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Edited Transcript of NMFC earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 New Mountain Finance Corp Earnings Call

New York Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of New Mountain Finance Corp earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Kline

New Mountain Finance Corporation - President & COO

* Robert A. Hamwee

New Mountain Finance Corporation - CEO & Member of Board of Director

* Shiraz Y. Kajee

New Mountain Finance Corporation

* Steven Bruce Klinsky

New Mountain Finance Corporation - Chairman of the Board

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Conference Call Participants

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* Christoph M. Kotowski

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

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate 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 morning and welcome to the New Mountain Finance Corporation Q2 2019 conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rob Hamwee, CEO of the new New Mountain Corporation -- sorry, Finance Corporation. Please go ahead.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [2]

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Thank you, and good morning, everyone, and welcome to New Mountain Finance Corporation's Second Quarter Earnings Call for 2019. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC. Steve Klinsky is going to make some introductory remarks, but before he does, I'd like to ask Shiraz to make some important statements regarding today's call.

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Shiraz Y. Kajee, New Mountain Finance Corporation [3]

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Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our August 7 earnings press release.

I would also like to call your attention to the customary safe harbor disclosure in our press release and on Page 2 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com.

At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on Page 4 of the slide presentation.

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Steven Bruce Klinsky, New Mountain Finance Corporation - Chairman of the Board [4]

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The team will go through the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended June 30, 2019, was $0.35 per share, once again at the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance's book value was generally unchanged to $13.41 per share, reflecting stable financial market conditions and no material idiosyncratic credit changes. We are also able to announce our regular dividend which, for the 30th straight quarter, will again be $0.34 per share, an annualized yield of approximately 10% based on last Friday's close.

The company had another productive quarter of deal generation, investing $183 million in gross originations versus moderate repayments of $68 million. This continued balance sheet growth was in part funded by our early July equity issuance and keeps us fully levered in our target range. Credit quality remained strong with, once again, no new nonaccruals. I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 10.1 million shares, approximately 12% of total shares outstanding. Finally, the broader New Mountain platform that supports NMFC continues to grow, with over $20 billion of assets under management and over 150 team members. In summary, we are pleased with NMFC's continued performance and progress overall.

With that, let me turn the call back over to Rob Hamwee, NMFC's CEO.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [5]

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Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy. As outlined on Page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. Since the inception of our debt investment program in 2008, we have taken New Mountain's approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well known to New Mountain or, more simply put, we invest in recession-resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk-adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource.

Turning to Page 7. You can see our total return performance from our IPO in May 2011 through August 2, 2019. In the over 8 years since our IPO, we have generated a compounded annual return to our initial public investors of nearly 11%, meaningfully higher than our peers in the high-yield index and approximately 1,000 basis points per annum above relevant risk-free benchmarks.

Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have.

Page 9 shows return attribution. Total cumulative return continues to be largely driven by our cash dividend which, in turn, has been more than 100% covered by net investment income. As the bar on the far right illustrates, over the 8 years we have been public, we have effectively maintained a stable book value, inclusive of special dividends, while generating a 10.3% cash-on-cash return for our shareholders. We attribute our success to, one, our differentiated underwriting platform; two, our ability to consistently generate a vast majority of our NII from stable cash interest income in an amount that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more extensive equity; and four, our alignment of shareholder and management interest.

Our highest priority continues to be our focus on risk control and credit performance, which we believe over time is the single biggest differentiator of total return in the BDC space. Credit performance continues to be strong with no material quarter-over-quarter credit deterioration in any single name. For the fourth consecutive quarter and 9 of the last 10 quarters, we have had no new nonaccruals.

If you refer to Page 10, we once again lay out the cost basis of our investments, both the current portfolio and our cumulative investment since the inception of our credit business in 2008 and then show what has migrated down the performance ladder. Since inception, we have made investments of approximately $6.9 billion in 267 portfolio companies, of which only 8, representing just $125 million of cost, have migrated to nonaccrual, of which only 4, representing $43 million cost, have thus far resulted in realized default losses. Furthermore, effectively 100% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale.

Page 11 shows leverage multiples for all of our holdings over $7.5 million when we entered investment and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric, the asset-by-asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks. As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction with only a few exceptions. Three loans that have had negative migration of 2.5 turns or more are the same 3 names we had discussed in prior quarters. As a reminder, one loan is the previously restructured Edmentum but prospects remain bright. A second loan is an issuer where we believe the likelihood of the payment default is low in light of our recent equity contribution from the sponsor that resulted in a 29% loan pay down. And the third issuer, in early July, completed a process which resulted in a significant equity infusion that meaningfully delevered our position.

The chart on Page 12 helps track the company's overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom of the page, we focus on below the line items. First, we look at realized gains and realized credit and other losses. As you can see looking at the row highlighted in green, we have had success generating real economic gains every year through a combination of equity gains, portfolio company dividend and trading profits. Conversely, realized losses, including default losses highlighted in orange, have generally been smaller and less frequent and show that we are typically not avoiding nonaccruals by selling poor credits at a material loss prior to actual default. As highlighted in blue, we continue to have a net cumulative realized gain, which currently stands at $18 million.

Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $50 million and cumulative net realized and unrealized loss, highlighted in yellow, is at $32 million. The net result of all of this is that in our over 8 years as a public company, we have earned net investment income of $643 million against total cumulative net losses, including unrealized, of only $32 million.

Turning to Page 13. We have seen significant growth in the portfolio over the last year as we have increased our statutory leverage from 0.81 to 1.22, inclusive of our early July equity offering. Consistent with the strategy we articulated when we received shareholder authorization to increase leverage, significantly more than 100% of the growth in assets has come from senior securities through repayments and sales. Nonfirst liens have actually shrunk on an absolute basis by $125 million, while first lien assets have grown by $778 million.

I will now turn the call over to John Kline, NMFC's President, to discuss market conditions and portfolio activity. John?

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John R. Kline, New Mountain Finance Corporation - President & COO [6]

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Thanks, Rob. As outlined on Page 14, middle-market deal flow increased throughout the quarter after a slow start to the year in Q1. Loan spreads in the financing markets continue to be stable at levels that are supportive of our lending strategy. Over the last couple of quarters, we have seen material increases in enterprise value multiples in our core sectors. The highest-quality businesses in the private market currently trade for multiples as high as 15 to 22x EBITDA. Against this backdrop, we have seen some pressure on debt structures. But generally speaking, the sizes of sponsor equity contributions have increased far more than required debt commitments. Overall, there continues to be heavy competition for loans to high-quality businesses, although lenders have shown more caution towards businesses that have exposure to uncertain end markets. Looking forward, new deal flow continues to be very strong as we benefit from both the active financing market and continued momentum with our sponsor clients.

Turning to Page 15. This year, we obtained LIBOR switch from being a tailwind to a headwind. Thus far in 2019, LIBOR declined from 2.8% in early January to 2.2% today. The forward LIBOR curve currently suggests that 3-month LIBOR could decline by 50 to 100 basis points in the coming quarters. As shown on Page 15, if this does occur, NII per share could be pressured by approximately $0.015 to $0.03 per quarter. However, we believe that the current spread environment and increased balance sheet leverage will enable us to successfully address this potential downward trend in the base rate.

Turning to portfolio activity on pages 16 and 17, NMFC had a good quarter with total originations of $183 million, offset by $68 million of portfolio repayments, representing a $115 million expansion of our investment portfolio. Our new investments were highlighted by a number of middle-market club deals within our core verticals, most of which supported new sponsor backed by us. As I touched on earlier, many of these new private transactions are capitalized with meaningfully higher amounts of equity as a percentage of the total purchase price. These purchase multiples, which have steadily increased over the past year, enhance the loan-to-value ratios on our investments, indicate strong sponsor support and validate the attractiveness of the defensive growth niches that we target.

Pages 18 and 19 show our continued origination momentum since the end of the quarter where we have invested $241 million in new transactions with de minimis loan repayments. At least 2 of our new loans are eligible for our SBIC investing program, which we continue to expand. As mentioned earlier, we had seen robust high-quality deal flow in our sponsor finance business. And looking forward, we have a very solid pipeline of new investment opportunities in our core defensive growth verticals.

Turning to Page 20. Our mix of originations continues to skew meaningfully towards first-lien loans, accounting for nearly 75% of total new originations this quarter. 73% of our repayments were second lien loans, and only 27% of repayments were first-lien loans. Overall, our mix continues to shift towards first lien assets, consistent with our stated plan to employ increased portfolio level leverage with a more senior-oriented asset mix.

As shown on Page 21, NMFC's asset level portfolio yield has declined since Q1 from 10% to 9.4%. Approximately 40 basis points of this decline is due to the downward shift in the LIBOR curve, and 20 basis points of the decline is due to the aforementioned shift towards first lien assets. We have offset this decrease in asset level yield primarily through our proactive strategy of increasing portfolio level leverage. While we are mindful of the potential continued decrease in LIBOR, we remain comfortable with our portfolio yield, which solidly supports our quarterly dividends.

The top of Page 22 shows a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the significant diversity within our largest sector. The chart on the bottom left of the page presents our portfolio by asset type where you can see the shift towards first lien-oriented assets that we discussed earlier on the call. The chart on the lower right shows that virtually all of our portfolio is performing broadly in line with expectations, and we have no performing loans that have a substantially elevated risk of nonaccrual.

Finally, as illustrated on Page 23, we have a diversified portfolio with our largest investment at 3% of fair value and the top 15 investments accounting for 36% of fair value.

With that, I will now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements and key financial metrics.

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Shiraz Y. Kajee, New Mountain Finance Corporation [7]

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Thanks, John. For more details on our financial results and today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC.

Now I'd like to turn your attention to Slide 24. The portfolio had approximately $2.7 billion in investments at fair value at June 30, 2019, and total assets of $2.8 billion. We had total liabilities of $1.7 billion, of which total statutory debt outstanding was $1.4 billion, excluding $165 million of drawn SBA guaranteed debentures. Net asset value of $1.1 billion or $13.41 per share was down $0.04 from the prior quarter. Our statutory debt-to-equity ratio was 1.22:1, pro forma for the equity raise we had in early July.

On Slide 25, we show our historical leverage ratios. The step-up in leverage over the past 5 quarters is in line with our current target statutory debt-to-equity ratio. On this slide, we also show our historical NAV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO.

On Slide 26, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. Focusing on the quarter ended June 30, 2019, we had total investment income of $66.5 million, an increase of $2.3 million from the prior quarter primarily due to higher interest income from the increased asset base. Total net expenses of $38.6 million, a $1.9 million increase from the prior quarter, primarily due to additional borrowing costs from our increased debt balance.

As in prior quarters, the investment adviser continues to waive certain management fees. The effective annualized management fee for this quarter was 1.29%. It is important to note that the investment adviser cannot recoup fees previously waived. This results in second quarter NII of $27.9 million or $0.35 per weighted average share, which is at the high end of our guidance, and more than covered our Q2 regular dividend of $0.34 per share. As a result of the net unrealized depreciation in the quarter, for the quarter ended June 30, 2019, we had an increase in net assets resulting from operations of $23.8 million.

Slide 27 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 97% of total investment income is recurring, and cash income remained strong at 87% in this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 28. As briefly discussed earlier, our NII for the second quarter covered our Q2 dividend. Given our believe that our Q3 2019 NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q3 2019 dividend of $0.34 per share, which will be paid on September 27, 2019, to holders of record on September 13, 2019.

On Slide 29, we highlight our various financing sources. Taking into account SBA guaranteed debentures, we had almost $1.9 billion of total borrowing capacity at quarter end. During Q2, we paid down our 2014 convertible notes that came due. This is done by adding one new lender and $45 million of additional capacity to our Wells Fargo credit facility, upsizing our Deutsche Bank credit facility by $50 million and issuing an incremental $86 million of 2018 convertible notes. As a reminder, both our Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than to the marks of our investments at any given time.

Finally, on Slide 30, we show our leverage maturity schedule. As we've diversified our debt issuance, we have been successful at laddering our maturities to better manage liquidity. Importantly, we currently have no near-term maturities.

With that, I would like to turn the call back over to Rob.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [8]

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Thanks, Shiraz. It continues to remain our intention to consistently pay $0.34 per share on a quarterly basis for future quarters so long as NII covers the dividend in line with our current expectations.

In closing, I would just like to say that we continue to be pleased with our performance to date. Most importantly, from a credit perspective, our portfolio overall continues to be quite healthy. Once again, we'd like to thank you for your support and interest.

And at this point, I turn things back to the operator to begin Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Chris Kotowski, Oppenheimer.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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I was just curious, looking at Page 20 of your slide deck, and the originations are primarily first lien and the prepayments are second lien. And it just seems like every BDC we cover says that they're shifting their portfolio mix more towards first lien. And I'm just wondering, are the seconds just not getting done? Or is it a different structure? Or are the seconds just migrating to different kind of vehicle, to mezz funds? Or what is happening in the market there that lets all the BDCs kind of seem to be shifting in the same direction?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [3]

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Yes. So it's a good question. It's a combination of a number of things. And Chris, we are still doing second liens, right? It's just we're doing less relative to what we're doing in the past, and we're sort of matching repayments from second liens to the extent we're doing new second lien. And that could continue to evolve over time. But more fundamentally, I think, number one, as unit tranche has become more popular in the sort of mid-market, upper mid-market, that's just taking share from first lien, second lien. So that decreases the supply of second lien. Two, you have other significant participants, particularly, but we're seeing a lot more of now, our private equity investors and funds, limited partners and funds are taking pieces of sponsor-backed second liens. And three, you are just seeing other nontraditional players participate in the market as well. So there's still a pretty robust second lien market, but it's a combination of those things that's kind of balancing supply and demand there.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay. And I noted also, just for you specifically, I think in the subsequent events section, you said you had roughly $240 million in commitments. Does that pretty much speak for the whole amount of equity that you just raised? Or do you anticipate taking leverage up a little bit more from the 1.22 pro forma that you have here?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [5]

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So it certainly does -- to kind of speak for the equity that we raised, we do have a pretty good visibility of some repayments coming in. So we actually have 6 of our portfolio companies in the last kind of maybe 5 or 6 weeks have announced signed M&A deals that will result in takeouts, so we're also going to be using that in the coming weeks and months as a source of capital to fund the pipeline. So it's always -- we remain -- we retain our current target of 1.2 to 1.3 that we talked about in the past. Obviously, at any moment in time, we may be at 1.18, we may be up 1.36, but we're always moving towards that based on balancing originations, repayments and any equity offerings we did.

I think we always strive, and I think we've been very successful, in never having a significant lag from an equity offering that has any impact on our earnings that's been material.

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Operator [6]

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Your next question comes from Finian O'Shea, Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [7]

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Sorry, I was on mute there for a second. I was excited that someone actually -- it's a rare -- rarely pronounces my name correctly in a traditional way. Just first question on allocation, does the adviser ever retain any form of upfront economics before allocation to New Mountain and other funds?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [8]

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No. That's a hard and very simple no.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [9]

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So do you have a split in terms of how you record or account for upfront fees in terms of below the line yield enhancements and below the line meaning OID accrued and top line fee income?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [10]

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Yes. So again, to be super clear, right, all the economics flow to the underlying vehicles, whether it's the BDC or any of our privately managed funds, nonaccrued in any way, shape or form to the management company or any affiliate of the management company. In terms of how we split any of those upfront economics from an accounting perspective between in-quarter or in-year recognized income and OID that is obviously accreted over the life of the loan, it really depends, frankly, on the type of origination, and it can range from -- in fully syndicated. But if it all goes into OID towards true bilateral, it can all be upfront fee to most of the time in some kind of club format, it's going to be some split between some OID and some upfront fee. So it ties a little bit to the activity that we use to originate it. So in the end, the economics are the same, but from an accounting perspective, obviously, it moves around a little bit. It's not material, frankly.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [11]

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Sure. That's helpful. And tying that in with the commentary on less second lien, would we expect to see more of the direct and club formats? Or should more income trend into OID sort of smoothening out income versus syndication?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [12]

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At the margin -- and look, you've seen that in the last couple of quarters, right? We've had less onetime fee income. But I would say it's, a, small; and b, in any one quarter, there could be some volatility because they have a couple of big bilateral originations that generate significant fees.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

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And just one UniTek, it would seem to have been a driver this quarter on unrealized markdowns. Is there any key shift? I know you've been -- this has been obviously a long-standing name that, let's say, has required attention. And I know you guys have -- we've talked about it many times on earnings calls. But is there anything breakthrough here that led to this downdraft? Or was it more something with the market or an equity round? Any color you could possibly give us.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [14]

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Yes. I mean, the high-level color is it's nothing that we think has any impact on the long-term realizable value of UniTek. There was a couple of operating hiccups at the company in the last quarter, and we try to be sort of real time from a valuation perspective as, frankly, the percentage of the overall position, even the change, wasn't that meaningful. But we don't think anything that's happened there has any impact on our long-term ability to recognize and create value there as one of our kind of key equity portfolio companies. But we'll obviously update everybody if and as that allows.

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Operator [15]

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(Operator Instructions) Your next question comes from Ryan Lynch, KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [16]

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I had a question on Slide #14, where you're talking about the purchase price multiples in the market today of the high-quality businesses. My question is, you talk about purchase price multiples in the 15 to 22 range, but that -- the increased valuations have typically been bridged by larger sponsor equity check. So my question is just are you saying that maybe a couple of years ago a 15x buyout multiple would get about 7.5 turns of an equity check, back then 7.5 turns of leverage, maybe 50-50 split, and now that same company is going for a 20x buyout. Are you saying that the loan-to-value is still staying the same, meaning the equity sponsors putting in kind of 10x and -- or putting in 10x and then there's 10x leverage on that business? Or are you saying that the leverage is staying at that 7x leverage in the equity sponsors putting in more like 13-plus times?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [17]

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Yes. The latter, the latter. I mean maybe 2 years ago, it was 7 equity -- excuse me, 7 debt, 8 equity for the 15 purchase. And today, the 20x purchase, the 7 may have crept up to 7.5 or 8, but the balance, the other 4 to 4.5 turns, is cash equity. I mean, it's really quite interesting.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [18]

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I mean would you view that business has been even actually more safer than it was a couple of years ago if your leverage is flat or maybe up slightly but there's now a much larger valuation equity check behind you?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [19]

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You know what, it's an interesting question, right? At the end of the day, the business is still the same business if everything else in the world hasn't changed, the projection of cash flows, et cetera, it hasn't changed. So in that sense, it's still the same credit it has been. However, with all that incremental capital beneath you, that does have an impact on sponsor behavior. And so to the extent there are issues, the propensity of the sponsor to inject incremental capital is modified. And I would argue that given the magnitude of these changes, I do think it's a safer credit on an all-in system-wide basis.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Okay. That's interesting. You guys have always been very efficient with capital deployment, particularly around any sort of capital raising activity. My question was if I look at -- and this is pretty consistent from prior quarters, but having looked at your originations on Slide 16, 17, 18 and 19 for the second and third quarter, you guys always take kind of a smaller investment, bite size of a much larger debt tranche anywhere from 10%, 20%, 30%, 40% of kind of the overall tranche. And so I'm wondering, does that help out your ability to deploy capital more efficiently, meaning if you do raise equity capital at any one time, if you guys have a list of investments that you guys are looking to make, can you just increase your allocation size because you guys have so much capacity in that tranche and that allows you to put capital to work so much more efficiently than others? Or am I thinking about that the wrong way?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [21]

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I would say there's some of that, and that is a piece of the puzzle. But I would say probably more importantly is the thing that allows us, frankly, to be so efficient is the fact that our -- unlike most of our peers, our BDC relative to our total credit platform is the preponderance of our assets, right? So the vast majority of our allocations are going into the BDC as opposed to many other instances -- not every other instance, but many other instances, the BDC is a much, much smaller piece of the total platform. So it's getting a smaller percentage. So it's hard to move the needle by dialing up allocations or doing 1 or 2 extra deals. And then that also, frankly, intersects with the fact that our footprint, again, relative to our total credit platform, is actually quite meaningful. I mean we are able to, frankly, get what we want in most instances because of our footprint.

And then finally, the market has come to us in terms of our industries, right? There's more and more deals of sponsored capital, I think -- I give a lot of credit to New Mountain as a platform for being ahead of the curve in areas like health care, IT, enterprise software, technology-enabled business services. That's where the sponsor money is going. So the share of our addressable market of the total biomarket -- hey, the total biomarkets growing but the industries we target as a share of that market is increasing quite substantively, frankly, allowing us, I think, to see greater and greater flow. So it's really all those things coming together. Does that makes any sense?

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Yes, yes. That makes sense. And that's good and helpful commentary. Those are all my questions. I appreciate the time today.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [23]

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Great. Thank you.

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Operator [24]

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We have a follow-up question from Finian O'Shea, Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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Just a small follow-on came to mind, given your expertise on health care, are you seeing any pockets of stress or perhaps, therefore, interest to you guys on the services side? Understanding a popular private equity strategy in recent years has been roll-ups of certain health care services and we're seeing some of those flare up a bit in BDC portfolios, do you have any high-level commentary on that area of the market?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [26]

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So yes. Obviously, that is an area we spend an incredible amount of time in, and we've been very successful in on the private equity side. It is a sector where you have winners and losers for sure, and that's really been true for decades. And I think that will continue to be the case. And I do think that's where the value of not just being -- picking a good sector, but being able to go down 2 or 3 levels into the niches at the micro level and pick the better health care service companies versus the worse health care services company is of critical importance.

So yes, there clearly are pockets of stress. We currently don't have any in our portfolio, a material one. There's always things that are underperforming a little bit here or there, but nothing that we are particularly worried about. And we actually continue to think there's great opportunity given the research capabilities of the broader New Mountain platform in that sector. But it is not for the uneducated, frankly, it's not for the dabbler, it's a tough sector to know what's going to happen without having really deep expertise and connectivity in the marketplace.

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Operator [27]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for closing remarks.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [28]

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Great. Thank you very much, and thank you, everyone, for your interest and support, and we look forward to speaking with everyone again next quarter. And as always, in the interim, any calls -- any questions, don't hesitate to call us directly. Have a great day. Bye-bye.