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Edited Transcript of ABDC earnings conference call or presentation 12-Mar-19 1:00pm GMT

Q4 2018 Alcentra Capital Corp Earnings Call

NEW YORK Apr 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Alcentra Capital Corp earnings conference call or presentation Tuesday, March 12, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ellida McMillan

Alcentra Capital Corporation - CFO, COO, CAO, Treasurer & Secretary

* Peter Glaser

Alcentra Capital Corporation - President & MD

* Suhail A. Shaikh

Alcentra Capital Corporation - CEO

* Vijay P. Rajguru

Alcentra Limited - Global Co-­CIO

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Conference Call Participants

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* Christoph M. Kotowski

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Leslie Shea Vandegrift

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Alcentra Capital Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Ellida McMillan. Ma'am, you may begin.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, CAO, Treasurer & Secretary [2]

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Thank you, Joelle. Good morning, and welcome, everyone, to Alcentra Capital Corporation's Fourth Quarter 2018 Earnings Call. I'm joined this morning by Vijay Rajguru, Chairman of Alcentra Capital Corporation and Global Chief Investment Officer of the manager, Alcentra. Also joining us today are Suhail Shaikh and Peter Glaser. As we announced in our press release, Suhail has assumed responsibility as Chief Executive Officer from Vijay and Peter has become the sole President of Alcentra Capital Corporation.

Before we begin, please note that this call is being recorded. Replay information is included in our February 15 earnings announcement press release. It will be posted on the Investor Relations section of Alcentra Capital Corporation's website, which can be found at www.alcentracapital.com. Please note that this call is the property of Alcentra Capital Corporation. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's call may include forward-looking statements and projections. We ask that you refer to our filings with the SEC for important factors that may cause actual results to differ materially from those anticipated in any forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our SEC filings, please visit our website or call Investor Relations at (212) 922-8240.

The format for today's call is as follows, Vijay, Suhail and Peter will provide an overall business and portfolio summary, and I will then provide an overview of our results, summarizing the financials followed by a Q&A.

I will now turn it over to Vijay.

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Vijay P. Rajguru, Alcentra Limited - Global Co-­CIO [3]

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Thank you, Ellida. Good morning. Thank you for joining us to discuss our results for the fourth quarter.

Before turning to those results, I'd first like to elaborate on our recent management changes. We're delighted to announce that Suhail has been appointed CEO and Peter as President of ABDC. We believe this is the right time for these appointments as both Suhail and Peter have been instrumental in rotating the legacy assets into our new strategy and in leading the investment team. Moving forward, I will remain Chairman of the Board and will continue to provide strategic direction for ABDC.

In addition to serving as President, Peter will also be taking over as Co-Head of our European Direct Lending effort, where he'll work closely with Suhail, who will continue to lead our direct lending business in the U.S. As mentioned on our previous earnings call, we've been deploying a portion of our European direct lending fund into U.S. dollar-based investments, which are also allocated to ABDC in accordance with the terms of the co-investment exemptive relief that we received from the SEC. The management changes will bring further coordination between our European and U.S. direct lending teams in a way that will accelerate the growth of ABDC's rotation to upper middle market, private equity-backed transactions that'll be deployed in both vehicles.

We've also made significant progress this quarter towards rotating our portfolio into our new strategy and continued to make accretive repurchases of our shares under our buyback program. Specifically, we were able to buy back 411,939 shares in the fourth quarter under our share repurchase program approved by the board in the fourth quarter of 2018. Since the first of 2019, we have brought -- bought back an additional 229,729 shares, and since the beginning of last year, the company has bought back approximately 9.5% of the shares outstanding on January 1, 2018. We will continue to buy back shares until the board authorized amount of $10 million is exhausted. Since the buyback commenced in the fourth quarter of 2018, ABDC has expanded -- expended approximately $4.2 million.

With respect to rotating our portfolio, to which Suhail and Peter will comment in more detail, we have exited approximately $100 million positions and redeployed approximately $70 million into new investments in the fourth quarter and shortly thereafter. These actions have contributed positively to our recent results and have put us on a stronger course of continued success.

Our NAV per share has continued to stabilize, increasing by $0.05 per share since Q3 2018. This improvement, which is partially due to stock buybacks, occurred despite challenges in the broader loan and equity markets in the fourth quarter. And while we recognize it will take time to prudently rotate the portfolio into upper middle market senior-secured loans, we expect our strategy will continue to yield stability.

We are pleased with the growing stability of our NAV but also recognize that our progress may not be linear. We need to continue to be mindful of legacy positions from our prior lower middle market strategy and managing those early positions out of the portfolio as prudently as possible. We will continue to experience volatility in those names, given the size of the businesses and the equity co-investment component of those investments. Our board and management team are acutely focused on narrowing the gap between ABDC's share price and the portfolio net asset value, and I am encouraged by the progress we have made today. We regularly review all options available to us and are highly confident that we will have the right team and strategy in place to maximize shareholder value.

Suhail, Peter and Ellida will take you through some of the highlights of our quarter. Suhail?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [4]

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Thank you, Vijay. Good morning, everyone. I'm pleased to be addressing you in my new role as the Chief Executive Officer of ABDC. As Vijay mentioned, we are very satisfied with the stability of the book and have been working diligently to rotate our legacy assets into upper middle market senior-secured investments. We still have a lot of work ahead of us in rotating the book.

Let me start by sharing some views on the market. The overall leverage lending market experienced significant volatility in the fourth quarter led by concerns of global slowdown and uncertainty regarding Fed policy. Since year-end, technicals have stabilized with lower prices attracting investors to leverage loans, particularly in the quarterly syndicated loan market. In this backdrop, we remained very active in the fourth quarter and shortly thereafter. Given our platform's significant presence in the broadly syndicated loan market, we were able to leverage our insights in expeditious fashion. Based on these insights and our prior experience, we find periods of volatility in the broader liquid loan market to be a healthy environment to deploy capital in our direct lending strategy. We believe fundamentals remain solid, however, we remain cautious in our investment approach. As mentioned in our prior calls, we will continue to focus on businesses with minimum $15 million EBITDA and ones backed by strong private equity sponsorship.

We ended the quarter with $234.8 million in fair value of our investment portfolio with 30 positions, including 20 hedge companies, one broadly syndicated loan and one rated debt security in a CLO. As noted in our quarterly filing, we have since exited all but one of those broadly syndicated loans and CLOs in order to redeploy the capital into one new strategy.

Our NAV per share has improved from $11.08 to $11.13 when factoring in share buybacks during the fourth quarter. Our regulatory debt-to-equity ratio of 0.57x was below our targeted area given timing of deals, which closed in early 2019.

We have made fair value adjustments this quarter to 12 names based on company-specific circumstances, resulting in a slight net increase in unrealized depreciation on investments during the quarter. Most of the downward adjustments to the portfolio were in values to our equity positions based on company-specific issues and equity market-related adjustments.

Write-down in the quarter included Battery Solutions by $1.3 million, Palmetto Moon by $0.3 million, Envocore's equity by $1.3 million, Champion ONE's equity by $0.1 million, IGT's equity by $0.1 million and Metal Power Products' equity by $0.1 million. Our Goldentree Loan CLO debt position is written down by $0.2 million due to the broadly syndicated loan market decline during the quarter.

Writeups were as follows for Q4: Black Diamond by $1.7 million to reflect the final structure of the recapitalization, which launched in December; FST by $1.4 million, based on final proceeds received from the sale of the company; Tunnel Hill by $0.1 million, based on final proceeds received from the sale of the company; and Virence by $0.1 million, based on prepayment fees based as part of refinancing.

The average portfolio investment on a cost basis was $8.7 million and $6.9 million in a fair value basis. Measured on a fair value basis, first lien debt comprised 71.6% of the portfolio, a substantial increase from 62.4% last quarter; the second lien positions at 18.1% versus 16.5% in Q3; and subordinated debt at 0.5% versus 9.5% in Q3. Equity positions comprised approximately 9%, versus 10.8% in Q3, of fair value of the portfolio.

As you see, our portfolio rotation to senior-secured risk continued at a decent pace in Q4. We received proceeds from repayments, loan dispositions and amortizations of approximately $100 million while new investments and add-ons totaled approximately $70 million during the quarter and shortly thereafter. Our weighted average yield stayed consistent with our last quarter at approximately 11%.

We had only one investment on nonaccrual versus 4 in Q3 as we worked through the legacy portfolio. That investment is Southern Technical Institute, which was marked down to 0 on a fair value basis a few quarters ago. We were able to successfully restructure 2 of our legacy assets, Black Diamond and Xpress Global. Both investments have been on our watch list and are nonaccrual as of Q3. In the case of Black Diamond, we agreed to a recapitalization of the business with a sponsor, whereby the sponsor injected fresh capital into the business, and we were able to refinance that paper into a first lien senior-secured tranche paying a coupon of LIBOR + 6.50%. In the case of Xpress Global, the company was sold to Aterian, a private equity firm, as part of a broadly auction sale process. We received value of our -- for our investment in the form of an equity-like instrument as part of that transaction.

In summary, we believe that our continued focus on portfolio rotation should result in long-term value creation for shareholders. Vijay, Peter, Ellida and I remain confident about our abilities to reshape this portfolio and continue to stabilize and grow NAV per share as we use the broader Alcentra platform to benefit ABDC while we remain aware of the challenges of shifting some of these lower middle market positions into more stable investments.

Peter will now take you through some of our portfolio originations and how his new role as Co-Head of European Direct Lending will continue to benefit Alcentra Capital Corporation. Peter?

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Peter Glaser, Alcentra Capital Corporation - President & MD [5]

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Thank you, Suhail. Good morning, everyone. I'm pleased to have recently relocated to London to Co-Head our European Direct Lending business. Our leading EDL platform of approximately EUR 10 billion in AUM is one of the largest in Europe and the U.K. Its significant middle market and sponsor expertise will help us deploy capital for ABDC into what we believe will be attractive investments. I'll take you through some examples of this ability to utilize the broader Alcentra platform and leverage our global credit expertise on behalf of the BDC shareholders.

On the origination front, we continue to be active and use Alcentra's broader platform to benefit ABDC, as both Vijay and Suhail mentioned. In fact, most of the recent new originations in Alcentra Capital Corp. were a result of a coordinated effort using the European direct lending fund to invest in tranches where Alcentra can have substantial voting control in that tranche.

For example, some of the new investments that were made during the quarter and subsequently include the following: Clanwilliam is a $6.3 million investment in a unitranche loan that refinanced the existing capital structure of an Irish software company in the healthcare sector. The Clanwilliam transaction was led by our European direct lending team, and ABDC was offered to participate in the transaction in accordance with the terms of our SEC co-investment exemptive relief.

Another example is Sandvine. Sandvine was a $4.5 million investment in the second lien of a Francisco Partners' portfolio company. We announced Sandvine as a subsequent event in Q3 as well. Our European fund made a large investment in the security, allowing us to be relevant to the borrower and secure a co-investment position for ABDC, consistent with its available capital. In addition, our CLOs participated in the broadly syndicated first-lien loan.

WeddingWire, a $4.95 million investment in the second lien is in a Permira portfolio company. The second lien was part of a transaction to acquire XO Group, a public company that manages The Knot, which is a wedding planning site. Similar to Sandvine, Alcentra's European fund made a significant investment in the security, thereby providing ABDC with the opportunity to take a small investment in the company. Our CLOs, again, also participated in the broadly syndicated first lien.

Another example of CLO. CLO is a $9.8 million investment in a unitranche loan to support Permira's acquisition of a recruiting outsourcing business. Again, our European fund co-invested in the tranche, alongside ABDC, in this one as well. Cambium, another one, $3.8 million in the first lien and $4.7 million in the second lien in a take-private transaction by Veritas Capital of an education software business. Our European fund and other funds managed by Alcentra invested alongside the BDC in this investment. These names that I've gone through, Clanwilliam, Sandvine, WeddingWire, CLO and Cambium are all examples of transactions that allow ABDC to benefit from the strength of the broader global Alcentra platform.

Other new investments during the quarter include Impact Group, a $19.9 million investment in a unitranche transaction. $12.9 million was announced as a subsequent event at the end of Q3 of that $19.9 million. Impact is a CI capital portfolio company in the sales and marketing sector. And finally, Aegis is a $2.4 million investment in the first lien term loan of an Abry Partners portfolio company. This was a secondary purchase of a transaction that some of our principals had familiarity with from their prior experience.

In summary, we continue to use the broader Alcentra platform to provide for attractive positions for ABDC. I will continue from London to work closely with Suhail from my new role as Co-Head of European Direct Lending and help facilitate such opportunities going forward.

With that, Ellida will now take you through the detail of our Q4 operating results.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, CAO, Treasurer & Secretary [6]

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Thank you, Peter. For the 3 months ended December 31, 2018, total investment income was $7 million, a $1.2 million decrease over the $8.2 million of total investment income for the 3 months ended December 31, 2017. This was due largely to the continued transition of our portfolio into senior-secured loans.

The net management fee of $0.8 million was a decrease of $0.5 million for the 3 months ended December 31, 2017, due to lower average total assets and a temporary 25-basis-point reduction from May 1, 2018, to May 8, 2019. There were no incentive fees earned for this quarter nor the comparable period in 2017, although there was a $0.3 million write-off attributable to a previously earned fee in regards to legacy portfolio companies.

Interest and financing expenses for the 3 months ended December 31, 2018, were $1.8 million, a decrease of $0.3 million from the $2.1 million for the 3 months ended December 31, 2017. Professional fees and other general administrative expenses totaled $1.1 million, an increase of $0.3 million from the 3 months ended December 31, 2017, which was partially attributable to nonrecurring consulting fees. There were no consulting fees for the similar period in 2017. Net expenses after the waiver of management fees for the amended advisory agreement were $3.3 million, which was an increase of $0.9 million from the 3 months ended December 31, 2017.

Net investment income for the 3 months ended December 31, 2018, was $3.7 million, a decrease of $0.4 million from the prior year. The net realized loss this quarter from portfolio investments was $15 million, and the net change in unrealized appreciation from portfolio investments was $12.5 million due largely to the reversal of the unrealized loss for Show Media, Southern Technical and Xpress Global Systems. As a result of these events, our net increase in net assets resulting from operations during the 3 months ended December 31, 2018, was $1.1 million. As of December 31, 2018, Alcentra had $11 million in cash and $55 million outstanding under the -- I'm sorry, of the InterNotes and $28.5 million outstanding under the credit facility.

I'd now like to turn the call back over to Vijay.

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Vijay P. Rajguru, Alcentra Limited - Global Co-­CIO [7]

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Thanks, Ellida. Before we begin our Q&A, I want to reiterate that while we have work to do to execute our plan, we're confident we're on the best path to maximize shareholder value. We have a very strong team in place, both in terms of management and the board, and look forward to making continued progress against our plan over the coming quarters.

We'd now like to open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Leslie Vandegrift with Raymond James.

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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I just have a couple modeling questions for you on the portfolio questions. On Black Diamond, you mentioned the restructure in the quarter. And in the notes, it discusses a $2.8559 residual cost that's rolling off in the quarter. Can you give more detail on that restructure and then that residual cost? What's going on there?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [3]

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Yes. Let me take the first part of that question, and Ellida will handle the second. Restructuring was -- I think as we have mentioned to you at the end of the third quarter, we were in dialogue with the sponsor to recapitalize the business. And that process concluded in December, whereby the sponsor was able to inject fresh capital into the business. Our security going into that restructuring was a junior security. We were able to restructure into a first lien senior-secured dollar one best position. We went from being a non-accrual to our current base structure, paying LIBOR + 650 basis points on this paper and with ample liquidity to see the businesses execute on its plan. So we're pretty pleased with the way -- outcome of that restructuring and the way it happened. And some of the gain associated with that was largely a function of sort of where we had the paper mark at the end of Q3 and we ended up doing better than that, in the actual restructuring.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, CAO, Treasurer & Secretary [4]

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And that's the footnote to that extent, Leslie, is that the -- it was an accreted cost that we ended up using as a value to restructure it, which was a little -- which was different than what we had marked it out at fair value. So that's kind of the residual from the old tranche that the footnote is referring to.

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [5]

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Okay. And then on Cambium, you discussed the broadly syndicated loans, and they're rolling off quickly as you transition into different -- more senior-secured loans, like you did this quarter. So Cambium is a new investment. You did the second lien as well. What should we expect for the duration of that investment, given that it's another broadly syndicated?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [6]

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Yes. So Cambium was part of an investment thesis that we had, where we took a strip of the first and the second lien. And I think as I mentioned in my remarks, that was one of those situations where we were tracking a loan in the broadly syndicated market and took advantage of the dislocation in the marketplace, and we were able to pick that up at a very attractive yield at a price substantially below par. So we felt like between that and the gravity negotiated transaction that we entered into to buy the second lien, we stripped our investment for the BDC in the first and the second lien. And so that's on the side. And as far as the refinancing of that first lien, our view is that that's a buy-and-hold strategy for us. But as you probably are well aware, that first lien loans in a broadly syndicated market tend to refinance at a much faster pace than privately held loans.

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [7]

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Okay. And then my last question onto the equities, Envocore and Battery Solutions, those were the big movers on the equity side that I saw. Was there any specific news for either of these companies that led to those markdowns?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [8]

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Yes, both of them are on our watch list. Companies have, for a variety of reasons -- let's take Battery Solutions first. It has some issues, weather-related issues on delay on shipments, et cetera, which caused some earnings softness, which we had to take into account. In the case of Envocore, there was some other -- they missed their earnings for a variety of reasons in the company. While missing earnings, both are on watch list, and we're working very aggressively and very closely with the management and sponsors to monitor those situations on an ongoing basis.

I don't think -- and so what you see in terms of marks are really a reflection of what -- both the equity multiples are coming down in some respect. And then earnings missed based on what we had expected the numbers to pan out at the end of the quarter.

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Operator [9]

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And our next question comes from Robert Dodd with Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

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We just tackled different topics. On the discussion, Peter, with we're either having some European domiciled assets -- obviously, the Irish software business, for example. I mean, can you give us any color on where you would like that to go as a percentage of the portfolio? Obviously, the presentation non-U. S. domiciled assets look to be average 13% right now. That includes Goldentree though and some other things, I think. And the cap's at 30 on normal qualified as a percentage of assets. I mean, can -- what's the overall plan for those kind of other types of investment, same kind of style but different domicile, where it does look like they'll maybe have more of an edge in that, given the size of the Alcentra platform in Europe?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [11]

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Peter, you want to -- so just to -- one thing to note, Robert, is that, that 13%, the largest portion of that is really a Canadian investment in a company called Carlton and then obviously, Clanwilliam and then the CLO debt that you mentioned. So -- and then I'll give you overall, and then Peter jump in. Our view and that part of this whole sort of ability to globalize our business on the direct lending side and then -- and the shift towards management changes is really driven by this ability for us to use all our resources to bear within Alcentra. To the extent we see great opportunities coming out of Europe, we obviously have up to 30% of the asset pool to deploy in those opportunities and we'll continue to do that. Peter, I'll let you sort of fill in as you're seeing the opportunities as well.

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Peter Glaser, Alcentra Capital Corporation - President & MD [12]

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Yes. Look, I think that's absolutely right. I mean, we're clearly mindful of and constrained by the 30% bucket. The way we view the U.K. and European-domiciled businesses is are they attractive, do they fit what the BDC is trying to accomplish. And that -- there a number of factors around that. And then ultimately, the BDC obviously has -- in the U.S., has its own IC process. So it has to pass muster that way regardless of the views of a particular credit in Europe, and so it becomes very opportunistic. And when it's good risk/return and that happens to be domiciled in Ireland or England or elsewhere, the BDC will consider it. I don't think there are any specific targets beyond that except for attractive risk/return investments, all things considered. I think where you'll see more dollars put to work on behalf of the BDC by virtue of the European platform is that list that I mentioned, where we were able to get allocations because we were larger investors by using the European fund. Obviously, the Clanwilliam investment this past quarter was just over $6 million. And if you look at the aggregate of those other investments that I mentioned, it's something much closer to something like $20 million. And I think that's what you should expect to see potentially more of because those are U.S.-domiciled businesses, where we can be a major player in a tranche of a capital structure by virtue of the fact that we can combine together both our European fund that has a U.S. allocation as well as the capital from the BDC.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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Okay, got it. I appreciate that color. One more, if I can, on the portfolio repositioning overall, which I realize it takes time. Your portfolio has shrunk over the course of the last year, the number of investments, down from 37 to 30. Your base management fee or the waiver is it goes back up to effectively 1.25, right now, the 1.5 at end of April, if I remember right. How -- do you believe the portfolio is going to be sufficiently repositioned and of size, such that, that still is a base management fee where the dividend can be earned?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [14]

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Two -- let me break that question down into 2 pieces. First, just some high-level numbers. I think that 50% of our portfolio currently on fair value basis is what we deem to be legacy assets. 20 percentage points out of those, that 50%, are roughly on names that we actually like and are high-performing quality names that we'd like to keep in the portfolio. Another 9% is our equity positions, which frankly, we'd like to rotate out. But in most cases, we're a minority equity holder and so we don't drive the bus, if you will, on those decisions. And that 9% will then redeploy into more income-earning assets. And then the other sort of roughly 20% are in names where we are focused, very, very laser focused in trying to rotate out into this upper middle market higher-earning type of investments. So hard for us to say exactly how the portfolio rotates and how quickly it rotates, but I think our goal is also to increase the size and basically grow the portfolio as we get to the next several quarters. And some of it is just going to be through the capital that we are going to free up from legacy assets, some of it is going to be from, to your point, shrinkage being robust and us going back into a steady mode.

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Operator [15]

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And our next question comes from Chris Kotowski with Oppenheimer.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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Most of my questions have been asked. But I was just wondering, in the new investments that you went through, most of them were in the kind of smallish, $4 million to $6 million, size. But then Impact is a $20 million credit, almost 14% of net assets. And kind of what size positions should we be expecting in the BDC? And Impact looks like a particularly large credit and I was wondering why there's so much with that one.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [17]

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Yes -- no, good question, Chris. So in fact, with the unique situation, we have the ability to enter into a club with existing lenders. And frankly, the way that transaction came about was sort of an all or nothing. And so we like the underlying trend of that business, we like the underlying sort of quality and so we took a slightly outsize position in it. With respect to sort of our philosophy, I think we're trying to keep everything sub-5%, so you're spot on. And sort of the 4% is sort of where we'd like to see our positions, generally, and that's where we're going to target. And frankly, we -- besides, in fact, we have some legacy positions that are in that zip code as well of 14% to 15% with -- we're looking to try and lessen, if you will, or decrease the size of.

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Operator [18]

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(Operator Instructions) Our next question comes from Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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Just had one question, kind of a broader question on your strategy. So if I look at this quarter, you guys -- the way the average EBITDA grew pretty significantly for about $24 million from about $16 million last quarter, I know you guys are focusing on rotating the portfolio into more of an upper middle market strategy. I just wanted you guys to define -- because everybody sort of has different definitions of middle market. Can you kind of define what the upper middle market means to you all? So that's going to be kind of your focus going forward. As well as can you talk about why you view that as a more compelling opportunity and where you guys believe you have a competitive advantage in that space versus other direct lenders?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [20]

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Sure. Great question, Ryan. So we define upper middle market as sort of $15 million to $75 million of EBITDA. And -- I mean, that's sort of the broad range right now. But I think our view is that as you get to businesses that are in the $30 million, $40 million of EBITDA, they tend to have more staying power, there's reason for them to exist and they tend to have better sort of visibility in their earnings. They also tend to be capitalized by larger sponsors with substantial amount of private equity backing behind them, and so we like all of those features. And, frankly, from our strength of Alcentra's platform, really, resides in that area as well. As Peter mentioned, we're one of the largest direct lenders in Europe. That's been our focus, has been on -- focused on targeting upper middle market and deals by and large. And most of our sourcing capabilities come from that sort of pool of deals. So we think that we're well positioned for that sector. And I think in terms of how we compete, Peter alluded to this. I think we provide a solution between our ability to write sizable checks of $30 million to $50-plus million per tranche today between our various pools of direct lending capital for U.S. dollar-based investments. That number will grow as we raise other capital around the BDC. And in addition to that, where there is a liquid credit portion attached to that deal, our liquid credit teams and CLO funds also participate on those deals. So you're really going to the sponsors with a pretty holistic sort of solution. And that gives us a little bit of an edge relative to some of our competitors.

And then I think the final point is that we're all sitting here late in the credit cycle. So like -- our view is that being associated with these larger companies with larger sponsors that have the ability to write a check, should things start to get a little bumpy along the way, that's a much better place to be than being associated with smaller, low middle market companies with sponsors in many cases that don't have the ability to write large checks out of their part.

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Operator [21]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Vijay Rajguru for any closing remarks.

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Vijay P. Rajguru, Alcentra Limited - Global Co-­CIO [22]

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Thank you, Joelle, and thank you all for joining our call. We are here if you have any further questions, or as you go through our earnings statement, if you've got any more questions, reach out to any 4 of us and we'll make sure we are available to answer your questions.

And with that, thank you very much for taking the time to join us on this call.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [23]

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Thank you.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, CAO, Treasurer & Secretary [24]

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Thank you.

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Operator [25]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.