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New Mountain Finance Corporation (NYSE:NMFC)

Q4 2013 Earnings Conference Call

March 06, 2014, 10:00 AM ET

Executives

Steven B. Klinsky - Chairman

Robert A. Hamwee - CEO and Director

David M. Cordova - CFO and Treasurer

Analysts

Chris Kotowski - Oppenheimer & Co.

Ryan Lynch - Keefe, Bruyette & Woods

Bryce Rowe - Robert W. Baird & Co.

Ronald Jewsikow - Wells Fargo Securities

J.T. Rogers - Janney Capital Markets

Operator

Good day and welcome to the New Mountain Finance Corporation Fourth Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Rob Hamwee. Please go ahead.

Robert A. Hamwee

Thank you and good morning, everyone. With me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; and Dave Cordova, CFO of NMFC. Steve Klinsky is going to make some introductory remarks, but before he does, I'd like to ask Dave to make some important statements regarding today's call.

David M. Cordova

Thank you, Rob. I would like to advice 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 earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our March 5, 2015 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 by law.

Any references to New Mountain Capital or New Mountain are referring to New Mountain Capital L.L.C or its affiliates and may be referring to our investment advisor, New Mountain Finance Advisers BDC, L.L.C. where appropriate.

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 or call us at 212-720-0300.

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

Steven B. Klinsky

Thanks, everybody. Before turning the call back over to Rob and Dave, I wanted to welcome you all to New Mountain Finance Corporation's fourth quarter earnings call for 2013. Rob and Dave will go through the details, but I'm once again pleased to present the highlights of another strong quarter for New Mountain Finance.

New mountain finance's pro forma adjusted net investment income for the quarter ended December 31, 2013 was $0.34 per share in the middle of our previously announced range of $0.33 to $0.35 per share and which covers our previously announced Q4 dividend of $0.34 per share. The company's book value on December 31 was $14.38 per share which is up $0.06 from last quarter and represents a new high for the company.

We're also able to announce our regular dividend for the current quarter ending March 31, 2014. The regular dividend will again be $0.34 per share consistent with our previously communicated view that we have reached a fully ramped steady-state dividend level. The credit quality of the company's loan portfolio continues to be strong with once again no new loans placed on nonaccrual this quarter. We have had only one issuer default since October 2008 when the debt effort began, representing less than 0.3% of cumulative investments made to date.

The company invested $180 million in gross originations in Q4 and has closed and/or committed another $129 million since quarter end, keeping us fully invested and leveraged. Targeted yields on new investments continue to be consistent with our previously communicated expectations.

Our portfolio continues to emphasize positions in recession-resistant acyclical industries pursuant to New Mountain's overall strengths and strategies. We continue to be very pleased with the progress of New Mountain Finance to-date and we are pleased to address you as fellow shareholders as well as management.

With that, let me turn the call over to Rob Hamwee, New Mountain Finance Corporation's Chief Executive Officer.

Robert A. Hamwee

Thank you, Steve. As always, I'd like to start with a brief review of NMFC and our strategy. As outlined on Page 5 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with more than $12 billion of assets under management and approximately 100 staff members, including over 60 investment professionals.

NMFC takes New Mountain's approach to private equity and applies it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research. Some of the key hallmarks of defensive growth business models include acyclicality, sustainable secular growth drivers, high barriers to competitive entry, niche market dominance, repetitive revenue, variable cost structures and strong free cash flow.

With this historically successful business model focused approach in mind, our mandate since the inception of New Mountain's debt investment program in 2008 has been to primarily target what we believe to be high quality businesses that demonstrate most or all of the defensive growth attributes that were important to us, and to do so with an industry that are already well researched by 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 sustainable model that will allow us to continue 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 6, you can see our total return performance from our IPO in May 2011 to March 3, 2014. On Page 7, you can see the dollar attribution of returns by year and cumulatively since our IPO. As you can see from this slide, we have generated the significant majority of shareholder return to our regular dividends, but have also generated meaningfully positive returns through special dividends and increase in book value and multiple expansion. We continue to be very pleased with both our absolute and relative return performance.

As outlined on Page 8, credit spreads have continued to generally tighten since our last call, driven by an absence of any truth sources of systemic volatility and continued positive fund flows and ample market liquidity. For the most part, the compression in market spreads has not been insignificant in smaller less liquid credits. Recent history has shown that market conditions can change quickly, but I'd like to reemphasize that New Mountain Capital and accordingly NMFC have always been proactively focused on defensive acyclical business models and that our financing has termed out until late 2016 and not subject to traditional mark-to-market margin costs.

Given the renewed focus in the market on the possibility of future short-term and long-term rate increases, we wanted to highlight NMFC's defensive positioning relative to this potential issue. As you can see on Page 9, 85% of our portfolio is invested in floating rate debt. Therefore, even in the face of a material rise in interest rates assuming a consistently shaped yield curve, we would not expect to see a significant change in our book value.

Furthermore, as the table at the bottom of the page demonstrates, a meaningful rise in short-term rates will generally increase our NII per share with the only exception being a modest rise having a slightly negative impact as the cost of our borrowing rise or interest income does not initially go up given the presence of LIBOR floors on our assets. Our single 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.

If you refer to Page 10, we once again layout the cost basis of our investment both the current 12/31/13 portfolio and our cumulative investments since the inception of our credit business in 2008, and then show what, if anything, has migrated down the performance ladder. In Q4, once again no new assets had negative credit migration. We continue to have one SLF asset with a cost of $13.5 million and a fair market value of $7.3 million that previously migrated from an internal rating of two to an internal rating of three indicating operating performance materially below our expectations, but no near or medium-term expectation for nonaccrual.

We continue to have only one portfolio company in nonaccrual. $4.3 million of disposition has crystallized into a default loss which was fully reserved for previously leaving $1.6 million of disposition still on nonaccrual. Disposition represents a combined loss of under 0.1% of fair market value and 0.3% of cumulative investments to-date. Since the inception of our credit efforts in 2008, we have made investments in 126 portfolio companies of which only one has migrated to nonaccrual.

Over 99% of our portfolio at fair market value is currently rated one or two on our internal scale. Pages 11 and 12 show for the operating company and SLF respectively, leverage multiple for all of our holdings above $7.5 million when we entered into investment and leverage level for the same investment as of the end of the current quarter.

While not a perfect metric, the asset by asset trend and leverage multiple is a good snapshot at 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 two tables, leverage multiples on almost all case is roughly flat or trending in the right direction.

Turning to Page 13, as we announced at the end of January, we are very excited about our receipt of a Green Light Letter from the SBA in regards to our SBIC license process. If, as we currently hope, we are fortunate enough to receive a license we believe our current deal flow will allow us to responsibly deploy the SBIC capital at a reasonable pace with a material positive impact on our ROE. If approved, we currently expect to receive a license sometime in the next six months.

On Page 14, we show a table depicting how NMFC publicly traded float has increased by over four times based on the equity offerings we have completed since our IPO. We now have 47.9 million shares in our float and have completely exited all shares previously owned by our private equity fund, and liquidity and daily trading volume have increased commensurately. The private equity fund exit will also allow us to simplify our corporate structure in the coming quarters.

The chart on Page 15 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 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 nearly every quarter through a combination of equity gains, portfolio company dividends and trading profits.

Conversely, we have had only one material realized loss representing the realized loss of $4.3 million on API this quarter. Beyond that, the numbers highlighted in orange show that we are not avoiding nonaccruals by selling poor credits at a loss prior to actual default. The net cumulative impact of this success to date is highlighted in blue which is cumulative net realized gains of $20.5 million since our IPO.

Next, we look at unrealized appreciation and depreciation. As you can see highlighted in gray, we have cumulative net unrealized depreciation of $21.3 million. Finally, we combine net realized with unrealized depreciation to derive the final line in the table which in the yellow box shows a current cumulative net realized and unrealized depreciation of $41.7 million.

The point here is to show that on both the realized and combined realized, unrealized basis we have consistently and methodically more than offset any credit losses or impairments with below the line gains elsewhere in the portfolio. In fact, by this methodology, we have now built a $42 million cushion to offset any future credit losses some of which we have paid out as special dividends.

While market-driven volatility around unrealized appreciation and depreciation may cause the bottom line number to vary, over time true economic gains and losses will accumulate in the realized bucket where we will strive to retain a positive balance.

Moving on to portfolio activity, as seen on Page 16, we had a very active quarter for originations in Q4. We made significant investments in eight portfolio companies and had total growth originations of $180 million. Repayments in Q4 were broadly consistent with prior quarters totaling $107 million, including 3 million of assets sales we had net originations of $70 million.

As shown on Page 18, we have had a busy start to Q1 with originations and/or commitments of $129 million. All of the investments in keeping with our strategy are in industries and businesses that are well known to us through our historical private equity activities.

Pages 19 and 20 show the impact of Q4 investment and disposition activity on asset type and yields, respectively. Both asset originations and repayments were roughly split between first lien and non-first lien investments. Yields on originations were slightly higher than those on disposals. The modest increase in the portfolio yield from maturity from 10.8% to 11.0% was a function of a slight increase in the forward LIBOR curve and a modest increase on average asset yield noted above.

As you can see, we continue to find attractive opportunities to deploy capital which we have funded with a combination of opportunistic sales of lower yielding assets and asset repayments. The timing of any future equity capital raise will, as always, be dictated by the interplay between attractive ongoing new investment opportunities and the pace of portfolio repayments. We continue to operate with our credit facilities fully deployed as pro forma for Q1 to-date investment activity, our leverage ratio is now approximately 0.72 allowing for an optimized level of earnings.

In terms of the portfolio review, on Page 21, the key statistics as of 12/31 was very similar to 9/30. The asset mix remains roughly evenly split between first lean and non-first lien. As always, we maintain a portfolio comprised of companies in the defensive growth industries like software, education, services and healthcare that we believe will outperform in an uncertain economic environment.

Finally, as illustrated on Page 22, we have a broadly diversified portfolio with our largest investment at 4.1% of fair value and the top 15 investments accounting for 46% of fair value consistent with past quarters.

With that, I will now turn it over to our CFO, Dave Cordova, to discuss the financial statements and key financial metrics. David?

David M. Cordova

Thank you, Rob. For more details on the financial results in today's commentary, please refer to the Form 10-K that was filed last evening with the SEC. Before we turn to Slide 23, I want to mention that we have included a structure chart as Appendix A in the presentation and given the recent final sale by New Mountain's private equity fund, AIV Holdings; we are in a process of collapsing our structure since the legacy structure is no longer applicable. We anticipate the collapsed organizational structure to be more straightforward from an operational and financial reporting perspective. We will provide more information on our next quarterly earnings call as we continue to work on completing the process.

Now I would like to turn your attention to Slide 23. The portfolio had approximately 1.1 billion in investments at fair value at December 31, 2013. We had approximately 15 million of cash and about 17.1 million of other assets which is primarily comprised of approximately 10.5 million of interest and dividend receivable, much of which we've already received.

We had total debt outstanding of about 436.5 million on our two credit facilities which had 495 million of total capacity at 12/31. We had about 22.8 million of other liabilities which is primarily attributable to approximately 15.6 million of payable to affiliates for management and incentive fees. This all gets us to a net asset value of 688.5 million or $14.38 per share as of December 31, 2013. This is an increase of $0.06 per share from the September 30, 2013 NAV of $14.32 per share and primarily attributable to the appreciation of the broader portfolio. This is also an increase of $0.32 per share from December 31, 2012 NAV of $14.06 per share.

Our consolidated debt-to-equity ratio at 12/31 was 0.63 to 1. Taking into account the Q1 2014 investment activity to-date, we are fully levered with an approximate debt-to-equity ratio of 0.72 to 1. As a reminder, our credit facilities allow us advantage rates of 25%, 45% or 70% depending on the type of the underlying asset. At our OpCo facility, the rate is LIBOR plus 2.75% and at the SLF facility, the rate is approximately LIBOR plus 2%. Both facilities do not mature until October 2016. Importantly, our credit facility covenants are generally tied to the operating performance of the underlying businesses rather than the marks of our investments at any given time.

On Slide 24, we show the historical NAV per share and leverage ratios which highlights the upward trend in NAV per share since inception and leverage ratios broadly consistent with our target leverage of between 0.65 to 0.75 to 1. On Slide 25, we show our reconciliation of pro forma adjusted net investment income. For purposes of this slide, we start with GAAP net investment income for the current quarter and year-end and then adjust net investment income to reflect it as if all the predecessor assets were stepped up to fair value at the IPO, which is reflected in the non-cash amortization adjustment row.

We then make an adjustment for the capital gains incentive fee. This adjustment represents the reclassification of the non-cash capital gains incentive fee from above to below the adjusted NII line as under GAAP, we are required to accrue incentive fees assuming a hypothetical liquidation of the entire portfolio at the balance sheet date.

Lastly, we subtract a small change in tax estimate related to the YP distribution, which, as you may recall, we had previously deducted the $0.12 per share benefit of in Q2 resulting in a net adjustment and reduction in pro forma adjusted NII of $0.09 per share for the year ended December 31, 2013.

The bottom line is fourth quarter pro forma adjusted NII of $16.2 million or $0.34 per weighted average share which is in the middle of the adjusted NII range discussed on our November 12, 2013 call of between $0.33 and $0.35 per share and covers our Q4 regular dividend of $0.34 per share.

Turning to Slide 26, we show the quarterly migration of our adjusted NII starting with the current quarter pro forma adjusted NII and the prior three quarters' pro forma adjusted NII and adjusted NII. Once again, this highlights that while realizations and unrealized appreciation, depreciation can be volatile below the line, we continue to generate stable net investment income above the line.

Focusing on the fourth quarter pro forma adjusted NII, we earned total investment income of approximately 28.3 million. I'll walk through the components of investment income in greater detail when we turn to Slide 27. For the fourth quarter, we incurred net expenses of approximately 12.1 million. The management and the Part 1 incentive fee are relatively flat with the prior quarter. Our interest expense of 3.1 million is broken out to represent approximately 2.4 million of actual interest expense on our borrowings, approximately 0.3 million of non-usage and custodian fees and approximately 0.4 million of amortization of our upfront borrowing costs.

For this quarter, our combined amount of professional fees, administrative expenses and other general and administrative expenses are approximately 2.1 million gross and approximately 1.1 million net of expenses waived and reimbursed. These amounts relate to legal costs, audit and tax, Board costs, other admin expenses and indirect expenses reimbursable under our Administration Agreement.

Shifting to below the pro forma adjusted NII line, we had adjusted net realized losses of 1.9 million which is primarily attributable to the realization of the loss on the ATI term loan. This asset had been on nonaccrual with the fair value of zero. Adjusted unrealized gains of 5.5 million were primarily driven by higher marks on the broader portfolio and the reclassification of the ATI unrealized loss due to the sale.

As a result of the net realized and unrealized gains in the quarter, we increased our capital gains incentive fee accrual by approximately 0.7 million. In total for the quarter ended December 31, 2013, we had a net increase in members' capital resulting from operations of 19.1 million.

Turning to Slide 27, we breakout the components of both pro forma adjusted interest income and total pro forma adjusted investment income for the current quarter and the current and prior year. As has historically been the case, our total investment income is predominantly paid in cash. Though the amount of prepayment fees vary from quarter to quarter based on repayments, our historical earnings have consistently shown some material prepayment fee income. Therefore, we show total interest income as a percentage of total investment income both with and without prepayment fees, which is one measurement of the stability and predictability of our investment income.

The fourth quarter range of 92% to 97% is in line with the overall current and prior years. During the quarter, we received prepayment fees related to the repayment of six investments, four of which had meaningful call protection. Pro forma dividend income was less than 0.1 million. Lastly, other income of approximately 0.9 million was made up of bridge fees, delayed compensation, revolver fees and consent, amendment and forbearance fees.

On Slide 28, I'd like to give a brief summary of our annual performance for 2013. For the year ended December 31, 2013, we had total pro forma adjusted interest income of approximately $106.1 million and dividend and other income of approximately $3 million. Our pro forma Part 1 incentive fee was approximately 15.5 million and our management fee was approximately 14.9 million.

Interest and other credit facility expenses were approximately 12.5 million and our combined amount of net professional fees, accounting expenses and other administrative expenses were approximately 4.1 million. This all results in 2013 total pro forma adjusted net investment income of 62.1 million or $1.41 per weighted average share.

For the year ended December 31, 2013, we had total pro forma adjusted realized gains of approximately 3 million, pro forma adjusted unrealized gains of approximately 11.6 million and total pro forma accrued Part 2 capital gains incentive fees of approximately 2.9 million. In total for the year ended December 31, 2013, we had a total net increase in pro forma capital resulting from operations of approximately 73.8 million and a total net increase in capital resulting from operations of approximately 78.9 million including the impact of the nonrecurring YP distribution. Finally, for 2013 we declared total regular dividends of $1.36 per share and total special dividends of $0.12 per share resulting in total aggregate dividends of $1.48 per share.

Now I will turn your attention to Slide 29. As briefly discussed earlier, the $0.34 of pro forma adjusted NII for the fourth quarter fell within the middle of the range we discussed on our Q3 earnings call of between $0.33 to $0.35 per share. We paid a $0.34 per share dividend which we believe to be our fully ramped run rate adjusted NII. Therefore, we expect to fall within the range of $0.33 to $0.35 per share of adjusted NII in the first quarter of 2014 although this is simply an estimate and could materially change.

Given our belief that our fully ramped run rate dividend will continue to fall in the previously declared expected range of $0.33 to $0.35 per share, our Board of Directors has declared a Q1 2014 dividend of $0.34 per share in line with the past seven quarters. The Q1 2014 quarterly dividend of $0.34 per share will be paid on March 31, 2014 to holders of record on March 17, 2014.

At this time, I would like to turn the call back over to Rob.

Robert A. Hamwee

Thanks, Dave. Once again, we do not plan to give you forward guidance. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters as long as the adjusted NII covers the dividend in line with our current expectations.

In closing, I would just like to say that we continue to be extremely pleased with our performance to-date. Most importantly, from a credit perspective, our portfolio continues to be very healthy. Once again, we like to thank you for your support and interest and at this point, turn things back to the operator to begin Q&A. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Chris Kotowski from Oppenheimer. Please go ahead.

Chris Kotowski - Oppenheimer & Co.

Good morning. I am wondering if you were to gain the SBIC license, would you invest that in the same kind of assets, and are the loans you generally hold SBIC eligible?

Robert A. Hamwee

Yes. We would not have to change in any meaningful way the way we originate loans. We've backed tested the portfolio and the loans we've originated over the years and a meaningful percentage of those loans would have qualified certainly more than enough to utilize the full license and even a follow-on license. So, yes, the short answer is Chris, we would – it would be business as usual for us and we would just be using that as another place and another way to leverage the type of deal flow we've currently been doing.

Chris Kotowski - Oppenheimer & Co.

Okay. And then you referred on several occasions to the $0.34 as the fully ramped stabilized dividend run rate. Just my back of the envelope math suggest that you could add $0.01 to $0.02 a quarter with the SBIC license. Is that roughly the way you see it and/or do you think this is something that just adds a cushion to the $0.34?

Robert A. Hamwee

I think your math is not inappropriate. I think we're conservative in that other – all else being equal that would be the net impact, but we're always worried about things like spread compression, et cetera. So, I think we'll just have to see how it plays out and our hope is that it is accretive in that sense but right now we're just thinking about it more as a cushion against other things particularly any incremental spread compression from here.

Chris Kotowski - Oppenheimer & Co.

All right, fair enough. Thank you.

Robert A. Hamwee

Thanks, Chris.

Operator

Our next question comes from Ryan Lynch from KBW. Please go ahead.

Ryan Lynch - Keefe, Bruyette & Woods

Good morning. Thank you for taking my questions. You guys have done a really nice job of not only maintaining the yield in the portfolio but actually expanding the yields throughout the year. This is in contrast with what we've seen in most BDCs across the space. Can you guys kind of talk about how you guys have been able to accomplish this?

Robert A. Hamwee

Yes, and I think, Ryan, it really goes back to our combination of origination engine and ability to underwrite sort of unique assets and all that's a function of our affiliation with New Mountain Capital because we're I think seeing some more and some different things than others because of that affiliation and probably more importantly, we're able to underwrite based on the deep knowledge we have and the sectors we focus on with great comfort, things that other guys don't have that capability may not be able to get thereon. So I think that's the overarching theme. We'll have to see if we can keep it up in the context of 2014, but that's been sort of where we've been today.

Ryan Lynch - Keefe, Bruyette & Woods

Okay, great. And with the portfolio update you guys gave in your investor presentation, I see you guys are basically fully levered. Can you talk about your plans in regards to your ability or willingness to add additional leverage via expanding your credit facility versus raising additional equity capital?

Robert A. Hamwee

Yes, I mean I think we've got a little bit of room that if we were to add capacity which we certainly can, I think – we've always talked about kind of 0.75 as sort of the upper end of our comfort zone. It doesn't mean we can't go to 0.76, 0.77. So from a 0.72 that gives us a little bit of room there. We also continue to have some relatively liquid lower yielding assets that we can monetize through sale as appropriate, and we also have a little bit of visibility on some potential upcoming repayments. So that's kind of our near-term source of capacity. At the same time we would access the equity market as appropriate which is really just strictly a function of, as I said in the call, the interplay between all those things on the one hand and the level and degree of high quality deal flow on the other hand. But I think we've hopefully proven to the market that we assess equity only when we really need it and not just because we can get our hands on it and two, that we assess it in a way that allows us even post equity raise to be fully levered relatively quickly. So I think that's the philosophy that will continue to guide us.

Ryan Lynch - Keefe, Bruyette & Woods

Okay. Thank you. That's all from me.

Robert A. Hamwee

Okay, good. Thanks, Ryan.

Operator

Our next question comes from Bryce Rowe from Robert W. Baird. Please go ahead.

Bryce Rowe - Robert W. Baird & Co.

Thanks. Good morning. I have a couple of questions here. Rob, you talked about the targeted leverage range of 65% to 70%. Assuming you get the SBIC license and you take down some of the SBA leverage and you already get exemptive relief from the SEC, would that targeted leverage range go higher or is it still 65% to 75%?

Robert A. Hamwee

So, yes, 65 to 75 would exclude the impact of the SBIC leverage. I mean we manage against that target because of the 1 to 1 restriction, and as you know with the exemptive relief we would not be counting the SBA leverage in that calculation. So, we're very comfortable running at a higher consolidated leverage ratio inclusive of the SBA debt because we maintain our cushion relative to the test.

Bryce Rowe - Robert W. Baird & Co.

That's helpful. Okay. And then second question, you talk about pricing compression or spread compression, just curious kind of what is driving the spread compression? I assume it is competition. And can you talk about the sources of competition?

Robert A. Hamwee

Sure. I mean it's really a function of fund flows into the larger more liquid end of the spectrum in which we play, so it's everything from fund flows into high yield, both funds and EPS, obviously a revitalized CLO market. And then we're seeing different – separate accounts that large debt capital aggregators have accessed. So it's really across the board but it's fundamentally this phenomenon we're all been witnessing now for some years which is highly available liquidity and the thirst and chase for yield outstripping the supply, which obviously the price is set where demand and supply intersect. So, we're seeing less of that in the smaller end because this type of money typically wants liquidity and that's where we're having success maintaining spread. But we've been priced out of a number of attractive deals in the broader market because of this spread compression.

Bryce Rowe - Robert W. Baird & Co.

That's great. Thanks, Rob. I appreciate it.

Robert A. Hamwee

You're welcome, Bryce.

Operator

(Operator Instructions). Our next question comes from Ron Jewsikow from Wells Fargo Securities. Please go ahead.

Ronald Jewsikow - Wells Fargo Securities

Good morning. Thank you for taking my questions. I apologize if I missed this, but now that AIV is no longer a holder, does this impact the amount of equity you would look to raise on your follow-on offerings?

Robert A. Hamwee

Well, I guess it would impact the amount of equity we sell because as you know, historically we've done mixed deals, some primary, some secondary and we sized the primary relative to our needs and the secondary has been an addition to that. So if our needs were the same historically now that we no longer have this secondary component of those deals, the aggregate share sale would in fact be lower. So, while it doesn't change relative to our need for capital it does change the total share deal all else being equal because there will no longer be a complementary secondary component to the primary raise.

Ronald Jewsikow - Wells Fargo Securities

Yes, thanks. That's good color. I was just kind of wondering if it may be impacted your ability to raise, if you could theoretically raise more capital than you've kind of done the small, let's call them just in time offerings…?

Robert A. Hamwee

Yes, we definitely could at the margin. We might give ourselves a little bit more runway just to not have often offerings, but fundamentally again we're going to match up the size of the primary offerings to our relatively short-term pipeline of what we can do with that because again we hate to run at anything other than relatively fully levered.

Ronald Jewsikow - Wells Fargo Securities

Yes, that's good color. And then just one quick question on specific investment of Virtual Radiologic. It looks like it was just marked down a little bit more during the quarter and assuming that's one of the investments, that's a three or four rating, is there any additional color you can provide on what's going on there?

Robert A. Hamwee

Limited just because it is a private company and we are subject to confidentiality relative to that business, all that being said I think the mark reflects I think probably – at least for now as well as it's likely to get for a little bit. We think things have generally stabilized and we continue to be involved. We're constantly evaluating whether we should stay in the position or monetize, and I think you can infer from our continued holding of the position that we think there is more upside than downside and from that you can infer kind of what we think of the near-term prospects, but we're always reevaluating that and we're intimately involved with management on the path forward for that company.

Ronald Jewsikow - Wells Fargo Securities

All right, that's good color. Thanks for taking my questions, guys.

Robert A. Hamwee

Happy to do so.

Operator

Our next call comes from J.T. Rogers from Janney Capital Markets. Please go ahead.

J.T. Rogers - Janney Capital Markets

Good morning. Just wondering if – I'm sorry if I missed this before in the prepared remarks, but are you all planning on extending the reimbursement of G&A after the first quarter? And if not, I'm just wondering what the run rate is there?

Robert A. Hamwee

So the answer is no. The expense cap will expire on March 31. We feel like our scale has grown to the point where on a per share basis, the burden is what it's always been and that's always been our goal. We kind of came public with a subsidized per share expense burden and as you know, as we've grown our share count, we've gradually reduced the cap such that we kept that per share expense burden the same and now this – where the share count has grown to the point where the full removal of the cap will keep that expense burden per share the same. So, the bottom line is from an EPS modeling perspective, no change from where it's always been.

J.T. Rogers - Janney Capital Markets

Okay, great. Thanks, Rob. I appreciate that. And then I was just wondering if you can just talk generally about what kind of trends you're seeing in private equity M&A? I know there's a lot of talk about there being a mountain of dry powder, I think it's been the case for a number of years, but do you guys have any expectations in terms of activity for the year?

Steven B. Klinsky

Well, this is Steve Klinsky talking now. We feel good about New Mountain's own private equity activities and it's driven by similar factors what Rob said. Our team has gotten bigger and stronger. We're in more and more niches and a deeper, more operational way. And so our own firm has just acquired three companies in the last – after months of preparation, they've all been announced in recent months. So we're very busy. I think the key is that you can't just be a commodity provider of capital in a private equity option where it's just saying, hey, there's no money so I'll write a check and choose me. You have to really be a business these days in private equity to actually own and operate and understand companies. And that's what we try to do in private equity and we try to give that same sort of intellectual support when we look at the debt for New Mountain Finance Corporation.

Robert A. Hamwee

Yes, and in the broader market from an overall market trends perspective, I think we are seeing an increased level of activity broadly in the market as you talk about there is significant dry powder out there obviously that is attractively priced from a sponsor perspective. So, I think we've got a pretty good baseline of activity and time will tell whether we get a material step up from there. But I think at a minimum we'd expect healthy activity and whether it's very healthy, we'll just have to see.

J.T. Rogers - Janney Capital Markets

All right. And just a follow-up to that, just wondering if a healthy level of activity is enough to offset spread compression? I mean obviously it's hard to predict but from what you see right now.

Robert A. Hamwee

Yes, I think right now we see relative stability in the spread area more on the low end. That's what we think frankly the big end of the market which is now less applicable to us has gotten about as low as it's likely to get just given CLO funding costs and some other factors. So I think stability to maybe very modest trend down and that's obviously barring any shocks in the world and in the financial system.

J.T. Rogers - Janney Capital Markets

All right, great. Thanks for taking my questions.

Robert A. Hamwee

Yes, anytime.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Rob Hamwee for any closing remarks.

Robert A. Hamwee

Yes. Just want to thank everyone again for joining us today and we look forward to talking with you in a couple of months to discuss our Q1 results. And as always if there's any questions, we'll try to be open and user friendly. So just ahead and contact any of us directly. Thanks, everyone, for your time.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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