Saratoga Investment Corp. (NYSE:SAR) Q4 2024 Earnings Call Transcript

Saratoga Investment Corp. (NYSE:SAR) Q4 2024 Earnings Call Transcript May 7, 2024

Saratoga Investment Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp’s 2024 Fiscal Year-End and Fourth Quarter Financial Results Conference Call. Please note that today’s call is being recorded. During today’s presentation, all parties will be in listen-only mode. Following management’s prepared remarks, we will be opening the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp.’s Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp’s 2024 fiscal year-end and fourth 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 year-end and fourth quarter 2024 shareholder presentation in the Events and Presentations 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.

Christian Oberbeck: Well, thank you, Henry, and welcome, everyone. Saratoga’s adjusted net investment income per share for the year increased 44% as compared to last year and for Q4 decreased by 2.5% as compared to last year and 4% as compared to last quarter. The substantial year-over-year increase in NII reflects growth in AUM, strong overall portfolio performance and margin improvement from year-over-year increased rates and spreads on Saratoga’s investments largely floating rate assets with cost of financing liabilities remaining largely fixed. Perspectives on year-over-year quarterly performance include; a $0.04 decrease from last year’s Q4 includes $0.13 of dilution and from the increased share count resulting from the recent equity ATM issuances this year at NAV, which have not yet been deployed in new investments.

Higher quality income this quarter versus a year ago from a higher mix of recurring interest income, up 29% and lower other income items, including structuring, advisory and prepayment fees, which were down 44% and largely from a less robust M&A environment. And once yearly excise taxes were up $0.04 per share or 71% over last year’s fourth quarter. This quarter’s earnings of $0.94 inclusive of the once annual $0.11 excise tax on undistributed taxable income noted above, significantly exceeded our recently increased dividend by 29%. The level of interest rates stabled in the recent — stabilized in the recent quarter, resulting in elevated margins on our growing portfolio relative to the past year. In addition, our ongoing development of sponsor relationships continues to create attractive investment opportunities from high-quality sponsors at attractive pricing terms and absolute rates despite the constrained general volume of M&A over the past couple of years.

We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges. Saratoga’s credit structure with largely interest-only covenant-free, long-duration debt incorporating maturities primarily two to 10 years out has positioned us well with the elevated level of interest rates, delivering substantially increased margins and industry-leading dividend coverage. Most importantly, at the foundation of our performance is the high-quality nature, resilience and balance of our approximately $1.139 billion portfolio. Our core BDC portfolio, excluding our CLO and JV, is down 1.7% versus cost, including $13.8 million of markdowns this quarter in two discrete credits. Pepper Palace and [indiscernible], which is partially offset by $4.2 million of net unrealized appreciation in the rest of the core BDC portfolio.

The remaining fair value of these two written-down credits at year-end is $6.3 million, and we are actively implementing management changes and capital structure improvements, which have the potential for future increases in recovery value. The overall financial performance and strong earnings power of our current portfolio reflects the strength of the underwriting and 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 full-year, we originated eight new portfolio company investments and had 65 smaller follow-on investments in existing portfolio companies, which we know well, with strong business models and balance sheets. Originations this year totaled $246 million, with $30 million of repayments and amortization. This includes $43 million originated in 14 follow-on investments in Q4, offset by $11 million in repayments. Our credit quality for this quarter remained high at 98.1% of credits rated in our highest category with three investments currently still on non-accrual. With 86% of our investments at quarter end and first lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations.

We believe our portfolio and leverage is well structured for challenging economic conditions and uncertainty. Saratoga’s annualized fourth quarter dividend of $0.73 per share and adjusted net investment income of $0.94 per share imply a 12.4% dividend yield and a 16% earnings yield based on its recent stock price of $23.57 per share on May 3, 2024. The overearning of the dividend by $0.21 this quarter or $0.84 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. First, we raised $48 million of equity at NAV since the end of Q1, helping increase our NAV from $338 million as of May 31, 2023, to $370 million as of February 29, 2024.

With shares trading below NAV during this period, the manager subsidized the issuance shortfall so that the BDC received a full NAV price for all shares sold. This equity provides additional balance sheet strength, reduces our overall regulatory leverage and supports our strong originations. Second, at year-end, we maintained a substantial $207 million of investment capacity to support our portfolio companies with $136 million available through our newly approved SBIC III fund from our expanded revolving credit facility and $41 million in cash. And third, on March 27, 2024, we entered into a special purpose vehicle and a new three-year financing credit facility, which provides for incremental borrowings in an aggregate amount of up to $50 million.

Saratoga Investment’s fourth quarter demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended February 29, 2023, and November 30, 2023. Our adjusted NII is $12.8 million this quarter, up 10% from last year and down 3% from last quarter. Our adjusted NII per share is $0.94 this quarter, down $0.04 from $0.98 last year and down 7% from 101 last quarter, inclusive of the dilution in excise tax factors noted earlier. Latest 12 months return on equity is 2.5%, down from 7.2% last year, down from 6.6% last quarter. Our NAV per share is $27.12 down 7% from $29.18 last year and down 1% from $2.42 last quarter and our quarter end NAV is up $370 million from $347 million last year and $360 million last quarter.

Importantly, KPIs related to full-year earnings power are adjusted NII for fiscal 2024 is $52 million, up 52% from $34 million last year and adjusted NII per share is $4.10 per share this year, up 44% from $2.85 per share last year. While this past quarter and fiscal year have seen markdowns to a small number of credits in our core BDC portfolio, Slide 3 illustrates how our long-term average return on equity over the past 10 years is well above the BDC industry average at 10.5% versus the industry’s 6.5%. The has remained consistently strong over the past decade, been in the industry, eight of the past 10 years. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago, and the quality of our credits remains solid with only three credits on nonaccrual, unchanged from last quarter.

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 now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal fourth quarter ended February 29, 2024, most of which Chris already highlighted. Of note, the weighted average common shares outstanding of 13.7 million shares in Q4 increased from $11.9 million last year and $13.1 million last quarter. Adjusted NII increased this quarter, up 10.3% from last year but down 2.6% from last quarter, primarily from first the impact of higher interest rates, both base rates and spreads as compared to last year, with a weighted average current coupon on non-CLO BDC investments increasing from 12.1% to 12.6% year-over-year and relatively unchanged from last quarter. Second, average non-CLO BDC assets increasing by 18.7% year-over-year and by 2.2% since last quarter.

And third, other income, including a $5.9 million dividend received from the Saratoga Investment joint venture for the year and $1.2 million received for the quarter. Adjusted NII yield was 14.0%. This yield is up from 13.6% last year and slightly down from 14.6% last quarter. Total expenses for this fourth fiscal quarter, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise tax decreased from $2.3 million for both last quarter and last year to $1.9 million this quarter. This represented 0.7% of average total assets on an annualized basis down from 0.8% for both Q4 last year and last quarter. Also, we have again added the KPI slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained including a 50% increase in net interest margin over the past year.

Slide 6 highlights the same key performance metrics for the full fiscal year with significant increases year-over-year in most operating metrics. Moving on to Slide 7. NAV was $370.2 million as of this quarter end, a $10.6 million increase from last quarter and a $23.2 million increase from the same quarter last year. During this year and quarter, $49 million and $14.4 million of new equity was raised at or above net asset value, respectively. The manager of the company contributed $4.5 million of that equity as part of the issuances and the BDC received NAV or more for all purchases. This chart also includes our historical NAV per share, which highlights how this important metric has increased 20 of the past 28 quarters, with Q4 down $0.50 per share, primarily reflecting the specific markdowns 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 $3.50 or 14.8%. We continue to benefit from our history of consistent realized and unrealized gains. On Slide 8, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.07 primarily due to the $0.05 net dilution from the additional $0.6 million shares issued in the recent ATM equity offerings and $0.11 in excise taxes on undistributed taxable income owed in December, partially offset by increased net interest and other income and decreased operating expenses.

On the lower half of the slide, NAV per share decreased by $0.50, primarily due to the $0.53 net unrealized depreciation and the $0.72 dividend recognized in the quarter exceeding the $0.94 in GAAP NII. On Slide 9, you will see the same reconciliation but now on a sequential annual basis. Starting at the top, adjusted NII per share increased from $2.85 per share last year to $4.10 per share, mainly due to the increase in net interest income from higher interest rates and AUM. On the lower half of the slide, this reconciles the $2.06 NAV per share decrease for the year. The $4.49 of GAAP NII was more than offset by $3.70 of net unrealized depreciation and the $2.82 of dividends paid during the year. There was a $0.05 net accretion from the ATM share repurchases and trip plan during the year.

Slide 10 outlines the dry powder available to us as of quarter end, which totaled $207 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facility. This quarter end level of available liquidity allows us to grow our assets by an additional 18% without the need for external financing, with $41 million of quarter end cash available and thus fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. We also include here a column showing any call options available to our debt. This shows that $321 million of baby bonds effectively all our 6-plus percent debt is callable within the next year, creating a natural protection against potential future decreasing interest rates, which should allow us to protect our net interest margin, if needed.

Since quarter end, we also closed on a new three-year $50 million secured revolving credit facility fully available immediately. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet 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. Also, our data is structured in such a way that we have no BDC covenants that can be stressed during such volatile times. Now I would like to move on to Slides 11 through 14 and review the composition and yield of our investment portfolio. Slide 11 highlights that we now have $1.14 billion of AUM at fair value, and this is invested in 55 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 12, 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 was up slightly by 10 basis points to 12.6% with base rates relatively unchanged. The total CLO yield remained unchanged at 8.0% from last quarter. The CLO is performing and current. Slide 13 shows how our investments are diversified throughout the U.S. And on Slide 14, 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 JV, which are included as structured finance securities.

Moving on to Slide 15. 8.6% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 12 fiscal years, we had a combined $81.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This consistent realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our Chief Investment Officer, for an overview of the investment market.

Michael Grisius: Thank you, Henry. I’ll take a few minutes to describe our perspective on the current state of the market 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. It seems to be in a bit of a holding pattern to see what happens in the broader macro environment. While liquidity among private equity firms remains abundant, an opaque economic outlook, 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 reentered the market as fears of an economic slowdown have abated amongst some industry participants.

This is shifting the supply-demand equation at the margin and we’re starting to see leverage creep up and spreads narrow. Now that said, the risk-adjusted returns 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, it continues to be a favorable market for capital deployment, especially at the lower end of the middle market where we compete. In addition, the flip side of a moderate M&A market is that our portfolio has experienced very little churn from redemptions. 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 a year that has seen ever shifting expectations for the economy due to inflation and rising interest rates, among other factors, we stayed largely focused on managing and supporting our portfolio. The combination of rising rates wider spreads, steady follow-on deal activity and very few redemptions allowed us to achieve healthy growth in our portfolio size and robust growth in our portfolio earnings. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital. As seen on Slide 16, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 69 follow-ons this calendar year, including delayed draws, which we expect to continue.

While we invested in nine new platform investments this calendar year, we focus much of our time and resources towards supporting our portfolio and managing a discrete few challenged 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. More recently, during the first calendar quarter, we added new portfolio companies, but still had 11 follow-on investments. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. There are a couple of credits specifically that are experiencing varying levels of stress that we have marked down this quarter that I will touch on shortly.

But in general, our portfolio companies are healthy and 80% of our portfolio is generating financial results at or above the prior quarter, 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. Now consistent with last quarter, we still have three investments on nonaccrual, namely Noland, Pepper Palace and Zollege. Looking at leverage on the same slide, you can see that industry debt multiples have come down slightly this year from their historical high levels.

Total leverage for our overall portfolio was 3.9x, excluding Pepper Palace and Zollege, while the industry is now again at above 5x leverage. Despite the success we’ve had investing in highly attractive businesses and growing our portfolio and the healthy deal flow we are seeing, it is important to emphasize that, as always, we’re 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 17 provides more data on our deal flow previously discussed, demonstrating how our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to multiple new strategic relationships that have become sources of new deals, two of the five new portfolio companies over the past 12 months are from newly formed relationships.

Reflecting our ongoing investments in business development. 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 18, our overall portfolio credit 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 businesses will sustainably exceed the last dollar of our investment.

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 $2.1 billion in 116 portfolio companies. We’ve had just one realized loss on investments. Over that same time frame, we’ve successfully exited 67 of those investments, achieving gross unleveraged realized returns of 15.7% on $917 million of realizations. Even taking into account the current write-downs of a few discrete credits, our combined realized and unrealized return on all capital invested equals 13.7%. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt.

We have three investments on nonaccrual with Pepper Palace and Zollege classified as red and Knowland is yellow. Knowland has been on yellow for a while, and this quarter saw an improvement to the Q3 mark, reflecting recent moderate improvement in the business and liquidity. Pepper Palace continued to suffer from poor performance and liquidity issues, reflecting the further $2.5 million markdown this quarter. The remaining fair value of this investment is $2.5 million. We are actively working with the sponsor on restructuring the balance sheet, including installing a turnaround specialist to manage the business. While not finalized, we are progressing toward an agreement that would have Saratoga take control of the business. As part of this plan, the turnaround specialist, who has substantial successful experience in similar situations, with significant equity in the business and become the CEO and a Board member.

And Zollege suffered from continued performance this past quarter and required liquidity to continue operating, resulting in us marking down this investment significantly by $11.3 million to a fair value of $3.8 million. We immediately started working with the founder and prior owner on a restructuring of the balance sheet. Resulting in us taking over the company last week 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. In addition to these nonaccrual investments, we also want to highlight an update on Netreo investment that faced challenges this year.

Subsequent to year-end, Netreo was acquired by BMC a global leader in software solutions for autonomous digital enterprises. On May 1, we received a full repayment of our first lien term loan, including accrued interest, and receive partial equity proceeds at closing with additional amounts held in escrow for future distributions subject to certain conditions. Now it is important to note 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 have $2.5 million of unrealized appreciation, reflecting positive market appreciation this quarter, partially offset by markdowns due to individual credits.

Of note is that the rest of the core BDC portfolio has continued to perform well, resulting in $4.2 million of net unrealized appreciation across our remaining 53 portfolio companies in Q4, 80% of our portfolio is generating financial results at or above the prior quarter. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remained strong as seen by our track record on this slide. Now moving on to Slide 19. You can see our first license has been merged into the BDC following its wind down. 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 U.S. small businesses, both new and existing.

This concludes my review of the market. And I’d like to turn the call back over to our CEO. Chris?

Christian Oberbeck: Thank you, Mike. As outlined on Slide 20, our latest dividend of $0.73 per share for the quarter ended February 29, 2024, was paid on March 28, 2024. This is the largest quarterly dividend in our history and reflects a 6% and 38% 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 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 fourth quarter over-earning of its dividend by 29%, $0.94 versus $0.73 per share in this quarter provides substantial cushion should economic conditions deteriorate where base rates decline.

Moving to Slide 21. Our total return for the last 12 months which includes both capital appreciation and dividends, has generated total returns of 8%, uncharacteristically unperforming the BDC index of 30% for the same period. Our longer-term performance is outlined on our next Slide 22. Five-year return places us in line with the BDC index while our three-year performance is slightly ahead. Since Saratoga took over management of the BDC in 2010, our total return has been 665.7% versus the industry’s 269.2%. On Slide 23, 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 reflects the growing value our shareholders are receiving.

While ROE and NAV per share are lagging the industry this past year, that is primarily due to the two discrete nonaccruals we have previously discussed. We continue to be one of the few BDCs to have grown NAV over the long term and we have done it accretively and our long-term return on equity remains 1.6x the long-term industry average. Moving on to Slide 24. All our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. The differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 12%, ensuring we are aligned with our shareholders.

Looking ahead on Slide 25. And 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’s shareholders in the near and long-term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Erik Zwick of Hovde Group. Your line is now open.

Erik Zwick: Thanks. Good afternoon everyone.

Christian Oberbeck: Hi, Erik.

Erik Zwick: Wanted to start maybe just on your thoughts as you look at the portfolio today and you mentioned spreads are getting a little bit tighter, leverage, maybe going up a little bit and certainly, the activity you had in the last fiscal year was weighted much more heavily towards add-on investments. Kind of given that backdrop, would you expect the next couple of quarters to be similar with more weighting towards add-on investments? Or are you seeing any improvement in the market for new opportunities today?

Michael Grisius: That’s a good question. This is Mike. It’s interesting. We can never have a crystal ball in terms of what the future holds. I would say this, right now, where we look at even, even with spreads tightening at the margin and leverage creeping up a little bit at the margin because we’re seeing some participants that were at the sidelines before kind of starting to enter the market. So there’s a little bit more competition. We think the risk-adjusted returns in the market are just fabulous in terms of the gross return that you can get on first-lien securities. So we’re certainly open for business and looking for opportunities to deploy capital. What certainly has happened, though, is that where rates are and given the uncertainty in the economy, we’ve seen that the overall M&A deal flow just in general is down.

So that’s certainly affected our investment — new investment velocity. It’s also affected us in that we haven’t had many redemptions at all. So the flip side of that is that we’re not seeing as many new opportunities that we like, but we do have a portfolio that’s holding up really well and is hungry for capital. I think a lot of the owners of those businesses probably would have foreseen that they would have sold some of those businesses a little bit earlier, but they’re probably waiting for a better, more favorable market. And so instead, they’re continuing to do acquisitions and continue to grow their business. So there’s sort of two sides of the equation. But to answer your question, hopefully more directly, we do think that there will be plenty of opportunities for us to deploy capital and that as the market picks up, that will — as it does so, we’ll probably.

Our investment volume will move in accordance with that. And I think the other thing I would add is that we’ve been in this market, very focused on supporting our portfolio companies, and you’ve seen that in the add-on activity that we’ve done. And we’ve also have a few discrete credits that we’ve been focused on very carefully as well, and that’s taken some of our time and attention.

Erik Zwick: I appreciate that’s the detailed answer there. Next question, just looking at you’re fairly active in the last fiscal year in terms of utilizing the equity distribution agreement. It looks like you’ve got a fairly good liquidity levels now with additional capacity on the SBIC II, the third one now approved and also the new $50 million revolving credit facility. So just curious about your thoughts around continuing to use the equity distribution agreement at this point to raise additional capital as well.

Christian Oberbeck: Well, I think that’s also a very good question. I think one of the important things that we’ve learned over time is having a highly diversified source of capital is very important. And I think utilizing the equity ATM is important for many reasons. And equity is kind of the cornerstone of so much of what’s done in the BDC space. In terms of these other facilities, I think we’re always looking to try and have a highly diversified source of capital because markets changed. There was a period of time where we did baby bonds, and there was another period of time where we able to raise institutional capital and then those markets can come and go at different levels. And we went back to baby bonds and then these credit facilities are important for flexibility.

There’s some residual level of outstanding at sort of at all times, but they also serve as swing lines, if you will, and allow us to move very quickly on investments, and then we can decide over time what the right overall financing is and basically adjust to that in the marketplace. So we don’t have any specific plan for any of our particular capital sources at this moment in time. But also just realistically, those are kind of opportunistic as well. It depends how the markets evolve. But at this point in time, I think we’re pretty well financed.

Erik Zwick: Thanks. And last one for me and then I’ll step aside. You have the second bullet on your objectives for the future is to kind of potentially add to your management team and process. So I’m just curious what the market is like out there now for finding new investment professionals to join Saratoga where are you finding the best opportunities if it’s from other asset managers or investment banks or other sources as well? And how competitive is that market today?

Michael Grisius: Yes, this is Mike. Let me jump on that. One of the things that’s interesting, if you look at our management team and just our team in general, the senior management team has worked together for 12-plus years. And there’s just been incredible continuity. So that track record that I referenced in the prepared remarks has been built by that senior management team and a credit culture that we’ve developed together a certain way of assessing risk that’s been successful. And so we’re really careful have been very careful, cautious about bringing in your senior people into the management team. It’s a little bit of that hard to take somebody in, teach old dogs new tricks or what have you, like, we really like training people up when they’re younger in their careers.

We view our business as one where you generally make money by not losing money. And the way you get trained well in credit is really almost an apprenticeship type way to do it, right, so that as people are growing in their careers, they have a continuity of looking at credit and risk in the right way, we think and so what I’m getting to is that, therefore we’re focused more on building from the bottom up. And we’ve done that successfully over the years where we’re bringing in people that are two, three years out of school, largely out of investment banking programs. We’ve got two new talented associates that are starting this summer. We’ve also got an analyst starting to augment our business development efforts. So the market is ripe right now for hiring young talented professionals more favorable than it was a couple of years ago where everybody was trying to kind of hold on to their professionals.

We’re seeing less activity and less competition from some others. And so we’re jumping into that void and trying to build our talent from the bottom up.

Christian Oberbeck: And one general comment as well is that we’re seeing the sort of — there was a very market increase in the rate of compensation starting in ’21, ’22, and that’s starting to moderate very substantially. And so that’s maybe the beginning of sort of a greater availability of professionals in general. But I think Mike explained pretty well what our philosophy is in Saratoga.

Erik Zwick: Yes, thanks. I think it is bigger [indiscernible]. That’s all for me. Thanks for taking my questions today.

Christian Oberbeck: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Robert Dodd: Hi guys. On the origination activity and pipeline, I mean you didn’t do any new platform companies in the quarter, and you talked about maybe some things didn’t hit your quality metrics. But a lot of follow-on activity. So you deploy capital nonetheless. On things not meeting your requirements in. I mean, can you give us any more color on that? Is that some of the businesses coming to market now. Are they asking for too much leverage, the long industries. I mean what is it that’s not taking checking the boxes for you to be willing to deploy new capital into new platforms. Obviously, the existing book. Which is always great to have. Can you give us any more color there?