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Executives

James Zelter - Chief Executive Officer and Director

Richard Peteka - Chief Financial Officer, Principal Accounting Officer and Treasurer

Patrick Dalton - President of Apollo Investment Corporation and Chief Operating Officer of Apollo Investment Corporation

Analysts

Jasper Burch - Macquarie Research

Vernon Plack - BB&T Capital Markets

Richard Shane - JP Morgan Chase & Co

Joel Houck

David Chiaverini - BMO Capital Markets U.S.

James Ballan - Lazard Capital Markets LLC

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

Apollo Investment (AINV) Q4 2011 Earnings Call June 1, 2011 11:00 AM ET

Operator

Good morning, and welcome to Apollo Investment Corporation's Fourth Quarter and Fiscal Year-End 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

James Zelter

Thank you, and good morning, everyone. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and COO; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

Richard Peteka

Thank you, Jim. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment 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'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. 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 these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law.

To obtain copies of our latest SEC filings, please visit our website at www.apolloic.com or call us at (212) 515-3450. At this time, I'd like to turn the call back to our Chief Executive Officer, Jim Zelter.

James Zelter

Thank you, Rich. The credit markets continue to exhibit strength throughout the March 2011 quarter, maintaining strong liquidity and driving debt yields tighter as investors continued their search for extra yield amid continuing low interest rate environment. These dynamics drove solid demand for primary and secondary paper, prompting continued record high yield issuance with $80 billion issued during the first calendar quarter of 2011, only $3 billion off the all-time high record quarterly issuance from the December 2010 quarter. Even renewed fundamental concerns about inconsistent domestic economic data, and certain sovereign issuers appear to pale in comparison to the significant liquidity within the current capital markets in this period. Now let me summarize some brief portfolio highlights for the quarter ended March 31, 2011.

In total, we invested $298 million in 8 new and 11 existing portfolio companies. We also received prepayments totaling $173 million and sold select assets totaling $82 million. At March 31, 2011, our portfolio of investments totaled $3.05 billion, measured at fair market value and was represented by 69 distinct portfolio companies, diversified amongst 30 different industries. The weighted average yield on our overall debt portfolio was 11.6% as of March 31, 2011, versus 11.5% at December 31, 2010. During the fiscal year ended March 31, 2011, we invested in 21 new portfolio companies, totaling $1.1 billion and harvested or exited 19 portfolio companies totaling $977 million over the same period. Since the initial public offering of Apollo Investment Corporation in April 2004 and through March 11 -- March 31, 2011, invested capital has now totaled over $7.3 billion and 147 portfolio companies with more than 90 different financial sponsors.

As we noted in our last call, 1 of our strategic priorities was to introduce new investors to Apollo Investment Corporation. Long-term investors interested in providing us with their capital, capital which we seek to use for growth. We believe these investors should recognize our current diversified portfolio of corporate securities and loans and will be motivated to partner with us for further into this uneven economic recovery. In doing so, in January 2011 we were pleased to issue a $200 million senior unsecured 5-year convertible note with what we believe are attractive terms: a 5 3/4 coupon with a conversion premium of 17.5%. We also added in January another $50 million commitment to our senior secured revolving credit facility from our growing syndicate of revolving lenders. We expect the inaugural unsecured issuance to generate significant long-term benefits to AIC and its shareholders. Accordingly, we have deliberately accumulated capital resources as we look ahead and prepare for we may -- what we believe may be a long period of investment opportunity for Apollo Investment Corporation. Pro forma for April 2011 debt maturities, AIC now has approximately $625 million of cash available for new investment.

Rich, why don't you take them through some financial highlights for the quarter, please?

Richard Peteka

Certainly. I'll begin with some March 31, 2011 balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $3.05 billion. This is up from $2.92 billion at December 31, 2010. Our March 31 net assets totaled $1.96 billion. With a net asset value per share of $10.03. This compares to net asset total of $1.90 billion at December 31, 2010 and a net asset value per share of $9.73. The increase in NAV per share for the quarter was driven primarily by net unrealized appreciation on our investment portfolio. Positive contributors to performance for the quarter included our investments in AIC Credit Opportunity Fund, Alliance Boots and Sorenson Communications, among others. Partially offsetting the company's unrealized appreciation for the quarter, was unrealized depreciation from PlayPower Holdings, Angelica Corporation and MW Industries, among others.

On the liability side of our balance sheet, we had a total debt outstanding of $1.05 billion at March 31, 2011, compared to $1.0 billion at December 31, 2010. Our leverage ratio at March 31 was 0.54:1 debt to equity as compared to 0.53:1 at December 31, 2010. No new investments were placed on non-accrual status during the quarter. Our portfolio of 69 portfolio companies has 2 companies with investments on non-accrual status at March 31, 2011, unchanged from last quarter. These investments represent 1.8% of the fair value of our investment portfolio at March 31, 2011, versus 2.0% at December 31, 2010. On a cost basis, they represent 6.5% of our investment portfolio at March 31, 2011, versus 6.6% at December 31, 2010.

As for operating results, gross investment income for the March 2011 quarter totaled $94.7 million, a slight increase from the $94.3 million for the quarter ended December 31, 2010, and up from the $87.7 million for the comparable March 2010 quarter. Expenses for the March 2011 quarter totaled $44.7 million. This compares to $44.2 million for the quarter ended December 31, 2010, and $39.1 million for the comparable March 2010 quarter. Ultimately, net investment income totaled $50.0 million, or $0.26 per average share. This compares to $50.1 million, or $0.26 per average share for the December 2010 quarter and $48.5 million, or $0.28 per share for the comparable March 2010 quarter.

Also during the March quarter, we received proceeds from sales of investments and prepayments totaling $255 million. Net realized losses on those sales totaled $1.6 million. These were primarily related to the realization of previously recognized unrealized losses on our investments in Infor Global Solutions, partially offset by realized gains received from a combination of several sales of other select investments. These results compared to net realized losses of $64.9 million for the December 2010 quarter and net realized losses of $219.7 million for the March 2010 quarter.

The company's investment portfolio had net unrealized appreciation of $63.6 million for the quarter ended March 31, 2011. This compares to net realized appreciation of $99.3 million for the December 2010 quarter and net unrealized appreciation of $161 million for the comparable March 2010 quarter.

In total, our quarterly operating results increased net assets by $112.1 million, or $0.57 per average share, versus an increase of $84.5 million or $0.43 per average share for the December 2010 quarter and a decrease of $9.9 million, or $0.06 per average share to the comparable March 2010 quarter.

Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Patrick Dalton

Thank you, Rich. Looking back on the fiscal year ended March 31, 2011, we would like to categorize it as the year focused on strategic initiatives. Among them, we'd certainly highlight 2 significant items. These are our continued portfolio optimization and rotation, and diversification of our capital structure to access to new debt investors, an expansion of our company's long-term debt capacity. We believe these important initiatives have positioned the company well for the long-term. We were active with our portfolio during the March quarter, investing in 8 few portfolio companies, as well as 11 existing ones.

Portfolio company investments totaled $298 million. I will take you through some of the specific portfolio changes. Investments were made in the following new portfolio companies: Avaya, Inc., Del Monte Foods, The Brock Group, Insight Pharmaceuticals, Ashland Distribution, RBS Holding Company, Valerus Compression Services and Yankee Candle. Of these investment, some of the larger investments included $49 million in the first- and second-lien bank debt of The Brock Group. Brock is an industrial specialty services provider to customers in the energy and industrial process industries and is a Lindsay Goldberg portfolio company. $40 million was invested in the second-lien bank debt of Valerus, a natural gas handling services company owned by TPG Capital. And $16 million was invested in the first-lien senior secured debt of RBS, a creative marketing and direct mail services provider focused on the non-profit sector. RBS is jointly owned by TA Associates and Stephens Capital Partners.

Investments in existing portfolio companies were made in the following names: Alliance Boots, Advantage Sales & Marketing, Allied Security, Global Auto Care, Ceridian, Datatel, Leslie's Poolmart, Multiplan, N.E.W. Holdings, Penton Media and Cengage Learning. Of these names, some of the larger investments include a $51 million investment and a second-lien bank debt of Allied Security. Allied Security, a Blackstone portfolio company is a provider of contract security services. Coinciding with this investment, our $20 million position in the mezzanine notes was repaid at a premium to par. $29 million was also invested in the first-lien bank debt with Penton Media, a B2B media company that went through a successful reorganization last March. And $21 million was invested in a second-lien bank debt of Datatel, an enterprise resource planning software solutions provider to the higher education institutions. We also chose to roll over our previous investments in the Datatel second-lien when it was refinanced at a premium to par. While our March 2011 quarter was an active one, we believe our investment pace will remain highly variable as we seek to identify and invest in the most attractive risk-adjusted return opportunities.

Now let me go through some portfolio highlights at March 31. We continue to be well diversified by issuer and industry, with 69 portfolio companies invested in 30 different industry groups. The company's total investment portfolio had a fair market value of $3.05 billion, it was comprised of 33% in senior secured loans, 58% subordinated debt and 1% in preferred equity and 8% in common equity and warrants measured at fair value. The weighted average yield on our overall debt portfolio at our cost at March 31, 2011, was 11.6%, versus 11.5% at December 31. The weighted average yields on our subordinated debt and senior loan portfolios were 13.1% and 9%, respectively at March 31, 2011, versus 12.9% and 8.7%, respectively at December 31, 2010. At March 31, the weighted average EBITDA of our portfolio companies continues to exceed $250 million and the weighted average cash interest coverage of the portfolio remains over 2x. The weighted average risk rating of our total portfolio was 2.3 at March 31, unchanged from December 31 measured at cost and continues to be rated at 1.9, measured at fair market value at March 31, 2011, which is also unchanged from the prior quarter.

Before I open up the call to questions, I'd like to reiterate that we continue to be pleased with how our overall investment portfolio is constructed and how the majority of our underlying portfolio companies are currently performing in this uneven economic recovery.

In closing, we'd like to thank all of our dedicated investors in Apollo Investment Corporation for your continued and long-term support and confidence in us.

With that, operator, please open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Sanjay Sakhrani of KBW.

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

This is actually Steven Kwok filling in for Sanjay. I guess, the first question is if you could just talk about any benefits from the investments that prepaid this quarter?

Richard Peteka

I'm sorry, Steven. To discuss benefits of the ones that prepaid?

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

Yes, I mean, that prepaid.

Richard Peteka

We don't generally go into specifics, but if you went through the portfolio and look at, I think the one that stands out is our investment in the VNU Nielsen, that one came out before this call, we got May call on that so that contributed to our interest-income line item. That was probably the significant item to point you to.

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

Okay. And do we know about how much that represented about?

Richard Peteka

It's roughly about $3.4 million.

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

Okay. Got that. And then I was just thinking about in terms of the loans, do you guys would see any slowdown in the repayments going forward? Or do you think it's going to continue that -- this elevated level?

Patrick Dalton

I think there's been a tremendous amount of activity over the last several quarters with companies that have the opportunity to refinance, have taken advantage to do so. We do have a lot of companies in our portfolio with call protection that make even the benefits of a lower yield slightly more costly given they make all prepayments or call premiums that are charged. So we do expect it to slow down because it's been done already. That's not to say there won't be some more coming through. We cannot predict those. It's really up to the underlying portfolio company management team and sponsors.

Richard Peteka

I think what we're seeing is over a period of time, the average life of our portfolio, we've always said it's between 3 and 5 years, and in slower periods, it probably elongates to 4, 4.5, 5 and in shorter periods, it's the 3 and 3.5. So we're seeing that, that doesn't really surprise us. So you'd see a lot of companies, as Patrick said, that did have access to refinancings would be doing so, and I think, you'll see a more steady pace over the coming quarters and years.

Steven Kwok - Keefe, Bruyette, & Woods, Inc.

My final question is with regard to, can you guys give any updates on Innkeepers, and if there will be any impact on your fiscal first quarter 2012 results?

James Zelter

I think that, as we said before, Innkeepers is the public bankruptcy process, restructuring process. There's a fair amount of disclosure in our document and our K regarding that, and I think that if you combine the 2 of them, that would be really, a clear indication of what we'd see going forward. So I think that those 2 in the aggregate should really give you the information you need to make any decisions.

Operator

Your next question comes from Rick Shane of JPMorgan.

Richard Shane - JP Morgan Chase & Co

Just 2 quick ones. One of the things that's happened and this just maybe because we're relatively new to the name, there is a what appears to be sort of a semi-annual increase in dividend income. Is that related to one investment, and is that predictable? Should we see it that way, as it's basically a semi-annual payment that comes through?

Richard Peteka

Rick, this is Rich. That's about a dividend from AIC Credit Opportunity Fund. There's 3 debt investments inside that fund. It's First Data, TFC and Alliance Boots and First Data is the notes, and that's the plan that the largest investment inside there and First Data senior notes that's a semiannual payer. So when we get the cash into that fund, it typically flows up semiannually. So that's the primary driver of the semiannual payment out of that investment.

Richard Shane - JP Morgan Chase & Co

Terrific. Second question, it does look like strategically, you're increasing your exposure to bank and senior secured loans a little bit. Can you just comment on that in terms of what that's telling us about the credit cycle and your thoughts, strategically?

Patrick Dalton

Rick, it's Patrick. Thanks for the question. I think, we said over the last several quarters that it's our view that rates are pretty low and they're not going to go much lower, and likely, will go higher. We don't know exactly when that's going to be. But we want to make sure that we're not going to speculate on rates either way, but protect our business should rates increase. We believe they will. And so we've repositioned our assets and liabilities to take advantage of rising rate environment. We want to protect the portfolio's earnings, and potentially maybe there's an opportunity to expand earnings in a rising-rate environment. So it's been an intentional and deliberate strategy that we have communicated several times. We look at the risk-adjusted returns of a senior security versus a mezz [mezzanine] security, fixed and floating, the remedies, the underlying attributes of the investments and make the appropriate ones. But you see the bias has been towards the senior secured and floating rate investments, and that's positioned intentionally.

Richard Shane - JP Morgan Chase & Co

And do you think that if we get into a some sort of dislocation event, where there's more opportunity further down the capital stack for you, that there's more liquidity that you can access by selling those senior securities off? Is this also a liquidity hold for you as well?

Patrick Dalton

Not as much. And there's definitely liquidity across our portfolio, including some of the junior tranches of securities that we hold, mezzanine or high-yield notes. So I mean, we look at liquidity as one aspect across the different securities. But we're not necessarily looking towards one asset class, because of liquidity. But we do want to have liquidity on our portfolio should we want to access that liquidity either to de-lever and/or to find more interesting opportunities wherever the economy brings us.

James Zelter

And Rick, I would just add that we've talked about this before, we've articulated a view that going forward, you'll see more periods, where volatility comes into the market and windows are shut down for other avenues. And that's a more predictable part of a longer cycle, where we had 18 months of down, 18 months of very strong markets. But now you'll see choppiness for a variety of reasons, and I think that those -- when we're the most opportunistic and have been. So that's the environment that we would expect to roll out in front of us.

Operator

Your next question comes from Vernon Plack of BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

A couple of quick questions. One, I was curious on the timing of exits and new investments in the portfolio. Was it spread out during the quarter? Was there bias toward the beginning of the quarter or end of the quarter? Any pattern there?

Richard Peteka

Vernon, this is Rich. I would lay it out as we were active throughout the quarter, but I would say that the new buys came in the middle and towards the end. And that the exit was [ph] -- it came in the middle. But again, pretty active throughout but when you look at the sizes of the larger transactions, again, middle to end on the new buys and kind of middle on the sales.

Patrick Dalton

And I would -- just on the buys, we can't -- we're not in control of these when the dates of these issuances happen at the closing of the loans. So it's really, we're reacting to the sponsor's choice as to when they're going to access the market.

Vernon Plack - BB&T Capital Markets

Right. Okay, great. And the carry-forward amount, is that about $88 million? Did I read that right?

Richard Peteka

Vernon, that's a great question. I would tell you that we're still working on the tax reconciliation between now and when we file our tax return, K-1s are coming in. We're still looking at potential currency adjustments. That's probably a number pre-other post October 31 adjustments as noted in those footnotes. So it's not a number that I actually can give you right now. We're still working on it.

Vernon Plack - BB&T Capital Markets

Sure. Okay. And just one other question. I'm trying to gauge the interest rate sensitivity to the investment portfolio. And I know you had a little over $1 billion in assets right now that are fixed, and just curious in terms of the impact, or any floors that you may have on those investments would have on -- in a rising interest rate environment. In other words, I'm just trying to gauge a sense for if LIBOR goes up 100 basis points, what impact will that have on that floating-rate portfolio, and a little color there would be helpful.

Patrick Dalton

I'll just pass [ph] and give you some of the strategy, and Rich is going to get the numbers for you, I think. We, as we mentioned, have tried to reposition ourselves to get some fixed-rate liabilities in the capital structure. Hence, the private note and the converted note that we did, which is about $425 million of liabilities that used to be floating rate liability is now fixed, and we've increased the assets in our portfolio from fixed towards floating. And Richard, I think, is going to give you the number on the sensitivity that's in our disclosure.

Richard Peteka

I believe a 1% move Vernon, as I flipped to it. It is going to be a $0.01 increase for a full-year. It's nominal but as interest rates rise 1% you'll get a $0.01 benefit over a year.

Patrick Dalton

And in our 10-K, there's a footnote on it.

Richard Peteka

In the quantitative analysis section of the 10-K, it will be more fully described.

Vernon Plack - BB&T Capital Markets

Yes, I saw that. I was just curious in terms of the floors of how, what impact that would have on any initial move in interest rates. But I think you answered the question.

Operator

Your next question comes from Joel Houck of Wells Fargo.

Joel Houck

I wonder if you guys could maybe talk a little about the strategy in terms of equity churn. You obviously got some nice embedded gains, given kind of the compressed spread environment that we're in, probably likely to stay. I mean, what's the -- what's your thought in terms of maybe turning some of those out into interest-bearing investments?

Patrick Dalton

Yes, our strategy with equity is really, though, it's been more of a co-investment alongside a sponsor, when they are making a purchase of a company. So we're not necessarily in control on the timing. These would be many illiquid securities and really are exited with preemptive and drag and tag rights with the sponsor when they choose to get liquidity and either sell the company. So that's very difficult for us to predict and/or manage. We have had, in the past, a couple of companies go public, and then we have liquidity, MEG being one, GS Prysmian, we also have liquidity when that went public and the sponsor chose to sell and we sold alongside of them. But overall, we can't control the timing of liquidity on the equity portfolio.

Joel Houck

Okay, that's helpful. And then when I look at your schedule of investments, you've got on the debt side, a lot of investments trading well above par. Can you maybe give us an accounting lesson here? How much of that is accrual of prepayment penalties? What's already run through income, what might come in the future income off of that portfolio trading at premium to par?

Richard Peteka

Joel, this is Rich. It's really security by security, depending on what's going on with the security. I really don't have a number to give you to help you with regard to what -- how much of that may flow in or may not, filling in [ph] The 157, it's a yield-based approach, given our principal markets. So how much of that amount above par is related to yields in the marketplace versus potential, what's going to come into income from a call premium, what the timing is of each of those call schedules, it's really hard to try to lay out to anybody.

Patrick Dalton

And just from a management of those, some of these are quoted in due trade. We could seek liquidity. However, the return we were getting, we think, is relatively attractive to an alternative. So to the extent that we got some liquidity, we have -- we look to find something else, we like the credit is to write the credit risk in the underlying portfolio companies. And so the price we're getting, is something that -- if we're holding, and we're continuing to hold it, because we like. Some of them do trade to a call price that there's an expectation to sponsor when it's called, when they call at that price. We cannot control that. So the values are the values and our strategy is really on a credit risk by credit risk basis, the yields we're getting for the risk we're taking.

Joel Houck

Okay. And then the last thing I have is you talked about new investments prepayments. Can you give us a sense for the kind of weighted average coupon that went on in the quarter versus what was refi-ed out? Just in general sense, it doesn't have to be exact.

Patrick Dalton

Joel, it's slightly lower, the assets that were being taken out, many of them are fixed rate assets -- and we're reinvesting in some floating-rate assets, and so we're now willing to take a discount for a floating-rate exposure in this environment. So if they're being taken out of a fixed rate, maybe slightly higher yield. That's we can't control. But our choice to reinvest the capital, you see the amount of activity in floating rate, and where our choices to take a floating-rate exposure, and even if that comes with slightly lower yields, over time provides protection in a rising-rate environment. So we view a lot of this as temporary.

James Zelter

And I wish to add that, overall, right now, when we think about our floating-rate assets versus our floating-rate liability, in aggregate size, a couple of years ago, we would have been more matched, and now we definitely have a much greater amount of floating-rate assets versus the floating-rate liabilities in the overall portfolio, probably, broadly, speaking around $500 million, something like that, such that when those rates rise, we believe we'll be the beneficiary of that.

Richard Peteka

And I think that the discount, the fact that the overall debt portfolio, actually moved up a couple of bps quarter-over-quarter, tell you that there's not a significant discount there between the yields that came out of the portfolio versus what came into the portfolio.

Operator

Your next question comes from Kieran McCabe of Bank of America.

Kieran McCabe

I had to make a question, a follow-up to that last one. And I guess, you kind of quantitatively mentioned the floating versus the greater floating kind of at lower rate on the new investments, I was wondering if you can kind of quantify that what on the new portfolio investments, what the average interest rate was, and what it was for the portfolios that were -- investments that were exited?

Patrick Dalton

That's a number that we're not going to disclose, I think, because in active management portfolio, things come in, and during the quarter, at different points in time, different prices we get some fees sometimes LID [ph] upfront for floating rate investment, we may get a prepayment premium on of the way out. So it's hard to quantify in a dynamically managed portfolio. But as we mentioned, to Joel that the slightest -- smaller discounts we're happy to take in this environment. But we can't control the exits as much as we can control the investments.

Richard Peteka

And then I'd say, that it's not just this quarter historically, we've never provided that because it is in that active portfolio for those reasons.

Patrick Dalton

And I think, one of things that we've said, time and time again, it's really focused on risk-adjusted returns and the market is robust. We're seeing a lot of refinancing and in securities coming to marketplace and a lot of liquidity driving yields down and chasing leverage up. We're not going to chase leverage up or credit risk up. We're happy to take the slightly lower yield because it makes sense for us on this environment, versus chasing yield and taking undue credit risk, which we believe is not the right thing.

Kieran McCabe

Okay, great. And I guess, I just had a follow-up on it. As you're positioning the portfolio more for a rising rate environment, having some more floating rate investments, and I guess, potentially, you could have some of these interest incurring [ph] at lower rates and pressuring NOI. Do you have any plans to offset this strategy through investments in other areas of the business such as your asset-management arm?

Patrick Dalton

We're always looking at what's accretive to our business. We want to make sure that it makes sense, it makes long-term business sense for us. But we are always looking at ways to improve, and to the extent that we have something to discuss, we'll present it to our investors at that time.

Kieran McCabe

Okay, great.

Operator

Your next question comes from Jim Ballan of Lazard Capital Markets.

James Ballan - Lazard Capital Markets LLC

A couple of questions. One is, over the last couple of years, it looks like including in this quarter, you've opted to kind of trade out of some of your more liquid assets into -- and purchase others kind of where you see better relative value. Is that a strategy that, given where the high-yield market's gone recently, is that a strategy where you still see -- you think you'll see opportunity going forward? Or are you sort of like figured you'd move more towards sort of traditional originating new investments?

Patrick Dalton

The good news is that we have access to excess capital. So we wouldn't necessarily have to rotate out of a name we liked to make a new investment. I think, we said last few quarters that we expect more deal flow coming from primary issuance, which really tracks M&A activity. We've got a healthy pipeline building. We are seeing a little bit of a lack of discipline from other credit investors, so we're going to be very prudent about when we make investments and where we make investments, and we're seeing even the lower end of the middle markets, some undisciplined deals as we see the world. So we're going to make sure that we're taking our time and making a portfolio decision on investments one at a time. But we do think that most of our activities, based on our deal flow pipeline, we're not saying we're going to do many of these deals, but most of the deal flow on the pipeline is from new M&A originated primary issuance, which is the business we love to be in.

James Ballan - Lazard Capital Markets LLC

Well, Patrick, given that what you just described, I mean, does it make sense for either to maybe liquidate some of the more liquid investments? I mean, could we see leverage maybe, come off a little bit in the short term if the market's getting a little undisciplined here?

Patrick Dalton

The good news is, a lot of those investments in our portfolio, because we've owned them for a while, have de-levered, have de-risked, are still paying us the same yields that we got when we made the investment originally and have -- many have call protection. So we really, would prefer those investments. We like a maturing investment that we know well, that's doing well and seasoned and de-risked over time. So we wouldn't want to -- unless we saw a better opportunity for that capital or became tight on liquidity, which we're not today, we wouldn't necessarily need to do that.

James Zelter

Yes, I would just add, Jim, that there's a differentiation between robustness in the secondary market versus robustness and fluff in the primary markets. A lot of names we'd like to hold, and we think, are relative value, but there are -- we're seeing a pretty active pipeline, a lot of middle market mezz deals are coming to us. And I think some of the leverage levels are put -- we're seeing recently getting pushed out to a point that we don't see value there versus stuff we own in our portfolio. So I think the primary market can get a little bit fluffy on the edge, and we can still be comfortable with our portfolio.

James Ballan - Lazard Capital Markets LLC

Terrific. Just one other question, on the AIC Opportunity Fund. It looks like that, that investment has performed very nicely for you. What are your thoughts, once those assets pay off or liquidate, what are your thoughts on continuing to maintain that fund or grow that fund going forward?

James Zelter

The name of the fund is an Opportunity Fund. It really comes from where there are opportunities that are that unique, and I think that these are 3 very unique situations that we found ourselves looking at and having access to. We like the opportunity. Right now, we're not seeing as attractive types of opportunities, given that robustness in the credit markets, and that's probably a fund that -- it's not really a fund, it's really a shell company that holds 3 individual loans, which will become see more investments in there in times of dislocation, versus times of the robust market we're in today. So that's why we set it up, and that's why it's called an Opportunity Fund, for when we find unique opportunities, they'll go in there, Jim.

James Ballan - Lazard Capital Markets LLC

Got it.

Operator

Your next question comes from Jasper Burch of Macquarie.

Jasper Burch - Macquarie Research

I guess, just starting off with, could you give us a little more color on the convert deal that was pulled, why it was pulled and when you might be looking to coming back into the market?

James Zelter

Sure. We're always pretty prudent stewards of our capital, and certainly, it was our view at that point in time that there would be a more prudent time for us to access the market. We are confident. We consider ourselves pretty savvy folks in the capital markets and are always looking to add what we think are accretive debt instruments to our capital structure, whether it's on the straight fixed or whether it's on the convertible. So active dialogues but nothing imminent to address in this phone call.

Jasper Burch - Macquarie Research

Okay. And I mean, I guess, looking at where some of other B to C convert [ph] deals are trading, I mean, do you think that market's still sort of open to be easy [ph] at this point? Or do you think that the next sort of round of issuance is going to be in a different type of debt?

James Zelter

I think we still feel that there's a great inquiry in the space, the convertible market -- I don't consider myself an expert in it, but there are -- it feels like there's a lot more demand than there is active supply right now. So if it made sense on terms, it made sense for us, we still feel like there's depth.

Jasper Burch - Macquarie Research

And then I guess, just changing tracks here. Given your commentary that sort of the assets that came off were lower -- were higher yielding than the assess you put on, what sort of drove the increase in the portfolio yield in the quarter? Was it repricing within the portfolio. Or just some fee amortization?

James Zelter

I don't necessarily have that. But those are some things that would make sense to me.

Jasper Burch - Macquarie Research

Okay, excellent.

Operator

Your next question comes from David Chiaverini of BMO Capital Markets.

David Chiaverini - BMO Capital Markets U.S.

You referred to the economy as being in an uneven recovery. Could you talk about what you're seeing in the portfolio regarding EBITDA and revenue growth trends? And also, what industries, if any, you're focusing more on, given your view of the economy?

Patrick Dalton

We're seeing some of the -- even today, some of the recent data that's come out, that's showing some of the unevenness in the recovery and lack of continued momentum, but still growth. I think our portfolio, we're pleased, in general, what we're seeing in our portfolio. We have continued to see portfolio revenue and EBITDA growth at the portfolio level. But certainly, idiosyncratic differences between companies and performance. But we've been pleased. I think, we've been more surprised in the upside and the underlying performance just given sort of our credit background in nature looking at downsides, but we are not going to run the business, assuming that there's going to be a steady continued growth. But as a debt investor, primarily, we don't necessarily need growth if there's cash flow at current levels in the companies. And so we're working very, very hard and looking at the portfolio, monitoring it very closely. But we're pleased.

David Chiaverini - BMO Capital Markets U.S.

And then on the any particular industries you may be focusing on more?

Patrick Dalton

Because we don't dictate which deals come to us, it's really driven by M&A volume and activity, which sectors are popular at that point in time. And so we're really -- as the opportunities come to us first, and then we'll look at its impact on the portfolio. We continue to be very cautious on heavy CapEx or heavy cyclical, or industries that are reinvesting constantly in growth, not using their cash flows to pay down debt service. So that does come in the form of some industries that are less, less popular for us to look at. But we're going to be looking at companies that show sustainable free cash flow, and we've invested in 30 different industry groups. So it can come from generally any industry group, but it's really the underlying what the cost structure of that company, what its demand, what its market position. And we don't necessarily instigate what the new deals comes to us. It's really what comes from the M&A activity in the marketplace. But we're seeing, across the board, for the most part, improvement.

Operator

Your next question is a follow-up from Joel Houck of Wells Fargo.

Joel Houck

I just wanted to follow up on the comments in terms of the pipeline. In terms of like, new LBO activity, can you give us some color in terms of, are these more likely to close near term? Perhaps in the first fiscal quarter? Is it more drawn out into kind of the second half of the calendar year?

Patrick Dalton

Joel, I'm glad you asked that question, because it really goes to the heart of why we continue to say, there's a lumpy investment pace, we don't control -- we don't really publish pipelines or commitments or give guidance, because we can't, until the deal actually closes, and funds, we don't know for sure, the timing that could cross over quarter end or not. But I think, given the amount of time and diligence that we perform, it does take several months, sometimes, to close a deal. That's the right thing to do. Given our activity levels more looking at the primary market versus secondary market, when you can -- you can be -- choose when to go into the market and close transaction, secondary versus the primary market, it will take some time. But again, we're active. Deals do get delayed and postponed. And so I think that your question's right on spot, which is that, we can't predict it. The portfolio continues to -- I mean the pipeline continues to build, and we don't know until the very end of a transaction, whether or not we're going to be there, or get there or negotiate the right deals. But you'll continue to see a lumpy investment pace. But we are seeing the pipeline pick up and it has not just been this last quarter.

James Zelter

Well, again, as Patrick mentioned, we appreciate everyone being on the call today. We appreciate your support and ongoing questions, and look forward to having you participate in next quarter's call as well. Thank you.

Operator

Thank you for participating in today's conference. You may now disconnect.

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