Triangle Capital's (TCAP) CEO Ashton Poole on Q2 2016 Results - Earnings Call Transcript

| About: Triangle Capital (TCAP)

Triangle Capital (NYSE:TCAP)

Q2 2016 Earnings Conference Call

August 4, 2016 09:00 ET

Executives

Sheri Colquitt - Vice President, Investor Relations

Ashton Poole - President and Chief Executive Officer

Steven Lilly - Chief Financial Officer

Analysts

John Hecht - Jefferies

Ryan Lynch - KBW

Jonathan Bock - Wells Fargo Securities

Robert Dodd - Raymond James

Chris York - JMP Securities

Bryce Rowe - Baird

Operator

Good day, ladies and gentlemen. At this time, I would like to welcome everyone to the Triangle Capital Corporation’s conference call for the quarter ended June 30, 2016. All participants are in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. [Operator Instructions] Today’s call is being recorded and a replay will be available approximately 2 hours after the conclusion of the call on the company’s website at www.tcap.com under the Investor Relations section.

The hosts for the call are Triangle Capital Corporation’s President and Chief Executive Officer, Ashton Poole and Chief Financial Officer, Steven Lilly. I will now turn the call over to Sheri Colquitt, Vice President, Investor Relations for the necessary Safe Harbor disclosures.

Sheri Colquitt

Thank you, operator and good morning everyone. Triangle Capital Corporation issued a press release yesterday with details of the company’s quarterly financial and operating results. A copy of the press release is available on our website. Please note that this call contains forward-looking statements that provide other than historical information including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled risk factors and forward-looking statements in our annual report on Form 10-K for the fiscal year ended December 31, 2015 and quarterly report on Form 10-Q for the quarter ended June 30, 2016. Each is filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.

And at this time, I would like to turn the call over to Ashton Poole.

Ashton Poole

Thanks, Sherri and good morning, everyone. Given Triangle’s recent public equity offering and the preliminary disclosures that we voluntarily made in conjunction with that offering, our prepared remarks on today’s call will be shorter than normal. Also, Brent is not able to join us today and so Steven and I together will cover his remarks within our respective comments. As it will come as no surprise to you, we followed our equity offering last week. We are very pleased with our collective financial and operating results for the second quarter and we are excited about the trends we see on the horizon for the second half of the year.

During the second quarter, our NII per share was $0.49, which equates to the high end of the range we provided in our prospective supplement filed on July 25. Our NII per share is almost 9% above our $0.45 per share quarterly dividend and represents exactly the type of operating cushion we strive to achieve. During the quarter, we made three new investments totaling approximately $46.3 million and we made several small follow-on investments in existing portfolio companies totaling $17.4 million. Together, our new investments and follow-on investments equated to $63.6 million in total investments. These investments were offset by principal repayments across our portfolio of $59.5 million.

And as we mentioned on our quarterly earnings press release, our new investment pipeline has increased materially over the last 30 to 60 days, which was a primary impetus for our equity offering. On a go forward basis, we would expect to invest the proceeds of our equity offering over the next two to three quarters. It’s always difficult to predict with accuracy the timeline against which new investments will close. And in the current market when both buyers and sellers appear fairly strong-willed, we are seeing transaction timelines become even further extended, hence, our guidance of two to three quarters in terms of investing the proceeds of our equity offering. Needless to say, however, we are certainly pleased to be in a position of strength to capitalize on what we believe are high-quality investment opportunities across the lower middle market.

In terms of some of the specifics of our investment portfolio, we experienced net realized gains in the quarter of $3.9 million consisting primarily of a $3.3 million gain on the sale of our equity in Performance Health and a gain of $2.3 million from the sale of our equity position in Top Knobs. These gains were partially offset by a $2 million loss associated with the write-off of our participation interest in UCS Super HoldCo, a holdover from our prior investment in the Tomich Brothers which have been valued at zero since the third quarter of 2015.

From a valuation perspective, we recorded pre-tax net unrealized appreciation on our current investment portfolio totaling $8.4 million for the quarter. Across the debt portion of our portfolio, we experienced $14.3 million of net unrealized appreciation largely driven by underperformance at our investments in Community Intervention Services, Cafe Enterprises, and Women’s Marketing. In addition, we wrote the remaining the $2.1 million value of our debt investments in BFN operations to zero. These write-downs were partially offset by pre-tax debt write-ups in our equity positions of $5.9 million driven primarily by strong performing companies such as Access Medical, AGM Automotive, Magpul Industries and NB Products. These results once again show the benefits of a diverse portfolio and our strategy to hold minority equity positions in a high percentage of our portfolio companies.

As of June 30, our non-accrual assets totaled 5.6% of the portfolio on a cost basis and 2.2% of the portfolio on a fair value basis. As we disclosed in our perspective supplement, during the quarter, we received a blockage notice from the senior lender with regard to our $15.4 million subordinated debt investment and community intervention services. As a result, we have placed this investment on non-accrual status. We are currently in negotiations with the company and the senior lender to affect an amendment, but the timing and results of that amendment are not known at this time. Also during the quarter, we placed our subordinated debt investments totaling $5 million in DP2 Holdings which was picked non-accrual account last quarter on full non-accrual.

Switching gears to the current investment environment, our new investment pipeline continues to yield weighted average rates in the 11% to 13% range from mezzanine investments and 9% to 11% for unitranche investments. Our current pipeline contains numerous opportunities for both types of investments. And while it is impossible to predict which opportunities will close and on exactly what terms, I am pleased that we have meaningful capital available to deploy in order to provide our stakeholders with attractive risk adjusted returns.

And with that, I will turn the call over to Steven.

Steven Lilly

Thanks, Ashton. Given the much of our standard financial disclosures contained in our quarterly podcast which was released at the time of our quarterly earnings press release, my comments will focus more on the color behind our results. The quality of our revenue during the quarter was very typical as we would say and that we experienced approximately $2.6 million of non-recurring dividend and fee income, which is very much in line with both our long-term average and our guidance range.

From an efficiency ratio standpoint, with efficiency ratio being defined as total G&A divided by total investment income, our second quarter efficiency ratio was 18.7% compared to our first quarter efficiency ratio of 19.1%. Both our first and second quarter annualized G&A expenses as a percentage of average assets totaled 2.0%. Our NAV per share as of June 30 was $14.82. This is at the high end of the range of $14.80 to $14.82 which we have previously disclosed in our prospective supplement on July 25.

The primary variables affecting our NAV this quarter were the portfolio movements Ashton discussed, our net investment income which was higher than our quarterly dividend and the positive effects of stock-based compensation during the quarter. I should note that during our equity offering one of our newer underwriters asked if we had ever conducted an offering ahead of quarterly earnings. I answered, yes. During the first quarter of 2012, we did that. He then asked what our NAV per share was at that time. I reported that it was $14.68. This quick story highlights one of Triangle’s long-term goals maintaining and enhancing NAV on a per share basis.

When one contemplates all of the activities since the beginning of 2012 with Triangle, $1.5 billion of cumulative investments, approximately $1 billion of principal repayments, significant realized long-term gains, supplemental dividends to shareholders from those gains, the contraction in pricing and the investment market over the last 2 to 3 years even realized losses in our portfolio in certain periods. What undergirds all of our operational activities is an NAV per share that not only has been relatively stable, but that which is higher than our NAV per share at the time of our IPO back in 2007 and also higher than intra-quarter offering in early 2012.

From a liquidity standpoint, in May we received an incremental commitment from the SBA totaling $32.8 million consisting of a redraw of $7.8 million of debentures we had previously repaid $25 million of new debentures representing a new commitment as part of the expanded SBIC investment program. Also relating to the SBA in conjunction with the Green Light Letter we received in May of this year permitting Triangle to apply for a third SBIC license. We are extremely pleased to report that last week, we formally submitted to the SBA our application for a third license. And on this development I would like to emphasize two important points. First, we are excited about the prospects of expanding our longstanding relationship with the SBA and we are delighted to have already raised 100% of the $50 million of equity capital required to fund fully the license should it be granted by the SBA.

Second and we want to be very clear with all of you as members of the investment committee – excuse me, the investment community that the SBA will either approve or deny our application and its sole discretion and that we are incredibly respectful of their process and the degree of privacy that is naturally associated with the application review process. As a result we are making this announcement as a matter of record only and out of respect for the SBA we will not provide any additional information publicly regarding our application for our third license until we have permissions to do so from the SBA.

Finally, from a liquidity standpoint including the effects of our recent equity offering, we have total liquidity of approximately $390 million representing cash on hand and availability under our $300 million senior credit facility.

And with that I will turn the call over to Ashton for a few closing comments before we open the call for questions.

Ashton Poole

Thanks Steven. The life cycle of the BDC contains three phases raising capital, investing capital and distributing capital to shareholders. TCAP has recently raised a meaningful amount of growth capital, during the ensuing months and quarters we will attempt to invest this capital prudently. And during the subsequent quarters and years we hope and expect those investments will generate meaningful value for our shareholders. And as in the years past we continue to be good stewards of the capital entrusted to us and we expect to have the opportunity to continue renewing this cycle on the future, a cycle of growth, stability and reward for our shareholders. We are fortunate to operate in such a dynamic industry and these are clearly exciting times. Many BDCs are delivering meaningful total returns to shareholders, returns which are superior to banks and superior to loan mutual funds. Triangle as a company is proud to be a part of the growing BDC industry. The second half of 2016 looks bright for TCAP. We are poised to take advantage of quality opportunities we see in the marketplace and we are able to do so with a firm operational and financial foundation.

And with that operator, we will open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Hecht with Jefferies.

John Hecht

Hey guys. Thanks very much. Couple of questions, first of all, just thinking about deploying the capital, it sounds like you guys are busier now than you were in the first part of the year, maybe talk about personal needs and where you stand in terms of the kind of human capital positioning with respect to deploying capital?

Ashton Poole

John good morning it’s Ashton, thank you very much for your message – sorry, for your question. Where we stand right now I think we are at 26, 27 employees we have hired and brought on board two employees recently one of whom is on the deal team. We still have our core senior deal leads to do a fantastic job of developing our relationships with our financial sponsor partners around the country. I would say that as the first half of the year has been slow for the industry in general, slower for Triangle as well, it’s typical what we are seeing over the last couple of years in the environment for this time of the year and yet the second half of the year tends to get a little bit more busy. So I think currently from our staffing levels, we appear to be staffed appropriately given the flow that we have. We obviously constantly monitor that, but our senior deal leads do a terrific job managing their relationships and the flow that we are seeing right now is not in-consistent with the flows that we would have experienced and the same timeframes over the last couple of years and our staffing levels have been adequate at those times as well. It’s a good question though and one we constantly monitor.

John Hecht

Okay. Thanks to the color there. And then I guess question and I know hypothetical in respectful the SBA with respect to your third license, but should you guys get a third license, would it change your kind of target total leverage ratio and I think that the BDC with the total leverage ratio or would you be kind of use it more as a margin tool, how would you think about using that type of capital?

Steven Lilly

John, it’s Steven. Thank you. I don’t it would change our total leverage ratio in terms of approach to the business and where we have operated historically. Obviously, the capital that the SBA when it approves any BDC for a license or a second license or a third license is very, very favorable capital and it’s just really almost the best form of capital for what we do in terms of making 5-year, 6-year commitments to portfolio companies. So I don’t think you would see any real material change for us if the license is granted. We would still approach in a way we have with our first two licenses.

John Hecht

Okay. And the final question is you talked about some of the activity more recent investment activities, I am wondering can you talk about activity thus far in Q3, any changes in terms or margins or anything that’s note worthy in terms of the investment climate?

Ashton Poole

Yes. John I would say that the pipeline that we have is healthy, it represents a good mix of mezzanine and unitranche opportunities. As I have mentioned in my remarks, historic pricing for mezzanine has been 11% to 14%. We are currently seeing on a regular 12% to 13% opportunities on the unitranche side kind of 9% on mezzanine side. Yes. Sorry, just to be clear 12% to 13% on the mezzanine side and then on the unitranche side 9% to 10%, so fairly consistent with past pipelines in terms of pricing possibilities.

John Hecht

Great. Thanks so much, guys.

Operator

Our next question comes from Ryan Lynch with KBW.

Ryan Lynch

Good morning. Thank you for taking my questions. First one, I just want to dive into the portfolio yield a little bit, so part of the reason you guys cut the dividend was portfolio yield contracted from about 14.8% to 12.3% and I get why the portfolio yields contracted, you guys did not want to reach for yields at the risk of putting on bad credits and potentially having credit loss in the future which is the absolute right long-term move to make, but I just want to talk about as we sit here today with the portfolio yield of about 12.3% given what you guys are seeing in the markets today and where you guys are finding the best opportunities, where do you guys think the portfolio yield will shake out maybe a year from now what does that look like?

Steven Lilly

Ryan, it’s Steven. Thank you for your question. The pricing that we have seen in the market has been very stable as you attending our Analyst Day back in June certainly heard and you have heard us talk about that on more recent conference calls. So really since kind of late 2014, the pricing has been very stable both on the mezzanine front and also the unitranche front. So since that period of time what’s affected our portfolio weighted average yield has been the repayments that we have had. And they have still been at higher interest rates and so we have continued to come down a bit. What you also are seeing I think from us is over the last several quarters the delta in the portfolio on a total basis has become sort of 10 basis points movement or something like that. So it’s been much more consistent at a level. I think if we were to make and obviously we can’t predict totally and Ashton alluded to that in his comments of what transactions will close and over what timeline. But I would think in terms of total weighted average yield in the portfolio, the level where we are today, we should be pretty close to that, I mean I would say within 25 basis points one way or the other, it would take a fairly meaningful sort of two years plus period of time to get outside of that range based on what we are seeing today and what’s likely to at least in our minds be a mix of both traditional mezzanine opportunities and then some high-quality unitranche opportunities that we might, does that help?

Ryan Lynch

Yes, that’s very helpful. That’s very good color on it. I actually have one maybe kind of follow-up to that though, you know you talk about the different yields and the unitranche versus the mezzanine product, you know historically I would say your guys second lien and mezzanine portfolio or percentage of your portfolio has been around 70% to 80% of your portfolio, do you guys see that mix shifting of potentially shifting any more to the unitranche product or are you guys seeing better opportunities in the unitranche product today or as you guys kind of expect your portfolio, the mix to kind of same the same that has historically been.

Ashton Poole

Ryan, it’s Ashton, we do get asked this question a lot and as I have said in the past, we always look for the right or best risk-adjusted return proposition for our shareholders. Sometimes the investments, we are asked to provide a sub debt proposal only, sometimes we are asked to provide a unitranche proposal only, sometimes we are asked to provide both unitranche and a senior sub proposal only. And you know each quarter ends up differently, this last quarter in Q2, we had three new investments, they happened, the two sub-debts and one second lien and the pricing were 11% 12% and 13% and so in those cases those were the right, what we thought were the best risk-adjusted return structures for our shareholders. Should a very high-quality unitranche opportunity come along at lower pricing and we feel that that structure is superior to a senior substructure.

We would go that route. So it’s hard to answer with certainty your question. I can just tell you that we have, the flow of both types of opportunities comes into the same funnel from our senior deal team and so we are fortunate to have that flow and fortunate to be in a position to be able to think through the structures that we believe provide the best gross to adjusted returns for our shareholders.

Steven Lilly

Ryan, it’s Steven. I might add one thing to what Ashton saying, just to try to give you as much color as we can. And that is maybe looking at it the other way, which is what I don’t think you will see is that Triangle’s portfolio will become a portfolio that is the majority of which is unitranche driven and then the minority of which is mezzanine driven. That’s not the focus that we have, that’s not, we’re not changing the style of investing. We’re simply becoming would-be increase in size of our balance sheet, we are able to be more relevant to a larger pool of sponsors who are looking at a larger pool of companies and so we are certainly pleased with that and we’re trying to give you guys the color of just how that can play into our portfolio. But it’s not, we are not seeking a major change in strategies certainly.

Ryan Lynch

Appreciate the color. And then just, you guys mentioned in the prepared remarks that Café Enterprises in women’s marketing you know had pretty big unrealized appreciation in the quarter, can you guys just give us any update on what drove those markdowns in the quarter and what were the outlooks for those two businesses?

Ashton Poole

Sure, Ryan, it’Ashton. I would say, in both of those obviously a private company so we can’t go into too much detail but I would say from a big picture symatic perspective on café, as you know that’s a medium-sized call it 40 to 50 units casual dining restaurant chain and like many other casual dining companies over the last quarter, the weather has been a major factor and certainly this company is more South-eastern in its geography and so the weather has been a factor in the foot traffic as well as just the general economic environment. So they had slower traffic, weather has exacerbated data and it’s put some pressure on some margin for the company but it’s a good restaurant chain and I think their performance is more consistent with a broader general theme as opposed to really company specific issues.

With respect to women’s marketing, as you may know women’s marketing is a full-service media strategy, and planning and buying organization that really serves the women’s market and so I think what the company has experienced is some changing ad spend methodology. So overall ad spend has declined somewhat year-to-date but importantly there has been a shift in methodology on how ads are purchased and whereas in the past, there have been more long-term commitments. Those commitments have started to shift and more shorter timeframes and so it has created a little bit of volatility and performance for the company. So those – hopefully that’s helpful color on both hard to go into too much – much more detail.

Ryan Lynch

That’s great color on both of all. Thanks. That’s all the questions from me.

Operator

The next question comes from Jonathan Bock with Wells Fargo Securities

Jonathan Bock

Good morning and thank you for taking my question. I reiterate Ryan’s point on cost of capital clearly matters and it’s very important for folks to look at it proactively as you have done and so, now taking a moment to look at the global landscape, it is, we are under the impression that there are some fairly large non-bank lenders that have recently been acquired, many of whom are seeking to exit the lower end of the middle market namely companies with EBITDA sub $10 million around that. Curious if you are finding any structural shift in the actual number of deals that you’re looking at is a result of perhaps what could be a fairly large exit from a fairly large lender?

Ashton Poole

Jon, I will start, good morning, thanks for your question. You know I would say that our flow as I call it from quarter-to-quarter is generally pretty consistent. I think we have, as we have highlighted before the first quarter of this year was slower for everyone in general and including us. Interesting, the second quarter I was looking at some steps from Q2 of 2015 and the investment activity that we made in Q2 of 2015 is almost identical in terms of dollar amount what we had in this past quarter and interestingly repayments were almost identical, so I would say from the Q2 angle it’s very consistent with what we have seen in the past. We have experienced an uptick in the last 30 to 60 days in terms of both the quantity of the flow and the quality of the flow and I think that is little bit of a marked departure from what we saw in the earlier part of the year where the quantity was a little lower and certainly our deal has looked at the quality wasn’t where we wanted it to be. So I would say that we are very optimistic about the second half of this year in terms of both the quantity and the quality of the flow is certainly playing out and what we believe is a very attractive pipeline and certainly play and important part in our thought process around the equity offering.

Steven Lilly

Jon, just before you start your next one. Let me just one thing if I may more in the global nature of what you are asking, there have been some folks who have announced that they will maybe move away from the lower middle market that type of thing, yes, I think I will make two points there, one is how one defines the lower middle markets is certainly a key point. But let’s assume for a minute that they defined at the same way that we do. We are all for that. We would love people to move from our market. Typically groups that choose to move away from the lower middle market who have already had a presence there do so because they perceive that more valuable to write bigger check and to kind of move in through the middle, middle market or the upper middle market and can put more dollars to work in the same amount of timeframe something like that. It’s any we really value the lower middle market and Jon has comments about staffing, I think goes to as well. It’s exactly where we want to stay and we think if you can resist resist the temptation to go to the broader up markets where things are more competitive

and leverage is higher. It does take a little more work and you have to staff appropriately but the returns really in our mind can be meaningfully better to shareholders over a sustained period of time. So we are happy to see people leave and we are happy to have few people in the room looking for dance partner while we are still here.

Jonathan Bock

I appreciate that, Steven, maybe only because credit risk appears to be just a bit elevated as folks are hypersensitive. You know the competition that comes from stretch senior is the competition that comes from unitranche et cetera. Lower, upper etcetera is kind of put in the forefront of a –bit of a focus on credit risk particularly if you think of mezzanine. So looking at one investment NB products, right this has got a fairly decent economic exposure to the portfolio and there we see a 20% pick junior bridge loan, can you give us a sense of the situation there in light of what we kind of considered to be a relatively high cost on an investment that matters and should perhaps get a little bit more color on.

Ashton Poole

Jon, it’s Ashton. NB products is one of our investments that is part of what we would call our unsponsored or fundless sponsor driven deals and we are partnered with another financial partner as being the primary sources of capital for that company, so it’s a little bit of a different breed if you will from the traditional financial sponsor sourced investment opportunity that we typically employ, so for example our equity ownership percentage in that business is significantly higher than what you would see in the typical equity co-investment situation. The company is a leading provider of gloves to the hardware, paint, general landscaping and other related industries. If you’ve been to a Home Depot, you will have seen their gloves they are the, one of the leaders in the country in that category. And the capital that went in to NB products this quarter was in support of a very strategic acquisition of a competitor that had significant penetration and another major retailer, so there was a very good diversification of risk from a concentration perspective and also it added significant complementary products to their portfolio, so it was viewed as very strategic that the 20% security that you’re referencing there was essentially “the equity” or a portion of the equity that was split in in addition to other securities to support that acquisition. So, it’s really a terrific opportunity for the company, we feel very good about the acquisition and it’s really one of our best from the sponsors that frankly we’ve ever seen is behind this transaction. So we are very comfortable with it.

Jonathan Bock

Additionally, the question kind of on PCX Aero, right so about $20 million exposure in there, we kind of see a follow-on but done so with perhaps lower marks on the investment. So if we think of mark to market often bit of a cannery would we, could we also think that follow-on kind of have been done to support what perhaps is a declining situation or is it something different?

Steven Lilly

Jon, it’s Steven, PCX is a company that PCX Aerostructures, they sell component parts, manufacturers and sell component parts primarily for helicopters and things of of that nature. They do a lot of VOD work, Department of Defense work and what I think other sort of governmentally exposed companies have seen and you might have seen this in some other BDC [ph] portfolios. There’s been an elongation to the revenue cycle for folks who have type of exposure, you know this is a sizable company you know just general thematic points you know revenues much closer to $100 million then to the bottom end of the spectrum so a larger company in our portfolio and so the follow-on investment, clearly their cash flow is lower than they would like and the sponsored and we would like given the elongation of the sales cycle but from a support standpoint with the company, William sponsor [ph] both remain very supportive of the company and its place in the market. And so it’s more of a call it out a timing difference but you know one that’s driven by more you know the customer that they serve I guess, I would say. Does that make sense?

Jonathan Bock

That does. Thank you and thank you for taking my questions.

Steven Lilly

Thank you so much.

Ashton Poole

Thanks Jon.

Operator

Our next question comes from Robert Dodd with Raymond James.

Robert Dodd

Hi guys, just on, first a question about the global market, I mean actually you mentioned you are seeing better quantity and quality of deals on prior calls you kind of broken down the market for us between kind of A deals, B deals, C deals et cetera, like I want to see your focus on the A side. Can you give us a bit more color, is this on I mean you know more A deals with better terms always you know partly the quantity is improving because some of the big deals are now coming through with much better structures for example, can you give us a bit more breakdown about exactly where the quality and quantity are coming from in that stratification?

Ashton Poole

Robert, good morning. The short answer is it’s lumpy if you will in terms of – you have to look at it both from a large macro perspective and then you have to look at it from a TCAP specific perspective and so I think our senses both the market has improved and certainly as you know we maintain very good relationships with numerous M&A sales side front and so we regularly canvas them for their perspectives on the markets and they all say that they are busy, they all say that their pitch activity is high and that they are all viewing the second half of the year as one that’s going to be you know active. I think you have to then dig down and peel the onion back to not only in TCAP’s case our relationships but really any other firm’s relationships and understand whether or not the sponsors if it is a sponsor driven model which as you know 75% of our deals are sponsored driven, whether or not our sponsors are actually you know in the flow and in a position to win the deals.

In some quarters our sponsor group is largely defined maybe a little slower, in other cases and other quarters, there may be an alignment of the starts where you know multiple of our great relationship sponsors are in the final stages of wining or do win the deal. So you have to marry both the macro perspective and then to peel the onion back to where your best relationships exist and how busy those sponsors are in terms of winning deals and right now I think we seemed to be benefiting from a little of both which is the macro environment appears to be a little bit more busy and consistent and also our really good sponsor relationships, they are positioning themselves well to be in a position to win deals. I mean they are certainly they are having to add back the question as whether or not they are going to win the deals and hopefully if they do will be a good position to be able to capitalize on that?

Robert Dodd

Okay, great. Thank you. Thanks. Great color. Just on community obviously marked at 76, very good mark, so that kind of emphasizes your comfort with how that things are going to go, but can you give us any more color obviously a delicate situation but I mean a block notice you put this deal in Q3 last year, what changed? I mean was this just an incidental hiccup that just happened to trigger a covenant with the senior guy or you know has there been a sub thing of a structural problem for that business?

Ashton Poole

Robert, community as you know is a provider of community based and outpatient behavioral health services, it’s a multi-state organization. Last fall they made an acquisition and I think there is two issues that have been effecting the company, one have been just a slower integration of that acquisition and realize performance that they hope to have, and then second, you know something that’s effecting it’s a healthcare general related issue which is the ability to attract qualified employees and get those employees on boarded and then out in to the field and recorded from a billing perspective and so I would say, you know in general those have been the two major issues that have effected this company that the senior lender here has chosen to take a pretty aggressive path regard to the blockage and so it’s really more and it’s consistent quite frankly with the way a lot of senior lenders are acting these days which is to act a little bit quicker on the front end and then have everybody come to the table to have a conversation as opposed to delaying any action and pushing it out. So I think we are just on the front end of that. With this company, I will be clear that we have a lot of confidence in CIS, it’s a good company, it’s not a broken company but it’s one where they’ve had a couple of operational missteps and the senior lenders just choosing to get ahead of it as opposed to delay any type of action. So I think the discussions are ongoing and we are actually confident about the company’s future and believe in them.

Steven Lilly

Robert, it’s Steven. I may add one thing to that, is the thing Ashton gave good color but your comment on the mark here the valuation of 76% and that giving some indication of our feeling about the company. It’s a really good point on your part and you know I think there Ashton’s color about how senior lenders are acting now, historically it was very typical when there would be a covenant violation and the deal on a senior basis that the senior lender would say you know you violated the covenant, we want everybody to come to the table and focus on an amendment and he would negotiate and then something would happen in all likelihood. Now, in the current market the difference is many senior lenders and this is, yes, you need to also of course we heard it from many, many of our friends across the industry. Senior lenders will exercise the notice of blockage and then they will use that notice as a way to bring people to the table more rapidly so to speak and in their mind more focus and clarity of the conversation. So it’s one strategy versus another, there are frequently times where that could happen in any BDC’s portfolio and you as an analyst or an investor or anyone in the public would not be aware of it because it might just be intra-quarter. Here we had an event where it happened obviously during the quarter but the resolution is still “in process”. And so that’s why we obviously disclose that in our prospectus supplement and wanted everybody to be aware of it and why we wanted to speak about it on this call. But just wanted you to have that color of kind of how the lending, senior lending market is acting. The result is the same. The process is just a little different.

Robert Dodd

Got it, got it. Thank you for that color. Really helpful as well. Again thank you. Just one last one if I can on the efficiency 18.7% obviously a very good number. Anything unusual in there, I mean, I presume, there were some bonus reversal or anything like that but with the lower bonus accrual so to speak as a result of credit issues or anything like that. Obviously, I mean you have given you targets is well established and 18.7% is below that, right. But is there any color on what drove that this quarter?

Steven Lilly

This is Steven, Robert. No real color on that. As you know having no noise for quite sometime, how we accrue or the compensation committee recommends to the full board or a quarterly bonus amount to be approved is – there is a lot of varying in that every quarter in every and every year. So we always say here that one quarter does not a trend make one way or the other. I will be – want to be real clear on one point and you allow for it so it doesn’t look like there’s a bonus reversal. In the history the company we’ve never had never that, that event occur. So the compensation committee’s view is when we accrue a number, whatever that number is and whatever quarter it is, we as the compensation committee want to be as certain as we can that this is a call it a good sticky number and one that we would not later have to go reverse and we don’t think that’s a good practice. So they tend to take a more conservative approach. I guess you might say in the early part of the year but again every quarter is unique and they make their own determination but that’s the style with which they make their determination I guess I would say. Does that help?

Robert Dodd

Absolutely, yes. Thanks a lot.

Steven Lilly

Great.

Operator

Our next question comes from Chris York with JMP Securities

Chris York

Good morning, guys and thanks for taking my questions. Forgive me if it was already asked. But first, how many investment professionals do you have at TCAP right now? And then secondly, how should we think about your desire to bring on new investment professionals say over the next 18 months as you consider growth in the platform?

Ashton Poole

Chris, good morning. We have I think the exact number is 26 employees and the split, if you want to split it and we typically have two major groups here within TCAP, one is the investment team side and the other is the shared services team side and obviously there is the senior management as well that includes Steven and Brent and me, so you I think from a matrix perspective, we probably go across both both groups but I would say that in general it’s call it 18 and 8 would be a split that would be consistent with how we think about shared services and deal teams, 18 on the deal team side versus they had on a broader shared services support team. As far as moving forward, you know we do think about staffing with respect to the deal team especially at all levels. We have analysts, we have associates, we have Vice President and we have principles and managing directors. And so, we do have obviously an active recruiting initiative for analysts who join and then continue to matriculate through as associates and VPs but also we have our five senior deal leads.

And so going forward it’s important to note that we are very inwardly focused company and develop from within. We have been so fortunate over the years to have really high quality employees and TCAP has been a place where folks want to hang their hat for a career and so we work hard on developing our employees so that you know when they come is an as analyst, we think about them as a long-term hire and ultimately a Managing Director of the firm and that’s the goal. We will always keep our eyes and ears open for someone externally you can bring a differentiated especially on the origination side, a differentiated angle maybe a different way of going to market or keeps out of new relationships that would be complementary to what we do have. But right now I would say we are adequately staffed in the sense that we have five senior deal leads, we have four Vice Presidents and then we have associates and analysts underneath that. So I think – I feel we have a good complement right now that’s consistent with the quantity of the deal flow that we have on a quarterly basis.

Chris York

Very helpful. Then maybe Ashton, so, if you did consider an external hire, what specialty or relationship focus would be complementary to your current roster on the deal team?

Ashton Poole

Well like – that’s a hard question to answer. In the world of lower middle market, there’s 200 roughly 250 financial sponsors who target the lower middle market and as I said to many of you before publicly, we have relationships with call it half of those and then the only 80-20 rule applies and as we’ve always tried to target the top quartile sponsors, we typically transact with call it 30 of those is a round number. So you know for someone to come in and have a differentiated angle, you know, it would have to be someone that has relationships that we don’t have for example of perhaps different set of sponsors that are viewed as high-quality and where we just typically haven’t had relationships or flow before. You know each firm has a different way of going to market. The way that we go to market is, we do it the old-fashioned way, our folks on airplanes every week flying all over the country and developing these relationships and it takes time, this is not something that happens overnight. And it’s a lot about trust and it’s a lot about partnership and it’s a lot about the ability for our senior deal leads to convince the financial sponsors that they can deliver TCAP. And so, you know it’s an easy question to what type of person would you like to bring on? It’s a harder question to answer of what that specific person would look like because it has to be a cultural fit, that has to be a business fit as well and so all of those factors make it hard question to answer. But hopefully the color that I gave you gives you a sense of how we think about it.

Chris York

No, it’s very helpful. I understand that. That’s tough one to answer and many moving parts there, so appreciate it. Lastly, how should we think about your ability to leverage maybe fixed cost over the longer term considering that you may be thinking about investing in some process improvements to prepare for the longer term?

Steven Lilly

Chris, it’s Steven. You know, I think we would echo what we have said in recent quarters and periods that Triangle as we continue to get larger incrementally and the recent offering certainly gives us a step functionability to do that now. You know, we will want to make the investments in the business that we need to from a – to stay abreast of things from a technology standpoint as Ashton just spent some time discussing with you from a human capital standpoint. You know, I think for right now our guidance of this plus or minus 20% efficiency ratio in the low 2% of assets under management range is is a good range for us. It is not to say will be 2.0 in every quarter like we have been for the first two quarters of this year in terms of a AUM, percentage of AUM. But in the low twos, I don’t think you’ll see a spike up to 2.75 so to speak anytime soon on a percentage basis. So there will be quarters that will bump around kind of going back to the question just a minute ago on bonus accrual that Robert was asking and we think about it more in the sense of one, what does the long-term trend look like and you know what’s the right thing to do for the business over the next 3 to 5 years as opposed to josh, what does mean for a specific quarter and where we might be with regard to Street estimates and consensus and those types of things. You know, that really is just frankly not a – as you know having know us for a long time. That’s just not our driving focus, it’s much more the – as a management team, we would say can quote “reasonably look out into the future which we would say would be the 3, 5 year time frame of how we want the business to look”. So I think you will see some of those things occur but just again hard to dictate which quarter it would be. Does that make sense?

Chris York

It certainly does. Thanks for that and that’s it from me.

Steven Lilly

Alright. Thanks so much.

Operator

Our next question comes from Bryce Rowe with Baird.

Bryce Rowe

Good morning, just wanted to ask about maybe the composition of the liability structure so that you guys have $125 million give or take of cash on the balance sheet before the equity offering and so now you’re sitting on quite a bit of cash understand that so we are using, potentially using a portion of that to capitalize a third SBIC license and to deploy into the investment pipeline but curious if there is an opportunity potentially to call some of the senior notes that are callable now and perhaps extend and lower pricing from a lion cost of that capital per se, thanks.

Steven Lilly

Bryce, it’s Steven. Thanks for your question. I think, obviously we are not up to commit unilaterally to one path or the other on in a forum such as this. I would tell you that I think, a decision to we have called in bonds before and we are pleased that we did that. Thought it was the right thing to do long-term for the capital structure and for shareholders. You know I think when you look at where our two baby bond issues are trading and where you know – call the reissue would be then you know those things are certainly considerations but also as you look at it from a standpoint of total cash, keep in mind that with two SBIC funds that cash that you see on our balance sheet is not all in what you would commonly call TCC or Triangle Capital Corporation, it’s you know some of that cash is obviously in one fund and some is in the other fund and some is what we call the holding company. So we try to balance those things and then I think we look to obviously the robustness of the new investment pipeline clearly paying down our bank line a little bit with some of the proceeds of the offering is great clearly being able to demonstrate to the SBA that were they to determine that we are worthy of a third license that we have capital on our balance sheet that is resting and waiting patiently to be used in a third license is a good signal we think and an appropriate signal we think. So I don’t think we are finding, we don’t have a lack of uses for the cash received from the offering certainly and I think some pretty good ways to invest it given Ashton’s comments on the pipeline. So again I wouldn’t commit unilaterally anything on the baby bond side but right now I think we have a lot of other opportunities to look at if that make sense.

Bryce Rowe

Yes, helpful. Thanks, guys.

Steven Lilly

Thanks so much.

Operator

And I am not showing any further question at this time. I would like to turn the call back to Ashton Poole for closing remarks.

Ashton Poole

Thank you operator and thank you everyone for joining us today for our call and we look forward for staying in touch with you on our next call. Have a great day.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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