Main Street Capital Corp

NYSE:MAIN

Earnings Call Transcript 2018-Q3

[Operator]

Greetings and welcome to the Main Street Capital Corporation Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Roberson, Dennard Lascar Investor Relations. Thank you, you may begin.

[Mark Roberson, Dennard Lascar, IR]

Thank you, Operator, and good morning everyone. Thank you for joining us for Main Street Capital Corporation's third quarter 2018 earnings conference call. Joining me on the call today are Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith. Both David Magdol, Chief Investment Officer and Nick Meserve, Managing Director and Head of Middle Market are in the room and available for questions.

Main Street issued a press release yesterday afternoon that details the company's third quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 09.

Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage.

Please note that information reported on this call speaks only as of today, November 02, 2018, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call and there are no guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors included but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call including information related to portfolio of companies was derived from third-party sources and has not been independently verified.

And now, I'll turn the call over to Vince.

[Vince Foster, Chairman and CEO]

Thanks Mark and thank you all for joining us today.

I will comment on our performance of our investment portfolio, discuss our recent dividend announcements and a few other recent developments and conclude by commenting on our investment pipeline. Following my comments, Dwayne Hyzak, our President and Brent Smith, our CFO will comment on our third quarter financial results, recent originations and exits, our current liquidity position and certain key portfolio statistics, and other recent developments after which we will take your questions.

We were very pleased with our third quarter operating results. Our lower middle-market portfolio our primary area of focus appreciated by $26.3 million on a net basis during the quarter with 30 of our investments appreciating during the quarter and 13 depreciated.

Our middle market loans, private loans and our other assets collectively appreciated by $9.7 million on a net basis. We finished the quarter with a net asset value per share of $24.69, a sequential increase of $0.73 a share over the second quarter. Our lower middle market companies collectively continue to exhibit very conservative leverage ratios on a relative basis which Dwayne will cover in greater detail.

Earlier this week our Board declared our first quarter 2019 regular monthly dividends of $0.195 a share in each of January, February and March maintaining our fourth quarter monthly payout rate.

The ex-dates for these dividends are December 28, January 17 and February 20 respectively. Six years ago we declared our first supplemental special dividend of $0.35 a share. At the time we've been operating as a public business development company or BDC for five years, and we're primarily making lower middle-market debt and equity investments.

Like most BDCs, we've operated as a regulated investment company or RIC, for tax purposes and have had to adhere strict earnings payout rules to minimize taxes, thus diminishing our ability to retain earnings. During those initial five years, Main Street consistently generated substantial but variable realized gains from exited equity investments.

These gains presented us with two options to comply with the RIC payout requirements. One, either payouts of realized gains as realized with obvious dividend fluctuations due to the volatility of such gains, or two, distribute the gains as periodic or supplemental special dividends. We chose the latter by paying an annual supplemental dividend in such amount as to provide several years of forward visibility to the projected recurrence of such supplemental dividends.

In mid-2013 we decided to make the supplemental dividend semi-annual, paid in June and December. We have continued this practice through the December 2018 dividend we declared last month. We are now in a position due to the size, diversity, and maturation of our business model to begin the conversion of our supplemental dividends and the regular monthly dividends.

We envision making this transition over the next five years such that by the end of the transition period our monthly dividend payout rate will be at least $0.05 per month higher than our current payout rate or at least $0.60 on an annualized basis. While currently our supplemental dividends of $0.55 per year will be reduced incrementally and fully absorbed into our monthly dividends.

In addition to completing the absorption of the supplemental dividends into our monthly dividends, our long-term goal over the transition period will be to continue to grow our total annual dividends at a level consistent with what we have delivered in the past. We believe that this transition will make our dividend policy easier to understand and follow, allow all third-party stock price services to correctly indicate and reflect our dividend yield, and more clearly align the dividend yield reflected by our new regular monthly dividends with our goal of generating best-in-class returns on our equity.

This will also enhance our ability to retain a portion of our realized gains through our various taxable entities while still growing our dividends. So to launch this process we'll be asking our Board to increase our second quarter regular dividend payout rate to $0.20 per month beginning in April 2019 and decreasing our June 2019 supplemental dividend to $0.25 per share from the [$27.05] per share rate in December 2018.

We've originated new lower middle market private loan investments of roughly $578 million so far this year, including lower middle market originations of $85 million in the third quarter. As of today I would characterize our lower middle market investment pipeline as above average.

We continue to seek and receive significant equity participation in our lower middle market investments. And as of quarter end we own on average 39% percent fully diluted equity ownership position in the 99% of these investments in which we currently have equity exposure. Our officer director group has continued to be regular purchasers of our shares, investing approximately $0.5 million during the third quarter.

With that, I'd without to turn the call over to Dwayne, to cover our performance in more detail.

[Dwayne Hyzak, President and COO]

Thanks, Vince. Good morning everyone.

We're pleased to report another quarter during which we grew our total investment income and net investment income over last year both in total and on a per share basis, and generated a record quarterly net increase and net assets or GAAP net income. We are also pleased that operating results represent a GAAP return-on-equity or ROE at 15.6% for the trailing 12 month period, and an annualized 18.6% for the quarter ended September 30. Results exceeded our stated long term goal of producing an ROE percentage in the low-to-mid teens.

We believe that our ability to consistently generate increases in both our net investment income and net asset value per share, and deliver a superior return-on-equity, continues to illustrate the significant benefits of our unique investment strategy in the lower middle market, which combined with our efficient operating structure and other complementary investment and asset management activities provides a value proposition that differentiates Main Street from other yield oriented investment options and generates the premium total returns realized by our shareholders.

We believe the primary driver of our long-term success has been and continues to be our primary focus on the underserved lower middle market, and specifically our investment strategy of investing in both debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just a financing source.

Each quarter we try to highlight different aspects of our unique investment strategy. Today, I'm going to discuss our efforts over the last few years to organically grow our internal investment resources along with an increased focus on our marketing activities in the lower middle market, has allowed us to significantly exceed our budget for lower middle market originations in 2018, and has positioned us for additional success in the future.

Since the end of 2014, we have effectively doubled the internal investment professionals we have executing our lower middle market strategy, significantly expanding our ability to execute this strategy. As a result of these additional resources coupled with our unique debt and equity investment strategy, our long-term partnership approach with our portfolio companies that has facilitated by our permanent basis or BDC, and a large addressable market for lower middle market investments. We are experiencing a record year for lower middle market originations.

Through September 30, we have originated $288 million of lower middle market investments for our main street portfolio and have clear visibility to several additional investments in the fourth quarter. We are also confident that our marketing efforts have continued to expand and strengthen our relationships within the lower middle market, providing us significant comfort regarding our current expectations for origination in 2019.

This expected continued growth in our lower middle market portfolio coupled with favorable opportunities we see for our private loan and middle market strategies, allows us to maintain our belief that the continued growth of our business through a combination of new equity issuance and modest debt capital issuance is in the best interest of our shareholders.

Now turning back to our third quarter operating results. Consistent with prior quarters, the contributions from our lower middle market portfolio continued to be well diversified with 41 of our 69 lower middle market companies with equity investments having unrealized appreciation at quarter end and with 30 of these companies that are flow through entities for tax purposes are 59% of our total investment in these types of entities contributing to our dividend income in the last 12 months.

We also have several equity investments in C corporations which have contributed to our dividend income. We believe that the diversity of our lower middle market portfolio is very important when analyzing the benefits from our lower middle market strategy and we believe that this diversity provides visibility to the recurring nature of these benefits in the future.

Now turning specifically to our investment activity in the third quarter and our investment portfolio at quarter end, we completed total investments in our lower middle market portfolio of approximately $85 million, which after aggregate repayments on debt investments and return of invested equity capital resulted in a net increase in our lower middle market portfolio at $56 million.

Our middle market portfolio was effectively flat with net increase of $3 million, and we had a net decrease in our private loan portfolio of $27.5 million. As a result of September 30, we had investments in 182 portfolio companies that are more than 50 different industries across the lower middle market, middle market, and private loan components of our investment portfolio.

Our largest portfolio company represents less than 3% of our total investment portfolio fair value with the majority of our portfolio investments representing less than 1% of our assets. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday, but I'll touch on a few highlights.

Our lower middle market portfolio included investments in 70 companies representing over $1.1 billion of fair value, which is 19% above our cost basis. At the lower middle market portfolio level the portfolio is median net senior debt-to-EBITDA ratio was a conservative 3.1 to 1. As a compliment to our lower middle market portfolio, in our middle market portfolio we had investments in 58 companies representing approximately $608 million of fair value, and in our private loan portfolio we had investments in 54 companies representing approximately $491 million of fair value.

The total investment portfolio as a whole continues to perform at a high level and our lower middle market, middle market, and private loan investments generated over $27 million of net unrealized appreciation during the quarter, and we had five investments on non-accrual status, which comprised approximately 1.2% of our total investment portfolio at fair valued, and 3.5% at cost. In summary, Main Street's investment portfolio continues to perform at a high level and continues to deliver on our long term goals.

With that I will turn the call over to Brent, to cover our financial results, capital structure, and liquidity position.

[Brent Smith, CFO]

Thanks Dwayne.

We are pleased to report that our total investment income increased by 13% for the third quarter over the same period in 2017, to a total of $58.3 million, primarily driven by an increase in interest income of $6.5 million, and an increase in fee income of approximately $1.5 million. Partially offset by a decrease of $1.6 million in dividend income.

The total investment income includes an increase of $2 million related to higher levels of accelerated prepayment, re-pricing, and other activity for certain debt investments, partially offset by a decrease of $1.7 million in dividend income that is considered less recurring when compared to the same period in 2017.

Third quarter 2018 operating expenses, excluding non-cash share-based compensation expense increased by $2.7 million over the third quarter of the prior year to a total of $18 million. The increase is primarily related to a $1.5 million increase in interest expense and a $1 million increase in compensation expense. The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets was 1.5% on an annualized basis for the third quarter compared to 1.5% during the same period in the prior year.

Our increased total investment income and the continued leverage of our efficient operating structure resulted in a 10% increase in distributable net investment income for the third quarter of 2018 to a total of $40.2 million or $0.66 per share, which exceeded our recurring monthly dividends paid for the quarter by approximately 16%.

The activities of our external investment manager and its relationship with HMS income fund benefited our net investment income by approximately $2.7 million in the third quarter through a $1.6 million reduction of our operating expenses for costs allocated to it for services provided and $1.1 million of dividend income from the external investment manager.

We recorded a net realized gain of $9.2 million during the third quarter, primarily related to the realized gains from the exit of three lower middle market investments and activity relating to the other portfolio. Partially offsetting these gains was a realized loss related to the restructuring of a middle market investment.

We recorded net unrealized appreciation on the investment portfolio of $36 million during the third quarter, primarily resulting from $26.3 million of net appreciation on our lower middle market portfolio, $7.5 million of appreciation on our external investment manager, $1.3 million of net appreciation on our other portfolio and $0.8 million of net appreciation on our middle market portfolio. Additional details for the change in our net unrealized appreciation can be found in our earnings release.

Our operating results for the third quarter resulted in a net increase in net assets of $68.7 million or $1.13 per share. On a capital resources front, our liquidity and overall capitalization remained strong. At the end of the third quarter, we had approximately $50 million of cash and $430 million of unused capacity under our credit facility for total liquidity of approximately $480 million. Currently, we have approximately $45 million of cash and $365 million of unused capacity under our credit facility for total liquidity of approximately $410 million.

We also raised approximately $18.5 million in net proceeds under our ATM equity program during the third quarter with an average sale price of $39.71 per share. As we look forward to the fourth quarter of 2018, we expect that we will generate distributable net investment income of $0.63 to $0.65 per share during the quarter. This estimate is $0.045 to $0.065 per share or approximately 8% to 11% above our previously announced monthly dividends for the fourth quarter of $0.585 per share, maintaining our conservative approach to our monthly cash dividends.

With that I'll now turn the call back over to the operator so we can take any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Leslie Vandegrift with Raymond James. Please proceed with your question.

[Leslie Vandegrift, Raymond James]

First of all just I missed it there at the end of your prepared remarks the issuance for the quarter through the ATM, I heard the average price but not how many shares?

[Vince Foster, Chairman and CEO]

Yes, it was approximately $18.5 million and the average price was $39.71. And I believe the number of shares -

[Brent Smith, CFO]

Just under 0.5 million.

[Vince Foster, Chairman and CEO]

Yes, I believe that’s approximately correct.

[Leslie Vandegrift, Raymond James]

And then you were talking about - you mentioned the five non-accruals, are they the same ones from last quarter, no change there?

[Brent Smith, CFO]

Yes, that's correct. There is no change in the investments around non-accrual.

[Leslie Vandegrift, Raymond James]

And on the middle-market investment, you mentioned in the prepared remarks that there was one that had a loss in the quarter from a restructure, which investment was that?

[Brent Smith, CFO]

It was - [SBIA] was the realized loss in the middle-market.

[Leslie Vandegrift, Raymond James]

And then finally - really appreciate the outlook on the dividend moving to supplemental over to regular payments. I think everyone else would agree with that. Because you did that obviously I assume that spillover income level is at least healthy right now – do you have that number now before you pay the next supplemental in December?

[Brent Smith, CFO]

Yes, at the end of the third quarter the spillover was approximately $68 million.

[Leslie Vandegrift, Raymond James]

And then just on market outlook. You guys are definitely at different lanes than most of the other BDCs. You have your niche – three niche portfolios a month. Given the increased leverage that other BDCs in this space are doing and leveraging markets in general seeming to heat up, have you noticed any of your portfolios benefiting from that? You have any more from the lower middle market versus maybe the private line or the middle market portfolios seeing more competition there?

[Brent Smith, CFO]

Yes, I wouldn't say that we really see an impact in our portfolios just because of the leverage. I think most of the BDCs that have announced they're going to access the leverage, actually haven't received any benefit yet. So today we would say that the impact on the market hasn't really been anything. Remains to be seen longer-term what impact it could have but I think our view is that if there is an impact it will be marginal just given the different focus we have on our side versus most of the other BDCs.

[Vince Foster, Chairman and CEO]

And remember that the first step was getting Board and/or shareholder approval. The second step is, once you've obtained that is to go back to your bank group and get your covenants amended if you can to try to accommodate some or all the additional leverage. So that's kind of the second phase the BDCs are working through now with some success. But it's still a work in process.

[Leslie Vandegrift, Raymond James]

And then just finally on your lower middle market portfolio. So far in fourth quarter what are originations and repayments looking like for pace?

[Vince Foster, Chairman and CEO]

Yes, so we have not announced all the activity yet but if you look at the net originations for the lower middle market it's just over $35 million on a net basis. And then on the private loan it's just over $30 million, and the middle market is effectively flat.

[Operator]

Our next question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.

[Tim Hayes, B. Riley FBR]

And I apologize if I missed this, I jumped on just a bit late. But should we expect that eventually all dividends will be in the form of monthly dividends? Or do you expect to always maintain a supplemental dividend?

[Vince Foster, Chairman and CEO]

No, I mean if we can help it we'd like to completely eliminate the supplemental. For tax reasons if you have a huge gain theoretically your choices are really limited if you either have to distribute it out, you basically have until you file the tax return of the year subsequent to recognizing the real big gain or there's a mechanism where you can retain the gain and pay the tax and pass out of tax credits, your share holds, that would kind of be the last resort. But if we can help it, we'd like to just go back to the regular monthly dividends not have specials. And I think our dividend policy and yield is going to be a lot easier to understand that way.

[Tim Hayes, B. Riley FBR]

And so should it be the kind of scenario where over the next several quarters, I guess starting in 2Q '19 that we start to seeing more of the supplemental gradually shift into the monthlies?

[Vince Foster, Chairman and CEO]

Yes.

[Tim Hayes, B. Riley FBR]

And then, obviously, it's a good marketing tool and hopefully will help the devaluation of the stock. But would you say that at the margin this move reflected an increase confidence you have in your ability to realized gains from your portfolio companies?

[Vince Foster, Chairman and CEO]

Yes, I think so. Dwayne?

[Dwayne Hyzak, President and COO]

I think it's more - Vince touched already in his comments, but our portfolio has grown and it's more diversified today. And if you have tracked our performance in the last couple of years, you would see a growing spread between our DNII and the monthly dividend. I think through the year-to-date 9/30, it's just over $0.30, so we feel very comfortable about that spread and that combined with our approach of being a very long-term investor in the lower middle market, where if we had our choice, we'd rather keep our best companies as opposed to have them leave the portfolio through an exit.

Those factors really gave us the confidence that we think we can make this change in the dividend with moving the supplemental into the monthly and at the same time maintain the historical growth rate that we've had on a total dividend basis and that's our goal over the next five years just to achieve that transition into a monthly only but maintain the consistent growth in the total dividends on a year-over-year basis.

[Brent Smith, CFO]

And I would add too. I think that implicitly when you have those two big special dividends or semi-annual dividends a year, you might be inclined to take an exit of a nice company where you otherwise wouldn't want to. And we really want to remove any incentive from having to sell some or all of our appreciation in a given company or companies, and I think this will help in that regard. And that really wasn't always the case if you go back eight or 10 years ago.

[Tim Hayes, B. Riley FBR]

And then another question, I believe actually I may have asked us on the last conference call, but how is the flow of the potential M&A or portfolio sales and some advisory opportunities been? Are you seeing deals that credit standards and return hurdles? And with BDC is kind of trading at depressed multiples, especially over the past several weeks, are you seeing an inflow of more opportunities?

[Vince Foster, Chairman and CEO]

Yes, so you touched on a couple of different questions here. So we'll try and address each one and them, you don't do it just as a follow-up.

[Tim Hayes, B. Riley FBR]

Yes, I apologize for that.

[Vince Foster, Chairman and CEO]

I would say on the exit front, we do have as we always do, some amount of exit activity I think you probably wouldn't be surprised that given where valuations are in general that for certain companies that if the management team or the other equity holders want to take a look, it's a pretty good time. So I do think that we have several companies that are somewhere in the process of looking at an exit and if those transactions happen, we're going to be in a position where we think the exit will be a very good exit for us.

But again it's not something that Main Street would be pushing. It would be more collectively on a company-by-company basis with the management teams and with the other owners of the business. Looking at that, I think you also asked a question about just the overall market. And as we mentioned earlier, David Magdol, our Chief Investment Officer is with us, so I'll let him give some commentary on the new origination side of things on the lower middle ok market.

[David Magdol, Chief Investment Officer]

So on a year-to-date basis we are obviously seeing a lot more activity on our book volume on the lower middle market side. We're also seeing that as a result of improved marketing efforts overtime and the lower middle market is just seeing increased deal flows as a result. So if you look at year-over-year, our incoming deal volume is up by 15% to 20% of what's more important than the actual number of transactions we're seeing with the quality of the transactions.

We've attended now about 40 meetings, we expect to attend 40 meetings on go-to individual markets, through conferences, and through meeting with intermediaries and referral sources. And that just really increased the deal volume that's coming in. So we expect that to continue to translate to new originations over time.

[Vince Foster, Chairman and CEO]

Tim, I think your last question was around some color on the asset management business. And I think consistent with our commentary for the last couple of quarters, we remain very interested and looking at new opportunities. There's always some level of dialogue between us and third-parties about new asset management opportunities. I would say as we sit here today there's not a material update in terms of something being closer to the finish line and in terms of us having a new opportunity. But it's something we're very interested n and we continue to look at opportunities as they come to us from time-to-time.

[Operator]

[Operator Instructions] Our next question comes from the line of Christopher Testa with National Securities Corporation. Please proceed with your question.

[Christopher Testa, National Securities Corporation]

Just wanted to just touch on the dividend policy change and just see what the philosophy has been regarding that. I mean is it just sort of that a lot of BDCs don't get as much credit as they might deserve for the supplemental dividends even if they're regular. So you guys think maybe it'll get shares a better evaluation. I'm just wondering just what was the underlying thing that that drove that?

[Vince Foster, Chairman and CEO]

Chris, we never really liked doing it. I think early on when the industry was newer and we were a newer participant, we were smaller. The fear was if your regular monthly dividends comprised both operating earnings and gains and you paid that out, you would be criticized potentially for not earning your dividend with operating income, right. You put yourself in an impossible situation. And we wanted to be - we wanted to really highlight our ability to earn our dividend through operating earnings and therefore that was kind of the history as well.

We don't want to retain them, we don't want to retain gains and go through the brain damage of passing out credits to our largely retail shareholder base and explaining to them how to claim another tax return. It's been done in the past by other BDCs, we didn't want to do that so we kind of painted into a corner and so we said well the least worst alternative is to do the semiannual specials, we never liked it, we don't like the name, I think it's confusing, we have to send out reminders, there's two dividends in December coming up in two X dates, it really kind of gets confusing.

So, when you think about where we are now compared to five or six years ago, we didn't really have the middle market business. The middle market business, the private loan business is that stream of income doesn't generate gains, right. The asset management business doesn't really generate material gains.

And so we think we're in a position now and we have a demonstrated track record that if some of our dividends going forward consist of a small amount of gain in operating earnings I think our shareholder base understands and we won't be criticized for not earning our dividends. So we care for all those reasons we think the time is right to do away then we'll do away with it over a multi-year period.

[Christopher Testa, National Securities Corporation]

That's great detail, thank you. And you guys in your prepared remarks had given some good color on the expansion of your investment team as it pertains to the lower middle market. So my question would be how much bigger do you think the lower middle market book could get before you'd have to make any more material high or is that kind of at senior level there?

[Vince Foster, Chairman and CEO]

I think we've touched on before. We think the lower middle market opportunity is huge. If you look at some of the materials we published and we touched on before we think there's upwards of 150,000 to 175,000 companies that fit the size that we look at. Not all those companies will be a fit for us because there's something about their operations that wouldn't be attractive or they're not in the market. But we do think it's a very, very large robust market.

So as we look at our ability to continue to grow there, we think that we have - just kind of long-term visibility to continue the growth. The key for us is to add resources that's why we've been focused on that for the last number of years. We continue to be extremely focused on it going forward. And we think we've got a structure in place with very well defined process, procedures, and approach to the market.

We think as we add resources we can onboard them in a very reasonable amount of time and make them very productive members of the team. I do think over time we will look to add more senior resources, we have not done that to date but it is something that as we look at the significant opportunity in the lower middle market, it is an opportunity we have as we look at our growth opportunities over the next two to five years.

[Dwayne Hyzak, President and COO]

So, one way to think about it as if you run a lower middle market team now, you are your own workout person, you are your own administrative support person in terms of your valuations et cetera et cetera. And so we think adding senior resources to help out administratively that might have specialized work out skills or specialized administrative skills that so we can - we really wanted to lower the lower middle market people originating dealing with their companies, being pro active board members et cetera and trying to take some administrative burdens away.

So in that context you'll see some senior resources coming in or if we have a new business line, Nick Meserve was a senior resource we brought in to help jump start our middle market and private loan practice. But fundamentally we want to take people off campus and train them our way and we're able to generate new hires off campus in the low double-digits and we've had really good retention. So that implies double digit growth without even doing larger deals and we are trying to do somewhat larger deals. David, you have comment?

[David Magdol, Chief Investment Officer]

I just had one thing. If you look at our total headcount in the lower middle market today versus four years ago, it's approximately doubled. The thing that gets lost sometimes in translation as we train people to do things the Main Street way, we're not only equity, we're not only debt, we got to train people to get a unique skill set. So the seasoning of that stack that we have today are our most valuable resources because they can translate and understand how to identify, execute, and manage that portfolio. That isn't outside resource, if we look outside we're either hiring some of the equity skill set or a debt skill set. Very rarely could we find someone with both. So we think we've got lots of expansion internally.

[Christopher Testa, National Securities Corporation]

And also something we've seen I guess in the larger market especially as of the 9/30 quarter is that there has been a more favorable trend in volume that's gone more towards LBOs and M&A versus the dividend recap the market's become accustomed to over the past several years. So I'm just wondering if you've seen favorable kind of use of capital trends in terms of the loan demand in the lower middle market as well?

[Vince Foster, Chairman and CEO]

I'd say in the lower middle market the types of transactions we're executing on are largely consistent with what we've done in the past. We haven't seen significant change there. Nick, is there any commentary you'd add on the middle-market?

[Nick Meserve, Managing Director and Head of Middle Market]

Yes, the middle market obviously we've seen a lot of less repricings out of it. The dividend recapped, we've seen lot of less of that than the LBO and new acquisition models.

[Christopher Testa, National Securities Corporation]

And last quarter I know that Vince you had made comments on AFFE, and since then obviously Ares and Apollo have kind of filed a formal petition with the SEC investment management division to get BDCs exempt from this as they definitely deserve to be. Just wondering if you have any additional insight onto this just in terms of the timing. Obviously the SEC doesn’t really move at the speed of lightning with many thing. So just wondering if there was anything that you could add since that filing?

[Vince Foster, Chairman and CEO]

Sure. The good news is that the filing made by the group that Ares and Apollo are part of is coordinating its efforts and communicating with similar activities of SBIA. And we have regular joint calls to try to kind of divide and conquer and try to figure out what legislative pressure we can bring to bear regulatory pressure et cetera and industry pressure to highlight this issue. And from the - I was on the last call that we had and I believe that - I think the consensus is that that filing triggers an informal 120-day period during which you can expect the SEC to review and respond with questions most likely request more detail. And so we're kind of preparing for that event.

I think this is going to be a long drawn out process relative to the SEC saying; good idea, here is your class order. So we're probably looking at probably several quarters of work to try to primarily educate the SEC staff and of course there is clearly members of the staff that are favorably disposed towards giving us a solution and there is others that probably remain to be convinced. That's kind of what my understanding is.

And so it's a consensus building, its educating, communicating, providing data et cetera. So there is a lot of work to do, but I think we're pretty optimistic that hopefully by this time next year we might have something done. That's kind of my personal opinion and hope.

[Christopher Testa, National Securities Corporation]

And just curious, I know you had mentioned there's probably some staff members there at the SEC that are maybe not so amenable to this. Playing devil's advocate I mean what is the actual opposition to this, like, I've never really understood why BDCs were not exempt from this and I never understood what this was seeking to gain. I mean just what do you think actual opposition this would be? I'm just curious.

[Vince Foster, Chairman and CEO]

So let's assume you and I form an externally managed BDC. Its only asset – well, you can't really do this but assume we could with the Main Street. We charged 2 in 20 for owning Main Street, which is internally managed. It would be reasonable for us to have to tell our new shareholders that there is a kind of a fund-to-funds or comp counting fee effect if we were to do that relative to your ability to go out of Main Street yourself, right. So that's the fundamental goal is to communicate when there's a second round of fees like a fund-to-funds. Fund-to-fund vehicles you see commonly at private equity, right.

So I think that's the overriding concern and it's difficult to communicate. And we're prime examples of internally managed BDC. If a mutual fund has a Russell 2000 benchmark fund, it's actively managed or pass through what have you and it happened on Main Street. They have to take part of my salary and gross up their advertise cost of the fund. I mean it doesn't really make any sense. So barely trying to figure out along the continuum where did the internally managed BDCs really – where is the right place to stop the line and cause disclosure? Maybe there is another type of disclosure within the body of our filing or the filings of the mutual funds that hold BDCs and so it's...

There is a lot of work to do. So it's not a fundamentally bad or unreasonable rule. It's just - it doesn't appear to – it appears to be in unequivocally apply to us such that we get kicked out of the industry. And I think it's more education and I think it's more - when we say that AFFE us being the AFFE curtails capital flow to small businesses because of the relative lack of absence of institutional investors we have to prove that. We have to back that up and guys like you can help.

[Christopher Testa, National Securities Corporation]

Got it. That's great detail.

[Vince Foster, Chairman and CEO]

Just can't say and expect them to say okay, right. So that's the work we have to do.

[Christopher Testa, National Securities Corporation]

Yes, I would not expect them to just say okay to a policy change, but appreciate all the detail and you guys taking my questions this morning. Thank you.

[Operator]

Our next question comes from the line of Jason Arnold with RBC. Please proceed with your question.

[Jason Arnold, RBC]

I was just curious if you could comment on industry-wise if you feel like there's any real kind of pending opportunities in any specific industries or industries where you feel like your exposure might be a little bit lighter than you would like it to be? Any bigger picture or color there would be great?

[Vince Foster, Chairman and CEO]

I don't think we have any specific industry where we think we're light or we would go out and intentionally try and find new opportunities. Our model is more opportunistic. We're more focused on what is the transaction, what are the existing equity owners and management team, what are they trying to accomplish as opposed to saying we need to go out and target this specific industry. So I wouldn't say that there is one that we're looking for more exposure to specifically.

We do look at it on the flipside and if there's industry that we find unattractive right at paperwork we had, you kind of in overweight position when we look at the diversity of our portfolio. You may have the inverse of what you're asking but not on the new origination side.

[Jason Arnold, RBC]

And maybe conversely is there I guess on that note any industries that you just say, hey we bet more here than we need right now or that we maybe need to whittle down just kind of to your comments there?

[Vince Foster, Chairman and CEO]

I’ll just say as we get further along in a robust economy we've got our eyes open to industries that have had a lot of progression over the last a while in both multiple expansion and in earnings expansion. So I'd just we're being very cautious on looking at multiple year types of earnings flows that we can make sure we're not overpaying for something in a robust market.

[Operator]

We have no further questions at this time. I would now like to turn the floor back over to Management, for closing comments.

[Vince Foster, Chairman and CEO]

Great. Again, as always thanks for joining us and we look forward to speaking to you again in late February.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.