfully managed through a number of credit cycles, and that experience has made us particularly aware of the importance of, first, being disciplined when making investment decisions, and second, being proactive in managing our portfolio. In an environment that has seen ever-changing expectations for the economy due to inflation and rising interest rates, among other factors, we have stayed largely focused on managing and supporting our portfolio. Our underwriting bar remains high as usual, 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 in existing portfolio companies, as demonstrated with 24 follow-ons thus far this calendar year, including delayed draws, which we expect to continue. While we invested in no new platform investments this calendar year as of yet, we focused much of our time and resources on supporting our portfolio and managing a discrete few challenge credits. Overall, our deal flow remains strong and 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. The few discreet credits discussed in previous quarters that are experiencing various levels of stress remain unchanged, and I will touch on them shortly. But in general, our portfolio companies are healthy, and 79% of our portfolio is generating financial results at or above prior quarters. 86% 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. Consistent with last quarter, we still have three investments in non-accrual, namely Noland, Pepper Palace, and Zollege. Now looking at leverage on this same slide, you can see that industry debt multiples have continued to come down slightly this year from their historically high levels. Total leverage of our portfolio was 4.27 times, excluding Noland, Pepper Palace, and Zollege, while the industry is now again above 5 times leverage. Despite the success we've had investing in highly attractive businesses and growing our portfolio over the years, it is important to emphasize that we are not aiming to grow simply for growth's sake. Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment is in a durable business and will be accretive to our shareholders. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is down from prior periods, in part because we made a conscious effort to improve the quality of our deal funnel, and in part because market activity is down considerably, as previously discussed. 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. As you can see on Slide 16, our overall portfolio quality remains solid. While we are presently facing challenges in a few credits, I thought I'd take a moment to highlight that our team remains focused on deploying capital in strong business models where we are confident that under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investments. We can't be perfect, but we strive to be as perfect as possible, and we have not veered from our thorough and cautious underwriting approach. Over the dozen plus years that we've been working together, we've invested $2.2 billion in 116 portfolio companies. We've had just two realized losses on investment. Over that same timeframe, we've successfully exited 69 of those investments, achieving gross unlevered realized returns of 15.4% on $978 million of realizations. Even taking into account the current write-downs of a few discreet credits, our combined realized and unrealized returns on all capital invested equals 13.5%. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first-lien senior debt. We continue to have three investments on non-accrual, with Pepper Palace and Zollege classified as red and Noland as yellow. Noland has been on yellow for a while and this quarter saw an improvement in the Q3 mark for the second quarter in a row, reflecting recent moderate improvement in the business and liquidity. Pepper Palace continued to suffer from poor performance and liquidity issues reflecting the further $0.6 million markdown this quarter. The remaining fair value of this investment is $2.4 million. A transaction is imminent whereby we will restructure the balance sheet and take majority control of the business. As part of this restructuring, the turnaround specialist we have been working with, who has substantial successful experience in similar situations, will invest significant equity in the business and become the CEO and a Board member. And the Zollege restructuring on the balance sheet was completed during this first quarter, resulting in us taking over the company and actively managing this investment. We have in place a framework for an agreement that would have the previous owner invest meaningful dollars in the business and work in partnership with us with the immediate goal of returning the business to its former profitability levels and the ultimate objective of exceeding those levels. As part of the restructuring, we realized a $15.1 million realized loss for accounting, although we still have equity and a first-lien term loan in the company with a current value of $2 million. As previously communicated, during the quarter, our Netreo investment was paid off, and we realized a $6.1 million loss on our equity. It is important to note, however, that this investment taken as a whole, including both our debt and equity, produced a positive IRR of approximately 5% without taking into account any potential yield enhancement that could be achieved through our residual escrow and earn-out. In addition, the CLO and JV had $5 million of unrealized depreciation this quarter, reflecting primarily markdowns due to individual credits in our original CLO. Of note is the rest of the core BDC portfolio has continued to perform well, resulting in $1.2 million of net unrealized appreciation across our remaining 51 portfolio companies in Q1. 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, and we are currently ramping up our new SBIC III license with $136 million of lower-cost, undrawn debentures available, allowing us to continue to support US small businesses both new and existing. Now this concludes my review of the market. 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 $0.74 per share for the quarter ended May 31, 2024, was paid on June 27, 2024. This is the largest quarterly dividend in our history and reflects a 6% and 40% increase over the past one and two years, respectively. The board of directors will continue to evaluate the dividend level on at least a quarterly basis considering both the company and general economic factors, including the current interest rate environment's impact on our earnings. Recognizing the divergence of opinions on when interest rate cuts will commence and at what pace, as well as expectations for the economy, Saratoga's Q1 over-earning of its dividend by 42% ($1.05 versus $0.74 per share this quarter) deleverages by building NAV and also provides a substantial cushion should economic conditions deteriorate or base rates decline. Moving to Slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of negative 5%, uncharacteristically low, and underperformed the BDC index of 27% for the same period. Our longer-term performance is outlined on our next Slide 20. Our five-year return places us almost in line with the BDC Index, while our three-year performance is now slightly below the Index, being impacted by the recent latest 12-month performance. Since Saratoga took over management of the BDC in 2010, our total return has been 655% versus the industry's 276%. On Slide 21, you can further see our 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 growing value our shareholders are receiving. While return on equity and NAV per share are lagging the industry for this past year, that is primarily due to three discreet non-accruals we have previously discussed. Our dividend coverage and dividend growth have been among the strongest in the industry. We also continue to be one of the few BDCs that have grown NAV over the long-term, and we have done it accretively. Our long-term return on equity remains 1.6 times the long-term industry average. 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 in 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 12.5%, ensuring we are aligned with our shareholders. Looking ahead on Slide 23, we remain confident that our reputation, experienced management team, historically strong underwriting standards, and time and market-tested investment strategy will serve us well in navigating through challenges and uncovering opportunities 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 would again like to thank all of our shareholders for their ongoing support and I would like to now open the call for questions.

Thank you. Our first question comes from Bryce Rowe. Your line is open.

Thanks. Good morning, all.

Can you communicate with the operator?

I wanted to maybe start on just the environment for investing, making comments here around repayment activity, possibly picking up. And then Chris, you made a comment about…

Bryce, can you pause for a moment?

Sure.

Operator, can you hear us?

Yeah, Kevin, we can hear you. You just disappeared there for a short while.

Okay, so Bryce, you can go ahead and ask your question.

Okay. Hopefully you guys can hear me. Wanted to start here on the investing environment. You made some comments around kind of repayment activity possibly picking up. And then, Chris, you talked about cash having come in, I guess, subsequent to quarter-end. If you could just provide a little bit more commentary around that. And then I also wanted to kind of get a feel for the environment for new transactions. Obviously, it's been pretty skinny over the last 12 months in terms of new deals into the portfolio. What is it that you'd like to see that maybe you are not seeing to get some of these newer opportunities across the finish line?

Let me address that, Bryce, and thank you for your questions. To provide some context, the overall deal volume in the U.S., particularly for private equity-backed transactions, appears to be improving. However, M&A activity for private equity-backed deals has reached record lows, even lower than any recent years except for the peak period during the first half of 2020 due to COVID. Consequently, we are seeing fewer opportunities to invest in new portfolio companies. Nevertheless, we continue to support our existing portfolio and have been active in doing so over the last few quarters. We have also benefited from fewer payoffs due to reduced M&A activity. What's new is that the combination of capital waiting on the sidelines and the low volume of new deals is leading to increased competition on pricing. In certain credits, we are observing a more aggressive approach to deploying capital. For some of our lower leverage deals, where there are clear targets, we have noticed more senior lenders stepping in with attractive financing options, which may lead to some payoff experiences. Overall, we feel confident about our position in the lower end of the middle market, supported by strong relationships and our portfolio that should provide ample opportunities to deploy capital. We believe that over time, this will exceed any repayment activity we might encounter. From a credit quality perspective and activity level, being in the lower end of the middle market is advantageous. Our robust connections will create more chances for new deals. We are optimistic about the sectors we operate in, which tend to be non-cyclical and where we can deploy capital effectively. We take great pride in our team’s quality and believe our underwriting capabilities are among the best in the industry. The risk-adjusted returns in senior debt, paired with equity co-investments, form a sound strategy that has historically benefited our investors. Currently, while we are going through various cycles, there is a lack of deal activity that we are navigating.

Got it. That's helpful, Mike. I have a couple of follow-ups. Regarding the cash coming in after the quarter-end, can you provide a pro forma cash balance? Additionally, I'd like to ask about the undistributed position and how you're considering that as we look ahead to the second half of 2024?

I might start with the cash position. We don't generally disclose that, Bryce, but we did mention, as you said, we had another deal repay, and we have a couple of others that could potentially for the reasons that Mike described. And so therefore, we felt it was worthwhile to just mention that obviously, there is sort of net cash coming in thus far being only a month into the new quarter.

And with regards to the spillover question, the undistributed, that is the equation we are still working on. There are a lot of technical aspects to it as we do the timing of declared dividends, the magnitude of dividends and the like. And that's something that we will be focusing more closely on as in our next quarter.

Okay. I appreciate you guys taking the questions. I'll get back in queue.

Thanks, Bryce.

Our next question comes from Casey Alexander with Compass Point. Your line is open.

Hi, can you hear me? I know you had a little trouble there for a while.

Good morning, Casey.

Great. Good morning. A couple of questions. First one for Mike. The lender survey has suggested that some larger private credit platforms, because of the lack of deal flow in the upper middle and the traditional middle market, have been coming down market some. Have you seen that form of competition creeping into your market?

We haven't seen much of it, Casey, but a little bit. I think one of the deals that we referenced was one where it is a really large senior lending institution that's pricing the deal at a level that, candidly, doesn't make any sense for us, and will probably get paid off there. But outside of that, we haven't seen it much, but we’re seeing a little bit of that, which suggests to me that there are players that are probably sitting on capital and are just looking for ways to deploy it even if the pricing isn't really sensible.

Okay. That's great.

I should say this, though, just before we depart. From a day-to-day kind of where we play in the marketplace and who we compete against, it is not those groups. Are we subject to somebody, an institution like that looking at a portfolio company that's been in portfolio for a while, doing really well, and they can come in and try to knock that off? Yes, we are always subject to that a little bit. And this environment probably is right for that type of activity. But in terms of what we do and where we play in the market, we don't see those large institutions very much. Companies have to grow up to that point, whether you're subject to that.

It's reasonable to think they might be interested in your late cycle investments that you've added over time. Thank you, Henri. As for the Live Oak facility, it appears you're increasing its capacity. How would you compare the costs associated with Live Oak to those of Encina? Is your intention to keep adding banks to the Live Oak facility with the goal of having it replace the Encina facility?

Yes. I mean it is a great question, Casey. I think firstly, what we loved about having the second facility is it allows us to broaden our relationships with new banks in a way that still achieves our goal of having a credit facility with a really strong structure. So when that opportunity came along with a firm we know, Live Oak was a great opportunity. And then the upsize, as important as the extra 25 was just because it creates more availability. We added two new banks to that in addition to Live Oak. And as you probably know, in the Encina facility, there is also another bank as well. So we effectively now have five new relationships in the last two years in these two facilities. Encina still has, I think, almost two years left on it. So we don't need to make any decisions now regarding whether we, at some point, go back to one facility that's just much larger. But they operate in a way that it really doesn't create much more cost or work for us in having the two facilities versus the one. It's just two different SPVs. But we're set up in process-wise to deal with two versus one, it's not a problem. From a cost perspective, it is very similar. The Live Oak facility just has a tiering. And so from how much we actually draw, the rate comes down. So it starts off at the same rate, but as we draw more every 25% more that we draw, we save 25 basis points.

Yes. Well, I mean, the reason that I bring up the question is because the Encina is not the cheapest facility in the world, and it has a pretty meaningful minimum draw. And so here we are sitting on $93 million of cash, and yet we have a minimum. It feels like an inefficient use of capital to a certain extent.

Yes. I think it is a balancing act for us around having available liquidity for those moments when you not only just need to fund the deal, but you need it for much more important market activities or functions, etc. And so we sort of accept that as a cost of doing business to have a very well-structured facility. But I hear you, obviously every single day, I wake up and we try to make sure we optimize our capital and our cash in the most efficient way.

Understood. Last question and I think you've done a much better job on the income statement of detailing where some of the other sources of income are coming from such as the dividend income and the structuring and advisory fee income. It is still in this quarter, you had about $0.09 a share or let's call it $0.07 a share after accounting for the incentive fee of other income. What's the texture of that other income? How much of that should we think of as one-time this quarter? It is a pretty meaningful amount to be just dropped down into other.

Yes, I completely agree with you. We have provided a more detailed breakdown of the income statement, particularly as the sources of other income have diversified. Dividends are becoming a larger component. Currently, the other income primarily consists of amendment fees and prepayment fees, along with a small amount of monitoring fees. I would estimate that about two-thirds of this is transactional, meaning it's tied to specific deals for that quarter. However, such events tend to happen more frequently, making them somewhat recurring over time. While there are one-off items, they recur because prepayments and amendments occur almost every quarter. It can be somewhat uneven at times, but I wouldn’t classify all of it as one-time only.

Yes. Okay. But given your comments about at least having one payoff that you know of coming up in this quarter and your sense that some more are coming, it would thus be reasonable to expect some meaningful other income in the coming quarter?

Yes. I mean, that could be the case. It's obviously specific to every deal, but that's an unreasonable assumption, yes.

Okay, great. Thank you. That's all of my questions. Thank you.

Our next question comes from Robert Dodd with Raymond James. Your line is open.

Hi everyone. I have a couple of questions to focus on. First, regarding the non-accruals, last quarter you provided a lot of detailed insight into the issues affecting that business. I’m not looking to go over all of that again, but with the restructuring and the partial realization write-down, was there anything that changed or trended differently that influenced this? Or was that all part of the plan you laid out last quarter regarding the restructuring in New York? Has anything changed, or is this just a continuation of what was already happening?

It was a continuation of what we already saw going on. We felt like those discrete credits are meaningful enough that we wanted to discuss it again and keep people informed of events there. But now these are both credits that we are actively working, and I think there are a lot of elements of certainly those credits that we liked from the beginning that we still feel fundamentally are there in those credits, and we are going to work hard to try to recover as much capital as we can in each of those situations. But both of them, we've got a lot of wood to chop.

And Robert, I would also just add that although we've restructured them now and there's a big component to some of the securities, we continue to keep them on non-accrual. As you probably noted that we continue to say we have three investments on non-accrual going forward.

I appreciate the information. Thank you. Regarding the second point, I find the market insights you provide very helpful. There were 16 follow-on investments, which is quite significant. Can you share more about the nature of these follow-ons? Are they additional acquisitions by the portfolio companies, or are they intended to provide incremental working capital? I'm curious about how these follow-ons are being utilized, especially since there haven't been any new platform investments recently but there has been a lot of follow-on activity. Any insights on this would be appreciated.

Sure. Most of the businesses that we invest in, not all of them, but most of them have a pretty healthy appetite for additional capital. And most of that is to drive growth through M&A activity through add-on activity. And so the majority of those follow-ons were really to do tuck-in acquisitions in existing platforms. And that's something that's worked out really well for us over the years where we've come in and, in some cases, lent. And I think our biggest portfolio company right now is one that started off as a $6 million debt piece with a $2 million equity co-investment and that company kept coming back to market to execute on acquisitions that have worked out really well. So that strategy is kind of fundamental to what we do, and that's what the majority of those follow-ons were for.

I understand. Thank you for that. It's what I anticipated you would say. Can you help clarify something for me regarding the market? I'm not quite grasping it, not in relation to what you're explaining. As you mentioned, your private equity activity is low for new platforms. Most of the businesses you’re involved with have a private equity sponsor, yet they are very engaged with add-ons. They aren't pursuing new platform acquisitions, even though financing costs are fairly high for both. What is the distinguishing factor? Clearly, multiples may be lower for add-ons. But why are private equity sponsors willing to absorb the additional financing costs for an add-on, yet hesitant to invest in a new platform acquisition? Where is the disconnect? Is it related to pricing or financing?

It's a really good question. And now this is a generalization, but it's the right perspective. A new platform opportunity typically yields a pretty healthy multiple. And so when a sponsor is looking at a new platform, they usually pay up for that new platform. It's gotten to a certain scale. It's something that gets marketed through a really competitive process, etc. And in a lot of these businesses, private equity firms have been very successful doing bolt-on acquisitions that are a bit smaller, that are very complementary to their core platform business and very accretive to execute with an add-on. But often, those add-on acquisitions don't command platform multiples. They are typically a bit smaller businesses that may not have the value that you get for a platform so you can execute on an add-on at a lower multiple and make it very accretive to shareholders. And we've seen that play out very effectively in other markets, but certainly in this market, I think a lot of the private equity firms are saying, 'Geez, I think there's a marketplace where I can command a better exit on my business. It's performing really well. So now it's not the time to sell. Let's kind of hold and figure out the best time to exit.' But in the meantime, let's continue to do what we've done, which is go out and continue to build the business, and some of that includes add-on activity at multiples that are lower than where they execute on the original acquisition.

Thank you for that. How would you describe the current difference in valuation between add-on acquisitions and platform acquisitions? Based on what you've shared, it seems there is a significant gap. Is this difference historically large, or have you observed different trends in the past? How does the current spread compare to previous market periods?

I don't know that it is much wider. When private equity firms are executing on a new platform, it's a very common place for them to be thinking about what acquisitions can we do. There's an organic growth component; there's certainly some where the primary goal is to go and do acquisitions. And much of that is driven by the delta between what they think they can sell the company at a larger scale versus what they can do when they execute on smaller add-ons. And so that delta, I'm not sure it is much different. Certainly, there is variability depending on where you're in the market and what end market they are operating in. But I wouldn't say that they are much different in this environment than they are in others.

Yes. And one further comment I'd make on that is, again, it's all specific to the given investment. But some of these platforms while they are acquiring a business at an X multiple pro forma for the synergies and the cost savings and things like that, it can be a significant discount. And so you've got a multiple arbitrage on what you go in at, but then your pro forma arbitrage is even greater. And so that's really the economics of these buildups, and people have done very well on that.

Yeah. Got it. Thank you.

That's a very good point. So very often, the seller and the add-on views the sale as though they're getting X dollars for it, right, X multiple for it. But the buyer can look at the cost structure and say, 'I don't really need a lot of that redundant cost, so I'm actually buying it for something less than that.' So there is a - it's kind of a win-win.

Yes. No, I appreciate that color. It all makes a lot of sense. But it seems like a lot of those dynamics like the bid ask, etc., that's true at any point in the market cycle and it just seems that it's unusually skewed not just for you, for everybody, unusually bonds right now and something is going to give at some point. But thank you for your color.

Actually, I think it is a very good question. And I think maybe one other perspective on it, which again, a gross generalization. But I think it is also different markets. Some of these smaller deals are kind of are owned by individuals, owned by families, owned by management teams, and they are selling into a private equity institutional environment. And so they're selling for different reasons. They might be selling because of life cycle, maybe they want to retire estate planning, taken as long as sort of like individually driven decisions. But I think in the private equity market, it's much more of a market decision going on. People may have paid certain multiples and they are not going to sell until they get a certain rate of return and there's going to hold until they get that for can’t hold any longer. So I think that the private equity platform marketplace is a different marketplace than this other one because it is driven by different drivers, different factors. It is not a pure rate of return timing, like a private equity firm could say, 'Well, I'm going to hold this for another two years.' But the 65-year-old manager is like, 'This is the time to sell my company. I want to move to Florida. I do whatever I want to do.' And so he is not going to say, 'Oh, I want to wait on 67 because I don't like the market.' He's kind of ready to move on.

Yeah, understood. Thank you.

Our next question comes from Erik Zwick with Capital Markets. Your line is open.

Thank you. Good morning, everyone. Maybe first a follow-up on the fact that there were no new investment commitments in the quarter, and you mentioned that you didn't meet your standard. I was curious if you could provide a little coverage – little color to that in terms of leverage spread, covenants. And I'm curious if all it's all reflective of some weakening in the economy? Or are you seeing some potentially sectors that you are just wanting to avoid more? So I'm wondering if you could provide some thoughts there.

Good question. I can't say definitively whether it's about spread or leverage. The deal volume has decreased significantly, and we are already very selective in supporting a portfolio company. When you combine the lower deal volume with the thorough evaluation we apply to any new investment opportunities, it hasn't produced results. One thing we're noticing is that pricing has dropped significantly. Comparing current deal pricing to a year ago, in some cases, it is over 100 basis points lower. We have to adjust to that as competition evolves, and this likely influenced a few of our decisions as well.

Got it. Thank you. And other one for me. Just with respect to the restructurings of Zollege and Pepper Palace. You mentioned there is a potential to create some future increases in recovery value. And I know it is early days for both of those just kind of completing the restructuring. But how do you think about that from a time standpoint? Have you set or will you set, say, like six months, one year, two year targets for improvement in the KPIs at those companies? Or how do you think about it from a timing perspective?

We don't set targets in terms of we are going to give us sort of date certain and evaluate otherwise make kind of fundamental decisions. I think, like anything, we are constantly evaluating what the opportunities are where we're positioned, where the company is positioned, and the best way to try to maximize value, and that is something that you're constantly assessing and then you make a decision based on those facts. I think in both these deals, as I mentioned, there are some elements of the businesses that we think are attractive but certainly have a lot of work to do to get them to a better place. So time will tell.

And maybe one last follow-up on that one. Just in terms of the new management teams that are putting in place, how are you sourcing those? And I guess that's kind of the crux of the question there.

In the case of Zollege, we reached out to the original founder, who had sold the business to a private equity firm and was still involved at a reduced level. He's helping us operate the business now and is set to invest capital as part of a future deal. He started the business from scratch and successfully built it, so we are cautiously optimistic that with a fresh perspective and by leveraging market opportunities along with solid aspects of the business model, we can enhance its performance. His willingness to invest new capital shows he shares this belief. For Pepper Palace, we've partnered with someone experienced in turning around distressed businesses and has a history of making successful capital investments in such situations. This individual will also be investing significant funds into Pepper Palace.

Very helpful. Thanks for taking my questions today.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Christian Oberbeck for any closing remarks.

Again, we thank you for your support, and we look forward to speaking to you next quarter.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.