U.S. Markets open in 3 hrs 38 mins

Edited Transcript of MDLY earnings conference call or presentation 16-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Medley Management Inc Earnings Call

New York Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Medley Management Inc earnings conference call or presentation Thursday, March 16, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Sam Anderson

Medley Management Inc. - Senior Managing Director, Head of Capital Markets & Risk Management

* Brook Taube

Medley Management Inc. - Co-CEO & Chairman

* Rick Allorto

Medley Management Inc. - CFO & Secretary

================================================================================

Conference Call Participants

================================================================================

* Craig Siegenthaler

Credit Suisse - Analyst

* Mickey Schleien

Ladenburg Thalmann & Company Inc. - Analyst

* Ann Dai

Keefe, Bruyette & Woods, Inc. - Analyst

* Casey Alexander

Compass Point Research & Trading - Analyst

* Christopher Nolan

FBR & Company - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome and thank you for joining Medley Management Inc.'s fourth-quarter 2016 conference call.

I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Medley Management Inc. and that any unauthorized broadcast of this call in any form is strict prohibited. Audio replay of the call will be available by using the telephone numbers PIN provided in the Company's earnings press release.

(Operator Instructions)

Now I would like to have the call over to Sam Anderson, Medley's Head of Capital Markets and Risk Management who will host this morning's conference call. Mr. Anderson, you may begin.

--------------------------------------------------------------------------------

Sam Anderson, Medley Management Inc. - Senior Managing Director, Head of Capital Markets & Risk Management [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone, and thank you for joining us today for Medley Management's fourth-quarter 2016 conference call. I'm joined today by Rick Allorto and Brook Taube, our CEO and CFO.

Before we begin today I want to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information and today's conference call may include forward-looking statements and projections which are subject to risks and uncertainties. Any statement other than a statement of historical fact may constitute a forward-looking statement.

Please note that the Company's ex-results could differ materially from those expressed by any forward-looking statements for any reason such as those disclosed by our most recent filings with the SEC. We do not undertake to update our forward-looking statements unless required by law.

During this conference call we will refer to certain non-GAAP financial measures including fee earning assets under management, pre-tax core net income and core net income per share. We use these as measures of our operating performance, not as a measure of liquidity. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles.

In addition, these measures may not be comparable to similarly titled measures used by other companies. Please refer to our earnings press release and our Form 10-K for definitions and reconciliations of those measures to the most recent directly comparable GAAP measure.

We have posted our fourth-quarter 2016 investor presentation which is available in our investor relations section of the Company's website at www.mdly.com.

I would now like to turn the call over to Brook.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [3]

--------------------------------------------------------------------------------

Thanks, Sam, and welcome everybody to our fourth-quarter call. 2016 was another year of solid growth for us at Medley. Our total AUM passed through $5 billion and ended the year at $5.3 billion which was an increase of over 6% versus the prior quarter.

At the end of the year, our fee earning assets under management was $3.2 billion. We continue to have substantial dry powder which we expect will drive both the revenue and earnings growth in the quarters and years ahead.

Over the past year importantly we have diversified our alternative asset management platform and today at Medley we have five investing disciplines supported by over 45 investment professionals. Direct lending remains our largest business and it's focused on lending to borrowers in the US middle-market. In this business we are generally in a bilateral relationship with the borrower and also the agent on the investment.

Our second largest business, which expanded significantly in 2016, is our corporate credit business. Here we invest in partnership with other credit providers and are typically not the agent, nor do we hold the majority of the loan. This discipline typically involves larger borrowers and, therefore, larger overall facility sizes than those loans in our direct lending business.

The third business today at Medley is our tactical opportunities business. Here we provide flexible capital and may invest in various parts of the capital structure. Our pipeline here is strong and we expect to grow this business in 2017 and after.

The fourth business is our structured credit business. As we have spoken about this business includes Medley Credit Opportunity Fund which is our institutional CLO opportunity fund and will include a retail product in the future. We have also established our first managed account for an institutional partner targeting this strategy which has begun investing.

And, finally, our fifth investing team here is our liquid income securities group. And this team is responsible today for Sierra Total Return Fund, our first interval fund, which launched and we expect will begin raising capital in the second quarter.

On balance the investing teams and broadening product offering positions us well as we look to grow the business for the next phase of growth at Medley.

Turning now to a quick update on the past quarter, last night we announced our financial results ending 12/31 and we reported core net income of $0.14. On February 9, our Board of Directors approved a dividend of $0.20 per share that was paid on March 6 to shareholders of record on February 23.

During the quarter we issued an additional $28.6 million of 10-year unsecured notes. That brought the total of our 10-year unsecured notes to $53.6 million.

Following the end of the year we issued 69 million in seven-year unsecured notes and the net proceeds from these offerings were used to fully repay the outstanding balance on our term loan and provide additional cash to support growth in our business. These public debt offerings allowed us to extend the maturity, term out and fix the rate on our debt, all with new unsecured borrowings. At this point our balance sheet is in very strong position to support our growth in the years ahead.

Overall at the firm we remain focused on building the business around the combination of permanent capital, long dated private funds and separately managed accounts. Sitting here today we see significant demand, continued demand for our yield solutions from both the institutional market as well as our growing retail market presence.

I will turn now to give you a quick update on the institutional side of the business. As we mentioned on our last call, during the fourth calendar quarter we were selected to manage nearly $500 million of new capital for new institutional investors. Our total capital raise then on our institutional side now exceeds over $1.3 billion looking back in the last 15 months.

On the retail side our Sierra brand remains a leader in the retail channel and we continue to expand the Sierra product offerings. Sierra Income Corporation, our first retail offering, continues to raise capital on a daily basis and remains a top performer among its peer group. At Sierra Income Corporation we are now approaching nearly $1 billion of gross equity raised since inception.

Turning now to Sierra Total Return Fund, I'm pleased to report that we've had several significant developments. During the fourth quarter we were declared effective by the SEC and in February we formally launched the fund. Today we are in the early stages of executing selling agreements with broker-dealers and we anticipate selling shares beginning in the second quarter.

And, finally, I'd like to reiterate that we are also on file with our third Sierra-branded product. This is called Sierra Opportunity Fund which we expect to launch in the latter half of this year or at the latest early 2018. And these products expansions are important steps as we continue to diversify the asset management platform here at Medley.

I'd like to turn the call now over to Rick to give you a brief update on the financials for the quarter.

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [4]

--------------------------------------------------------------------------------

Thank you, Brook. Our results from operations for the three months ended December 31, 2016 were as follows.

Total revenues increased by $2.3 million to $18.3 million compared to $16 million for the same period in 2015. This increase was due primarily to an accrual of performance fees for the three months ended December 31, 2016 compared to a reversal of performance fees for the same period in 2015. This was partially offset by a decrease in management fees.

Management fees decreased by 20% or $3.8 million to $15.3 million compared to the same period in 2015. Total expenses decreased by $661,000 to $9.2 million compared to $9.8 million for the same period in 2015. Pre-tax core net income of $7.4 million was consistent with the same period in 2015 and core net income per share was $0.14 for the three months ended December 31, 2016 and the three months ended December 31, 2015.

Core EBITDA increased by $232,000 to $9.8 million compared to $9.6 million for the same period in 2015. Our results from operations for the full year ended December 31, 2016 were as follows. Total revenues increased by $8.6 million to $76 million compared to $67.4 million in 2015. This increase was due primarily to an accrual of performance fees during 2016 compared to a reversal of performance fees in 2015 which was partially offset by a decrease in management fees.

Management fees decreased by 13% or $10.2 million to $65.5 billion compared to 2015. Total expenses increased by $20.5 million to $56 million compared to $35.6 million in 2015. The increase was due primarily to increases in performance compensation and higher expenses under our expense support agreement with one of our funds.

Pre-tax core net income decreased by $3.8 million to $29 million compared to $32.8 million for 2015. Core net income per share was $0.54 during 2016 versus $0.61 during 2015. Core EBITDA decreased by $3.2 million to $38.5 million compared to $41.7 million in 2015.

That concludes my financial review. I will now turn the call back over to Brook.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [5]

--------------------------------------------------------------------------------

Thanks, Rick. Thank you all for joining today.

Obviously, 2016 was an exciting year for all of us at Medley. The team continues to grow. We are expanding the product offerings, we passed through $5 billion of AUM and we are all looking forward to delivering some continued good news in the quarters and years ahead.

We can open the call now for questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Craig Siegenthaler, Credit Suisse.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [2]

--------------------------------------------------------------------------------

Thanks, good morning everyone. So we have seen a lot of capital entering the direct origination space since 2012. Is the market becoming too competitive now? And also how you continue to generate healthy IRRs with low downside risk given the increasing competition today?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [3]

--------------------------------------------------------------------------------

That's a good question, Craig. Thanks. I will answer it in two parts.

First, obviously, we are expanding, have expanded the mandates, investing mandates in Medley. So direct lending is an important part, but it's not the only thing. And we've, obviously, positioned the products and distribution to allow us to be broader than direct lending.

As it relates to the middle market, there's a couple of things going on. Clearly there's more competition. That's largely driven by the opportunity.

It remains attractive, especially on a relative value basis. So we've seen spreads tighten in the liquid markets. That is not where we are active. In the middle market it tends to be less sticky.

There's also two other factors we've witnessed. The largest players are migrating to even larger deals.

To give you some color, if you had $20 billion, $30 billion, $40 billion under management you simply have to do larger deals and we've witnessed that. So there is a scaling that's going on which is exactly the dynamic that you are questioning.

Secondly, given the challenges of getting to retail and institutional capital, the smaller players don't appear to be scaling as quickly to fill that void. Our view is where we are positioned with the portion of our business the focus is on this that we can generate enough disciplined origination to continue to deliver attractive risk-adjusted returns on the credit side.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [4]

--------------------------------------------------------------------------------

Thanks. Just as a follow-up, can you give us an update on the CLO opportunities fund? I am wondering where is AUM today and how quickly could this fund ramp?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [5]

--------------------------------------------------------------------------------

I think as I mentioned in the last call we had a target first closing of $100 million. We did add a managed account, which is beginning to invest. We expect that the total investment there in the next quarter or two will meet that $100 million level.

We have also begun exploring distribution partnerships and strategic partnerships with larger balance sheets to scale that. I will also comment that we are in active discussions with a very senior executive to join to continue and drive that business growth.

So we will have an update on that business in the next quarter. It's a high priority and a big opportunity.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [6]

--------------------------------------------------------------------------------

Thanks for taking my questions.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg.

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg Thalmann & Company Inc. - Analyst [8]

--------------------------------------------------------------------------------

Good morning, Brook and Rick. My first question relates to demand by the retail community. I'm curious about now that the Fed has raised rates a few times, are you seeing any change in the retail brokerage community's view of the risk-reward balance for alternative investments?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [9]

--------------------------------------------------------------------------------

The short answer, Mickey, is not yet. That has not been a topic or a priority conversation. We think time will tell.

The large part of our retail distribution is delivering LIBOR-based return streams which should benefit over time. So we are watching it carefully, and we will see what happens. But there's nothing specific to comment on today with respect to the question.

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg Thalmann & Company Inc. - Analyst [10]

--------------------------------------------------------------------------------

Okay. Bigger picture question, Brook.

Now that it's a little clearer what the new administration's priorities are going to be and the Fed has tightened a few times, I'm interested in understanding whether that has affected your investment thesis in terms of where on the capital stack you are most comfortable as well as the average EBITDA the companies are most interested in?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [11]

--------------------------------------------------------------------------------

Sure. We don't have a specific comment on the impact of the administration and changes that might ensue. I think generally if we see positive measures with respect to taxes capital spending and the normal healthcare, otherwise that all to be on the margin beneficial for corporates.

Looking at our business today, the core middle market strategy, which is the direct lending, lends to borrowers that are between, say, $10 million and $30 million and our corporate credit business invests $30 million and above. That's not a hard and fast line, but to give you a framework.

We are still seeing relative value in the middle market. The corporate credit markets are getting a little bit more permissive and aggressive. So we are keeping our eye on it.

But we are not trying to move billions and billions and billions of capital into the market. So sitting here today we still find it attractive. The themes that we are talking about with our partners, institutional and retail, are the following: floating rate exposures, senior exposures, covenants, diversification.

Those are the themes. And I think we will stick with that given where we are and our view on the cycle.

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg Thalmann & Company Inc. - Analyst [12]

--------------------------------------------------------------------------------

Are there sectors perhaps that you are less interested now? For example, perhaps you could, we could argue that there's more risk now in healthcare which is, obviously, a large consumer of capital given the uncertainty regarding changes in the Affordable Care Act.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [13]

--------------------------------------------------------------------------------

Sure. We've said many times our strategy is one of diversification. So rather than selecting sectors or industries we tend to look at all.

On the margin your point is very well taken. I think being selective in how you position risk in the healthcare sector is something that needs to be carefully done. But there still ought to be opportunities. It's a big part of the economy and there's many high-quality companies.

Second, just as an example, storefront retail, consumer exposures, probably not on the hit list today. So we are looking carefully at the same trends that most people have. And our business still when all is said and done is a bottoms-up fundamental investment by investment decision.

And I think the secure floating-rate covenants diversified still rule the day first. But, of course, we are paying careful attention in many sectors to do, to avoid any potential issues.

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg Thalmann & Company Inc. - Analyst [14]

--------------------------------------------------------------------------------

Okay, one last modeling question maybe for Rick. If my numbers are correct, there was a pretty meaningful drop in G&A from the third quarter in the fourth quarter. Was that due to the Sierra relationship or was there something else going on there?

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [15]

--------------------------------------------------------------------------------

Yes, Mickey, that was due to the expense support agreement with Sierra. That was not renewed for that fourth quarter and there was no expense support provided during the fourth quarter.

--------------------------------------------------------------------------------

Mickey Schleien, Ladenburg Thalmann & Company Inc. - Analyst [16]

--------------------------------------------------------------------------------

Okay, I appreciate that. Those are all my questions. Thank you very much.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Ann Dai, KBW.

--------------------------------------------------------------------------------

Ann Dai, Keefe, Bruyette & Woods, Inc. - Analyst [18]

--------------------------------------------------------------------------------

Thanks, good morning. I wanted to go back to the discussion around direct lending.

So it does feel like the pace of capital deployment finally picked up a little bit this quarter, but generally this year has been a lot slower than I think I would have imagined. So can you just help me square that trend with your commentary around the opportunity for direct lending still being very good and give us a sense of what your view is of the current investment landscape?

For instance, is this quarter's activity a good run rate? Can you accelerate from here, things like that?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [19]

--------------------------------------------------------------------------------

Thanks, Ann. Well, the big driver of slower net growth in assets this past year was refi. The level, and just using the public markets at a proxy timing, there was, (inaudible) were 10% of the market refinanced to lower spread.

So as we looked at the affected had not as dramatic but certainly impacted the middle market when we got a refinanced instead of putting it back out we kept the origination constant. So I think the net growth would have been higher if we didn't have the increase in refinancing. Our expectation now is that that is going to slow.

Any quarter over quarter is really deal dependent. So I wouldn't want to say that it's going to pick up or stabilize at this quarterly run rate, but we clearly would expect fee earning assets to be significantly higher by year-end. That will be driven by the deal side of the business but also by these other important investing disciplines that we are scaling.

--------------------------------------------------------------------------------

Ann Dai, Keefe, Bruyette & Woods, Inc. - Analyst [20]

--------------------------------------------------------------------------------

Okay, that's good color. Are there in your separate accounts any provisions around how quickly you have to put some of this dry powder to work?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [21]

--------------------------------------------------------------------------------

No. In fact, on balance the relationships are expanding. The need for yield is rising.

The normal and customary investing framework which we, and risk disciplines we apply which relates to deal size diversification, those are more likely to be barometers on the growth than any specified pace, fast or slow. We would expect to continue to put those out consistently this year and add to them.

--------------------------------------------------------------------------------

Ann Dai, Keefe, Bruyette & Woods, Inc. - Analyst [22]

--------------------------------------------------------------------------------

Great, thanks. And last question for me, DSA wasn't renewed for Sierra Income, but can you remind us is there the expense support agreement in place for Sierra Total Return and is that similar to what you had for Sierra Income?

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [23]

--------------------------------------------------------------------------------

Ann, this is Rick. We do have a similar agreement in place for Sierra Total Return. But there is -- there are some distinctions to it and it's more of an expense limitation agreement and not tied directly to the distribution of which Sierra Income Corp. was tied more to the distribution.

--------------------------------------------------------------------------------

Ann Dai, Keefe, Bruyette & Woods, Inc. - Analyst [24]

--------------------------------------------------------------------------------

Terrific. Thank you.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [25]

--------------------------------------------------------------------------------

I would also just add to that, we don't expect that to have anywhere near the magnitude that it was for Sierra Income Corp.

--------------------------------------------------------------------------------

Ann Dai, Keefe, Bruyette & Woods, Inc. - Analyst [26]

--------------------------------------------------------------------------------

Okay, noted.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Casey Alexander, Compass Point.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [28]

--------------------------------------------------------------------------------

Hi, good morning. Rick, this is for you. Since the support, expense support agreement has expired, would you call the fourth-quarter run rate for expenses to be a reasonable level looking forward into 2017?

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [30]

--------------------------------------------------------------------------------

Okay, great. Secondly, I noticed, obviously, the big drop in reimbursable fund expenses. Has the clock run out on that and, therefore, we should also look for not significant amounts of reimbursable fund expenses as we go into 2017?

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [31]

--------------------------------------------------------------------------------

Casey, no, the clock did not run out on the reimbursement. And as far as future reimbursement it will be driven by the underlying performance at Sierra.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [32]

--------------------------------------------------------------------------------

Okay. How would you suggest that we model that then? I mean it's sort of a number that moves a lot. I'm not quite sure how you suggest that we model that.

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [33]

--------------------------------------------------------------------------------

It's a good question, Casey. And definitely agree it's difficult to model. Based upon, I mean the best advice is based upon the historical trends and activity of Sierra over the past five years.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [34]

--------------------------------------------------------------------------------

Okay. Secondly, do you see, I mean, we see that the management fees were impacted by lower incentive fees from the permanent capital vehicles. Again, do you expect that trend to also continue into 2017 or do you expect some recovery in that line?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [35]

--------------------------------------------------------------------------------

Casey, I will take that. I think it's too early to predict. What we said specifically on MCC call was that our intention is to stabilize the specifically certain assets over the course of 2017.

So it's probably a little premature to begin to predict. But we will certainly keep everybody posted. And, again, at some point you do turn the corner, (multiple speakers) on that.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [36]

--------------------------------------------------------------------------------

All right. And lastly, how do you see, how do you differentiate between the potential deployments on the institutional platform versus deployments on the retail platform as you look out into 2017? Is there a contoured difference between the types of commitments that you are looking to make, and is there one where you would expect to maybe potentially grow fee earning assets under management more than another?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [37]

--------------------------------------------------------------------------------

Let me answer it this way. We would expect consistent increase in the institutional accounts fee earning AUM. If you think about the retail side it largely will be driven by the growth, which I think is hard to predict.

Obviously, we expect to grow. We have the intention to expand, but it's really not related to decisions on how to position risk for what we see is available. I think it's a little bit different, and I would say if we experience the growth we expect in Sierra channels it might look the same.

--------------------------------------------------------------------------------

Casey Alexander, Compass Point Research & Trading - Analyst [38]

--------------------------------------------------------------------------------

Okay, I got it. Thank you for taking my questions.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions) Christopher Nolan, FBR & Co.

--------------------------------------------------------------------------------

Christopher Nolan, FBR & Company - Analyst [40]

--------------------------------------------------------------------------------

Hi, thanks for taking my questions. It seems like fee earning asset AUM growth for Sierra Income Corp. was flat third quarter to fourth quarter. Is that related to the expiration, the expense support agreement, was it related to waiting for the fiduciary rule date? Just trying to get a little color around that please.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [41]

--------------------------------------------------------------------------------

Sure, Chris. I think at a high level sales were lower. That's primarily any given quarter with some repayments and reinvestments, it wouldn't be surprised to have it be flattish with those significant sales.

So we will see what the effect is on sales growth. But if sales pick up we would expect the AUM to follow suit.

--------------------------------------------------------------------------------

Christopher Nolan, FBR & Company - Analyst [42]

--------------------------------------------------------------------------------

Okay, and then on the $500 million in institutional capital that you mentioned earlier in your prepared remarks, which vehicle do you think that will go for? Will it go for one of the permanent capital vehicles or will it go for one of the managed funds or?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [43]

--------------------------------------------------------------------------------

The bulk of it is a managed account. And that's with a large insurance company. And the balance is for our CLO opportunity business.

--------------------------------------------------------------------------------

Christopher Nolan, FBR & Company - Analyst [44]

--------------------------------------------------------------------------------

Okay. And then the Sierra Total Return fund, you indicated that it will start raising capital in the second quarter. Is that correct?

And should we expect -- and that has roughly 150 bps. What sort of growth are you anticipating in the second half of the year for that product?

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [45]

--------------------------------------------------------------------------------

Very good question and we ask ourselves that a lot. We are seeing significant positive absorption by interval funds and even the press and peers are picking up on the product as a high-quality way to deliver alternative assets to retail. So that's the general backdrop, positive, favorable.

If you look at our historical experience with Sierra Income Corp. and other products it tends to be a little bit slower (technical difficulty) penetrate and that has to do with messaging, sales, partnerships and then it begins to inflect and it's non-linear at some point. We are looking at ways to accelerate it. But it does take time to get out, get the message out, do the meetings, explain the product and then ramp it.

So it will be accepting capital. We will be making investments, but we'd expect to see an inflection. It's probably not before 2018 we'd see a real inflection, but we are working hard at ways to think about making it faster than that.

--------------------------------------------------------------------------------

Christopher Nolan, FBR & Company - Analyst [46]

--------------------------------------------------------------------------------

Final question. Was the decline in incentive fees only from MCC or was it Sierra, as well?

--------------------------------------------------------------------------------

Rick Allorto, Medley Management Inc. - CFO & Secretary [47]

--------------------------------------------------------------------------------

It was MCC.

--------------------------------------------------------------------------------

Christopher Nolan, FBR & Company - Analyst [48]

--------------------------------------------------------------------------------

Great, thanks Rick. Okay, thanks guys.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

At this time I'm showing no further questions. I'd like to turn the call back over to Mr. Brook Taube for closing remarks.

--------------------------------------------------------------------------------

Brook Taube, Medley Management Inc. - Co-CEO & Chairman [50]

--------------------------------------------------------------------------------

Thank you everyone for joining. We are off to a good start already in 2017.

Appreciate the continued support and look forward to speaking with you on the next call. Thanks very much.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.

You may now disconnect. Everyone have a great day.