Gladstone Investment's (GAIN) David Gladstone on Q4 2014 Results - Earnings Call Transcript

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Gladstone Investment Corporation (NASDAQ:GAIN) Q4 2014 Earnings Conference Call May 14, 2014 8:30 AM ET


David J. Gladstone - Chairman and CEO

David A. R. Dullum - President

David Watson - CFO and Treasurer

Michael LiCalsi - Internal Counsel and Secretary


Jeremy Roane - Hilliard Lyons

J.T. Rogers - Janney Capital Markets


Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's Fourth Quarter and Year Ended March 31, 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, David Gladstone. Please proceed, sir.

David J. Gladstone

All right, thank you, Charlotte, for that nice introduction and hello and good morning to all of you out there. This is David Gladstone, the Chairman. This is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. We have a common stock on NASDAQ trading symbol GAIN. And again, thank you all for calling in. We're always happy to talk to our shareholders and potential shareholders.

We like to give an update on our company, our portfolio companies and our business environment. I wish we could do this more often and again, all of you, if you're in the Washington D.C. area, have an open invitation to stop by our office that's here in McLean, Virginia, just outside of Washington D.C. Stop by and say hello. You'll see a team of about 60 people and now some of the finest in the business.

Now, let's hear from Michael LiCalsi, our Internal Counsel and Secretary who also serves as President of the Administrator. Michael.

Michael LiCalsi

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they are based on our current plans which we believe to be reasonable.

Many of these forward-looking statements can be identified by the use of such phrases; anticipates, believes, expects, intends, will, should, may, and similar expressions. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption, Risk Factors, in our 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website at or the SEC's website at

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this conference call, except as required by law. Please also note that past performance or market information is not a guarantee of future results. Please take this opportunity to visit our website,, sign up for our email notification service. We don't send out junk mail, just timely news on our company. You can also find us on Facebook, keyword The Gladstone Companies and you can follow us on Twitter at Gladstone Comps. Now we will begin the presentation by hearing from Gladstone Investment's President, David Dullum.

David A. R. Dullum

Thanks, Michael. My voice is a little bit off this morning, so I apologize; hoping it will come through loud and clear. I usually like to start with a very brief review of what it is we do. It sort of helps to keep the long-term goals in mind as we update on these calls our short-term results. So Gladstone Investment provides capital for the buyout of businesses and these usually are companies with annual sales between $20 million to $100 million.

What we do is provide the subordinated debt in conjunction with the equity and occasionally some senior debt. This combination introduces the mix of assets for Gladstone Investment and is evasive to our strategy, which means our debt investments provide income to pay and grow our market dividend and we expect the equity to appreciate and of course from time to time to generate capital gains.

This is also what differentiates us from other public BDCs that are predominately debt focused whereas we are equity oriented. So, for instance, during this fiscal year we sold a company called Venyu Solutions Inc. which we purchased with its management team back in roughly May 2010. The equity portion of this investment generated cash proceeds of roughly $32.2 million resulting in a realized capital gain of approximately 24.8 million with dividend income of 1.4 million as well. Therefore, our original $6 million equity investment generated approximately 5.5 times return including the dividends received.

So the sale of Venyu actually is the fourth exit, so to speak, from our management supported buyout investments. These four liquidity events, all capital gains, have generated approximately 54.5 million in the realized gains since June of 2010. These realized gains have enabled us to offset the majority of cumulative realized losses that we had. So with this continued growth in operating income and these realized gains, our Board was actually able to declare a monthly dividend of $0.06 per common share for the last six months of fiscal year ending March 31, 2014 which was an increase of 20% over the first six months of this fiscal year.

The Board has also gone ahead and declared $0.06 per share for each of April, May and June of 2014 which is actually a run rate of $0.72 per share per annum. So again, we've been able to increase the dividend nicely. So generally, these investment opportunities come through our partnering with management teams and other sponsors in the purchase of a business. Our strategy which provides this financing package including the debt and the majority of the equity is a competitive advantage as it gives the seller and to some extent whoever the buyer is if we're partnering with a sponsor, a high degree of comfort that this purchase will happen. And the sources we concentrate off of these buyout opportunities, our independent sponsors, middle market investment bankers and middle market private equity firms, all of the areas where our equity component is meaningful to the transaction.

So in addition to outright purchases we occasionally will find opportunities to partner with a business owner who will sell a portion of that company to us and use this capital to grow the business. So looking at our activity for the quarter and the fiscal year, for the quarter ended March 31, we closed new two investments totaling $28.7 million and they were as follows. In February we invested 13.1 million in a combination of debt and equity to purchase Head Country, Inc. which is a manufacturer of a leading regional brand of barbeque sauce, seasonings and marinades.

Also, in February we invested in a $15.7 million again equity and debt package in support of an independent sponsor and allowed us with them to purchase Edge Adhesives, Inc. Edge is a developer and a manufacturer of innovative adhesives, sealants, tapes and related solutions used in a variety of industries. So with these two buyouts in February we then added – as a result that we actually added nine new proprietary investments during that fiscal year which was a total of about $126 million. This activity is the highest in any year of the fund's history and now actually we have 29 portfolio companies which is up from 21 at the last fiscal year end, so pretty good growth.

Additionally, during the quarter, one of our portfolio companies, Noble Logistics, had to file for protection under the bankruptcy code and opted to sell its operating assets in what's called a 363 sale. In this regard, we being GAIN, formed NDLI Acquisition Inc. which is a new investment for GAIN with $2.6 million funding we put in and became what's called the stalking horse bidder for these assets. NDLI prevailed in the court administrated option, so as a result NDLI assumed various debt instruments owned to GAIN by Noble and these loans now continue as a current pay accruing loans on the GAIN's balance sheet.

So NDLI operates in the same day package delivery business. So in connection with this transaction, we ended up writing off our previous equity investments in Noble and recorded a realized loss of $3.4 million. As a result, though, today GAIN has a total investment cost of 17.9 million in NDLI and our debt investments in NDLI paid currently at the rate of 10.7% and we also own a majority of the non-voting equity of the company, the other owners becoming or indeed are the managers.

So, turning to the pipeline for new deals, the team at GAIN of course is focused and very engaged on the active marketing and deal generating activity. Our goal is to of course find the opportunities that fit our investment parameters generally in valuations relative to EBITDA are in the multiples of up to around 6 to 6.5 times. In today's market we are frequently seeing opportunities, much higher valuation and frankly we tend to avoid these if we can. We do look at them and occasionally we might pursue one of these if there were some unique characteristics that we believe that the underlying intrinsic value is there.

Currently, we are in an extremely competitive and a challenging market environment, I need to say. However, we are encouraged by our marketing efforts and of course reflected in our new deal activity this past year. So we continue to grow our presence in the marketplace building a foundation to continue our growth trend and our position in the marketplace with our debt and equity product. The outlook in summary for this fund is to maximize its distributions to shareholders with good solid growth in both the equity and the income portion of the assets.

So with that, I'll turn it back over now to our CFO and Treasurer, David Watson.

David Watson

Thanks. Good morning, everyone. As Dave discussed, we had a decent amount of activity this quarter which concludes our largest year of originations in the fund's history. Not surprisingly then we achieved our best year of operating performance with over 36 million in total investment income and 19.3 million in net investment income.

We were also really pleased with our net realized gain activity of 8.2 million which has resulted in the fund to offset the majority of our accumulative realized losses since inception. Of which 40 million of the prior losses were incurred primarily during the recession in connection with the sale of performing loans to pay off a former lender. That chapter is fully behind us now and we are pleased with the position in the fund and our growth prospects.

So regarding our balance sheet position, at the end of the March quarter we had 331 million in assets consisting of 314 million in investments at fair value, 5 million in cash and cash equivalents and 12 million in other assets. At our cost bases, 73% of our portfolio assets consisted of debt investments of approximately 279 million and 27% or 105 million consisted of equity securities which we hope to produce capital gains.

For the first time since June 2009 we did not purchase U.S. treasury securities at quarter end to help satisfy our assets diversification requirements. As forecasted, the amount of T-bills that we have had to purchase has been coming down consistently over the past year due to the increased size of our portfolio and qualifying assets. We would have passed the diversification requirements the last three quarters without them and unless some unforeseen even occurs, we do not expect to have to purchase them in the future.

As for our liability, we had 110 million consisting of 40 million in term preferred stock, 62 million in borrowings outstanding on our 105 million credit facility, 5 million in secure borrowings and 3 million in other liabilities. So in all, as of March 31, 2014 we had 221 million in net assets or $8.34 per share.

Today, our balance sheet is largely the same as it was at year end. We had investments at fair value of 315 million, cash of 3.4 million, 62 million in borrowings on our line of credit and 5 million in secured borrowing. So in other words, we have over 45 million in available capital to deploy in new investments prior to any potential increases of our borrowing capacity.

Moving over to the income statement. For the March quarter end, total investment income was 8.8 million versus 8.7 million in the prior quarter, so those expenses, including credits, were 4.2 million versus 4.3 million in the prior quarter leaving net investment income which is before appreciation and depreciation gains or losses of 4.6 million versus 4.4 million for the prior quarter, an increase of 5.5%.

The increase in our investment income was due to an increase of 0.4 million in interest income which is from holding a larger portfolio, partially offset by a 0.3 million decrease in other income which was due to the fewer success and prepayment fees that were received this quarter compared to the prior quarter.

Over the last two quarters, other income has accounted for 9.4% and 12.7% respectively of our total investment income. And as I've mentioned on previous calls, during the past four fiscal years, other income has averaged over 20% of our total investment income and 16% in the latest fiscal year. We expect other income which is primarily composed of success and prepayment fees as well as dividend income to remain meaningful but volatile from quarter-to-quarter.

Our net expenses decreased quarter-over-quarter primarily due to a 0.5 million decrease in other expenses partially offset by an increase in interest expense from increased borrowings for our new deals. The other expenses were down due to lower debt deal expenses in the current quarter and the excise tax in the prior quarter. In total, our net investment income which was $0.18 per common share increased 5.9% over the prior quarter of $0.17 per common share.

For the fiscal year end, total investment income was 36.3 million versus 30.5 million in the prior year. Total expenses, including credits, were 17 million versus 14 million in the prior year leaving net investment income of 19.3 million or $0.73 per share versus 16.5 million or $0.68 per share for the prior year, an increase of 17%. This increase was driven by an increase of 5.7 million in interest income from holding a larger portfolio partially offset by related costs that are incurred from holding a larger portfolio such as borrowings and management costs and specifically the base management and incentive fee. Of note, other income was significant but consistent from year-to-year at 5.8 million or 17.3% of all investment income on average over the past two years.

Regarding our debt investments, our debt portfolio on a weighted average basis has grown from 198 million last year to 241 million this year with an average of 256 million in the fourth quarter. Our weighted average yield on interest-bearing debt investments was 12.6%, down slightly from the last quarter of 12.7%. The yield had a slight increase year-over-year to 12.6% from 12.5% last year. Keep in mind we often have success fees as a component of our debt instruments but they are excluded from our reported yields. Success fees are contractually due upon a sale of a portfolio company although the portfolio company can pay it earlier.

As of March 31, 2014, approximately 81% of our interest-bearing debt as associated success fees was an average contractual rate of 3% per annum. The success fees owed to us are approximately 17.2 million which is about $0.65 per share. We generally do not approve these success fees on our balance sheet. For comparison purposes if we had accrued these success fees as we would PIK, our weighted average yield on interest-bearing assets would approximate 15.6% during the March quarter. There is no guarantee that will be able to collect all the success fees or have any control over their timing. Overall, we believe this is positive portfolio growth and debt investments alone has positioned this company well for the future and in part has enabled us to increase our dividend rate on our common stock by 50% since late 2010 and 20% of the loans during this past fiscal year.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals or investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet. The change in fair value from one period to the next is recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

With our 24.8 million realized gain from the sale of Venyu in August 2013, we took the opportunity during the last six months of fiscal year ended March 31, 2014 to strategically sell two of our portfolio companies, ASH and Packerland, which resulted in realized losses of 11.4 million and 1.8 million respectively. We also realized a capital loss of 3.4 million in Noble in the March quarter.

While these actions generated a realized loss, they were accretive to our net asset value in aggregate by 5.7 million, reduced our distribution requirements related to our realized gains and reduced our non-accruals outstanding. The result of all this activity was a net realized gain of 8.2 million for the fiscal year and an accumulative net realized loss position since inception of the fund of just 0.2 million.

As for our unrealized activity, the net unrealized appreciation over our entire portfolio for the quarter ended March 31 was approximately 0.2 million. This included the reversal of 3.4 million in unrealized depreciation related to the Noble write off. So if you were to exclude reversal, we had 3.2 million in net unrealized depreciation for the three months ended March 31, 2014.

This unrealized depreciation was primarily due to decreased equity valuations with several of our portfolio companies which results from a quarter-over-quarter decrease in certain of the portfolio companies earnings used in our methodology to estimate the fair value of the equity of our investment. We are always mindful of the amount of unrealized appreciation on our portfolio quarter-over-quarter led with our other income, we experienced a lot of volatility in our valuations as market comparable multiples are difficult to obtain for lower middle market private companies.

To underscore this point, over the last five quarters, excluding reversals, we have seen our unrealized appreciation and depreciation fluctuate significantly from zero to 10.4 million of appreciation to 11.4 million of depreciation to 1.7 million of appreciation to 15.5 million of depreciation and to 3.2 million of depreciation this past quarter.

So given our long-term view related to our investments, we have been pleased with the realized values of which we have exited our investments and are generally less concerned about the inherent quarter-to-quarter fluctuations in our valuations. For the March quarter end, our entire remaining portfolio was fair valued at 82% of costs, which is up from 80.7% of costs last quarter but down from 87.8% of costs at March 2013.

So now let's turn to our net decrease, increase and net assets from operations. This term is a combination of the net investment income, unrealized net appreciation or depreciation and realized gains and losses. The March 2014 quarter end, this number was an increase of 0.9 million or $0.03 per share versus a decrease of 10.7 million or $0.40 per share in the December quarter. The quarter-over-quarter change is primarily due to the aforementioned realized activity and unrealized amounts of the two quarters.

For the March 2014 year end, this number was a decrease of 1.3 million or $0.05 per share versus an increase of 17.3 million or $0.17 per share in the prior year. Similar to the quarter-over-quarter changes, the year-over-year change is primarily due to the aforementioned realized activity and unrealized amounts over the two years.

All of our portfolio companies are current in payment except for one which continues to remain on non-accrual which represents 0% of the fair value and 4.2% of the cost bases of our total debt investments as of March 31, 2014.

Regarding interest rate risks, approximately 83% of our loans had variable rates but they all have a minimum of floor, so we have been protected in the low interest rate environment that we have experienced over the last several years. These floors have minimized potential negative impact to our interest income for distribution. As of March 31, the weighted average floor on our variable rate loans is 2.6% with a margin of 10.1% resulting in an all-in rate of 12.7%. The remaining 17% of our loans are fixed with the weighted average rate of 11.8%.

If you got a chance to review the 10-K that we filed last night, you may have noticed that a number of our investments were reclass from control to either affiliate or non-controlled, non-affiliate. As part of this reclass, we have revised prior period financials to reflect the reclass for comparability purposes. The general change in the definition of classifications from prior reported period to the year ended March 31, 2014 relates to the use of building securities as a primary determinant of classification compared to the use of profitability and non-building equity securities in prior periods. There was no impact to our bottom line as a result of this reclass.

Also, over the last four fiscal years our net investment income per share of $2.76 has outpaced the distributions we have made to our common shareholders by $0.36 per share or 30%. This has largely been driven by income generated from our equity investments. Our Board continues to maintain a conservative distribution policy to ensure we earn our dividend. RICs generally have to distribute at least 90% of their taxable ordinary income and capital gain. As in the past, we will continue to utilize Section 855(a) of the IRS code which allows us to carry forward a reasonable portion of our income and gain.

The balance, as of March 31, 2014, was 3.9 million or $0.15 per share. It's our desire to be tax efficient. Over the last six months, the Board increased our monthly sustainable distribution rate by 20% to $0.06 per common share a month and also declared a one-time special distribution of $0.05 per share that was paid in November. We look forward to maintaining all this momentum and increasing shareholder value.

That concludes my remarks and I will now turn the call back over to Mr. Gladstone.

David J. Gladstone

All right, thank you very much, Michael, Dave and David. Those were good – a really great summary reports. And since they're summary reports, I hope all of our listeners will read the press releases issued yesterday and also yesterday we filed our Form 10-Q. All of these have a lot of information about our company. You can access the press release and the 10-K on our website at and also it's on the SEC's website.

This fourth quarter was another good quarter of growth for this fund and it build upon the first three quarters for the fiscal year. Our team accomplished a lot during the fiscal year ending March 31, 2014 and these include things like increasing the dividend by 20% which is the current monthly rate of $0.06 per share per month and it's a run rate of $0.72 per year and it's quite an accomplishment to move it by 20%.

We have paid 12 monthly dividends plus an extra dividend of $0.05 in November, so not only did you get the monthly, you got an extra in November. Increasing the investment income by 7.4% to $0.73 per share during the year, again another win and increasing income on top of that; there was a net realized capital gain of $8.2 million. All of those are increasingly showing progress in this company.

Invested 126 million in new portfolio companies and certainly a record; $6 million in existing portfolio companies and then renewed our line of credit for three years increasing the commitment by 75% up to 105 million, all tremendous things during the year ending March 31.

Our biggest challenge today is to sustain the growth that we've accomplished over the last three years and we'll continue to find new investments that all of us believe survive another possible recession like the last one we had, as well as all of the inflation that must come given the government's spending.

We continue to avoid industries like housing, banking, finance companies that are highly leveraged, high technology companies, venture capital companies, all these commodity-oriented companies and highly cyclical industries.

Availability of capital is always a concern for companies like ours because we pay out all of our income, so we have to raise capital and we will continue to use our current credit facility to grow and look at raising additional long-term debt and equity capital as time goes on.

Although the recent economic indicators have been real positive, the economic recovery going forward has always been sluggish. We still don't have a robust economic recovery. So we'll continue to monitor the economic outlook which affects all the investment climates in which we operate.

We feel we have a few concerns, mainly there's still uncertainty around the federal reserves' monetary policies and the impact on future interest rates. We always worry about that every time we look at a deal. The fiscal crisis in the federal government is still on top of mind of all of us here. The federal deficit now is over 17 trillion and it continues to climb as the government spending is just unsustainable.

Many private companies like those which we invest feel that there's too much regulations around the areas of healthcare, financial services, the energy area, emission, all of those continue to bother our small business concerns and it's hindering their performance and expansion and certainly preventing them from continuing to increase the number of jobs.

Despite these economic outlooks, funds have continued to make consistent monthly dividends. We have a history of earning our dividend which I think some of the BDC don't. We have continued to make monthly distributions to our shareholders and during the fiscal year ending March 31, 2014, we increased the dividend, as I said, by 20% and we paid out a bonus dividend of $0.05. In total we paid out $0.71 per common share.

In April 2014, our Board of Directors declared a monthly distribution to our common shareholders of $0.06 per common share for each of the months ending April, May and June of 2014. The Board will meet again in July to consider and vote on the monthly distribution for July, August and September.

Through the date of this call, we've made 107 sequential monthly cash distributions to our common shareholders and some bonus dividends or extra dividends along the way. At the current distribution rate for the common stock, the stock is trading at $7.87. We're paying $0.72 for the yield on the distribution, about 9.2%. This to me seems extremely high given the aggressive growth that this company has had. The average yield during the last three calendar years has been approximately 8%, so we're trading above our three-year average.

The monthly distribution of 7.125% for our preferred stock translates into about 14.8 for us monthly. It's $1.78 annually. Preferred stock had a closing market price yesterday of 26.16 on NASDAQ, ticker symbol GAIN and with a 'P' at the end for preferred, gives a yield of about 6.8%. That's very solid because the coverage ratio is outstanding at this point in time. So if you want a certainty of dividend, you can get 6.8% if you want to take a little more aggressive posture and get 9.2% with a chance to get extras and upturn on the dividend. You can buy the common stock at $7.87.

I think the management team here has a very successful track record of investing in middle market businesses. They have worked together through multiple economic downturns. We all believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions with a potential for special dividends from our capital gains and we continue our disciplined approach on investing and our focusing on making very conservative investments in American-owned businesses.

So now I'm going to stop and Charlotte, if you'll come on, we'll take questions from many of our loyal shareholders.

Question-and-Answer Session


Certainly. (Operator Instructions). Our first question will come from the line of Jeremy Roane from Hilliard Lyons. Your line is open.

Jeremy Roane - Hilliard Lyons

Good morning and thank you for taking my question. On the capital needs front, I see that your cash balance has fallen to 4.5 million at end of the quarter and you're using a substantial portion of your credit line. How are you thinking about your need for capital going forward?

David J. Gladstone

Well, just like always we weighed into our capital that we have from our line of credit and at some point in time when we feel the moment's right, we'll have to raise preferred stock or common stock or some kind of long-term debt. As you know, yesterday we finished our new preferred stock in Gladstone Capital. It was well received and so as a result I think there will be no problem in selling additional preferred here. I suspect the same is true at a 9.2% yield I think we would raise capital here. I really don't like to raise common stock at this point in time mainly because we're trading below net asset value, but obviously in order to grow and make everybody get higher dividends, we do common stock. But that's the way we solve our capital needs since as you know we pay out all of our ordinary income and don't keep any.

David Watson

Jeremy, we were able to – if you recall, we were able to increase our line of credit pretty significantly over this past year to 105 million and so there's always a possibility to increase the size of that [mechanism] (ph) as well.

Jeremy Roane - Hilliard Lyons

Okay. Thank you very much.

David J. Gladstone

Next question, Charlotte.


Thank you. (Operator Instructions). It looks like we have a question from the line of J.T. Rogers from Janney Capital. Your line is open.

J.T. Rogers - Janney Capital Markets

Good morning, guys. Thanks for taking my question. Just a general question about the environment right now sort of the near-term pipeline, what are you guys seeing and any sort of anticipation for sponsor activity? Do you think – will you see it growing throughout the year, staying stable or falling off?

David A. R. Dullum

Hi, J.T. It's Dave Dullum. I'd say it's a challenging environment right now. As I mentioned earlier, we have what I think is a good head of steam looking at a number of opportunities. I think it's hard to predict obviously and I would not predict where we'll be, but all I can say is that relative to the pipeline we keep filling it of course, the funnel at the top, and we're very careful in how we look at these deals. Frankly, there have been a number that we've not been able to get forward on because of the valuation that we see other folks willing to pay. We're not going to do that. So we're sticking to our knitting keeping – working really on filling the pipeline and again, I think we'll have another decent year. I look forward to that and just a lot of hard work. And as I keep telling our folks around here (indiscernible) to generate the investment opportunity. So it's challenging just because of valuation that we're seeing.

J.T. Rogers - Janney Capital Markets

Okay. And then just on that valuation point, I know you guys have talked about this before if you could just refresh my memory on this. I know that you said that there was unrealized depreciation due to lower net income in the quarter. I was wondering, do you all change your valuation multiples given that we're seeing increasing valuations elsewhere in the market?

David A. R. Dullum

Yes, that's a great question. We have historically our methodology which of course is public and that our Board operates under. We've got a methodology where we effectively index the multiple we originally paid for the portfolio companies. So where we'll frankly generally made the purchases, so to speak, the index, if you will, has generally been – it fluctuates quarter-to-quarter obviously but generally it's not really truly reflective of the current marketplace. We will and have in certain circumstances made exceptions and in a couple of cases back a couple of years ago when we were close on a sale of a portfolio company, we had to acknowledge that we had legitimate offerings, if you will, and so we adjusted for that. But it's not something we do as a course normally and we're kind of a looking at and continue to revise our thinking because truthfully we're probably using multiples in some cases that are indeed below where the market is today certainly from what we're seeing transactions being competed at, but our process keeps us somewhat on a different track.

David J. Gladstone

J.T., just piggybacking on that, we use two approaches on those multiples. One is some indexes out there that have what I'll call an index of small and midsized businesses is a general index and then in some cases we have indexes that are specific to the industry and again, it's very hard to drill down and get an index on a small business area that just don't exist. And so as a result we have revert back to the general index. But when we can find an index that's specific to smaller businesses in a particular area, we'll use that and that's usually higher than what the general index is because the general index obviously has all flavors of businesses in it. I would encourage everyone not to spend a lot of time on valuations and net asset value simply because it is so tenuous and I think if you gave a business to be valued to six or seven people, you get six or seven different valuations. Unlike mutual funds which can look in the index as well as in their own market and find exactly what our holding is, we have no way of doing that. And so while we see people paying very high amounts in multiples for businesses, we're not following that index and I don't think it benefits anybody to have a huge net asset value. So we're just being conservative on that in case the world comes down to reality in the near term.

J.T. Rogers - Janney Capital Markets

Great. Thanks for the detail on that. And then just one last question just on Noble Logistics; continuing to add capital to that position. I was wondering if you could talk about the trends there. What your expectation is when you were making the stalking horse bid?

David A. R. Dullum

So, J.T., this is a company – of course the old Noble Logistics was in the portfolio a couple of years and they've been actually a pretty interesting industry in the same day delivery business and not going into a lot of detail or actually very little detail I'd rather not at this point but – [gossip] (ph) some of the sensitivities, but they're just – it's a fundamentally sound business. The company continues to and performs well. They chose – they being the company for a variety of reasons regarding a class action lawsuit primarily in California that caused them to take the decision to do the bankruptcy protection and then in turn sold the assets and that gave us the opportunity as I mentioned to provide the stalking horse bid which we of course have been successful in. So what we have now frankly is an investment that we believe is a good investment going forward. Given the nature of the industry we're actually seeing a lot of activity frankly in that industry at fairly high values. So we got a good management team I think of it as effectively and that new investment going forward and perhaps the best part of all this is essentially the relatively small amount of equity, if you will, that we had to write off which was some of the old investments and now the new investments effectively also own a fairly significant equity position in the business going forward with the debt that we effectively had before. So, I have a good feeling about this business going forward. We just have to keep working on it.

David Watson

J.T., like in the past couple of years we haven't had the support in Noble with Capital, so this is more of a situation that Mr. Dullum just described.

J.T. Rogers - Janney Capital Markets

Okay, great. That is really helpful. Thanks a lot.

David J. Gladstone

All right. Charlotte, do we have any other questions?


Thank you. (Operator Instructions). At this time, I'm not showing any further questions. I would like to turn the call back over to David Gladstone for any closing remarks.

David J. Gladstone

All right. Thank you all for dialing in. It was a good call, had a lot of good information out there, so hope you all have a chance to dig into the details and hope you buy a lot of shares. That's the end of this call.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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