Portman Ridge Finance Corporation (PTMN) Q2 2024 Earnings Call Transcript

Portman Ridge Finance Corporation (NASDAQ:PTMN) Q2 2024 Earnings Conference Call August 9, 2024 10:00 AM ET

Company Participants

Ted Goldthorpe – Chief Executive Officer, President and Director
Patrick Schafer – Chief Investment Officer
Brandon Satoren – Chief Financial Officer, Secretary and Treasurer

Conference Call Participants

Christopher Nolan – Ladenburg
Deepak Sarpangal – Repertoire Partners
Steven Martin – Slater Capital Management

Operator

Good morning, ladies and gentlemen, and welcome to Portman Ridge Finance Corporation’s Second Quarter 2024 Earnings Conference Call. An earnings press release was distributed yesterday, August 8th, after market close.

A copy of the release, along with an earnings presentation is available on the company’s website at www.portmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company’s Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes.

Please note that today’s conference call may contain forward-looking statements which are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company’s filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law.

Speaking on today’s call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer.

With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Ted Goldthorpe

Thank you. Good morning and welcome to our second quarter 2024 earnings call. I’m joined today by our Chief Financial Officer, Brandon Satoren; and our Chief Investment Officer, Patrick Schafer.

Following my opening remarks on the company’s performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail.

Yesterday, Portman Ridge announced its second quarter 2024 results. And despite operating under challenging market conditions, we reported net investment income of $6.5 million or $0.70 per share, an increase of $300,000 or $0.03 a share as compared to the prior quarter.

A well-diversified portfolio remains one of our highest priorities for Portman Ridge portfolio, and I’m pleased to share that we finished the quarter with exposure to 28 industries and 75 unique portfolio companies with an average par balance of $2.6 million. This compares to 27 industries and 79 unique portfolio companies with an average par balance per entity of $3.1 million as of March 31st, 2024.

Further, subsequent to quarter-end, we amended and extended our existing senior secured revolving credit facility with JPMorgan Chase Bank. Under the terms of the amendment, we increased the facility size by $85 million to $200 million and reduced the applicable margin by 30 basis points from 2.8% per year to 2.5% per year.

Additionally, the reinvestment period was extended from April 29th, 2025, to August 29th, 2026, terming out our revolving period by two years and improving the company’s asset liability matching. The remaining $85 million of secured notes will be refinanced with the upsides of the credit facility.

We value a long-term commitment and relationship we have with our lenders and JPMorgan, a world-class financial institution. The amended credit facility will provide us with meaningful liquidity as well as the flexibility to grow the company’s balance sheet as we look to capitalize on future investment and origination opportunities. We continue to believe our stock remains undervalued and as such, we continue to repurchase shares under our share repurchase program.

During the second quarter, we purchased a total of 79,722 shares for an aggregate cost of $1.6 million. These repurchases were accretive to Portman’s net asset value by $0.03 per share during the quarter. Additionally, the Board of Directors approved a $0.69 per share distribution for the third quarter of 2024, which represents a 13% annualized return on net asset value amongst the highest in the BDC space.

Turning to conditions in our primary market. The second quarter of 2024 continued the macro trends seen in the first quarter. New deal activity picked up pace and syndicated markets have continued to remain open, though borrowers have continued to rely heavily on private credit capital providers for M&A activity given the certainty they provide, resulting in tailwinds for our industry.

Having said that, the combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market.

According to KBRA DLD private data, private credit spreads for borrowers with greater than $100 million of EBITDA and those between $50 million and $100 million of EBITDA have both declined by approximately 75 basis points since the beginning of the year. That is compared to spread compression of approximately 50 basis points for borrowers between $20 million and $50 million of EBITDA and just over 25 basis points for borrowers a little bit less than $20 million of EBITDA.

As always, our strategy at Portman is to be selective regarding new investment opportunities by leveraging the platform scale of BC Partners and this robust deal pipeline, while also increasing the diversification of our investment portfolio through hold size.

As an example, during the quarter, we made only two investments in portfolio companies, one comprising a $4.6 million investment and the other a $2.7 million investment while the remainder of our additions were in the form of incremental capital to existing portfolio companies to support their add-on acquisitions. Patrick will provide details shortly. This has allowed us to maintain a relatively consistent spreads on new origination as compared to our portfolio as a whole.

As we enter the back half of 2024, we remain confident in our business with our amended credit facility, robust pipeline, strong balance sheet, we believe we are well positioned to continue executing our strategy and delivering strong returns for our shareholders.

With that, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schafer

Thanks, Ted. Turning now to Slide 5 of our presentation and sensitivity of our earnings to interest rates.

As of June 30th, 2024, approximately 89% of our debt securities portfolio was either floating rate with a spread tied to an interest rate index such as SOFR or PRIME rate with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have remained relatively consistent for the last five quarters.

Skipping down to Slide 10, originations for the quarter were lower than last quarter and were also below the current quarter repayments and sales levels, resulting in net repayments and sales of approximately $18.2 million.

During the quarter, we took advantage of rising secondary prices to exit or materially reduce a number of our more liquid loans. This proactive rotation represents a substantial portion of the net repayment and sales amounts. Our new investments made during the quarter are expected to yield a spread to SOFR of 724 basis points on par value and the investments were purchased at a cost of approximately 98.6% of par.

Our investment portfolio at the end of the second quarter remained highly diversified. We ended the second quarter with a debt investment portfolio spread across 28 different industries, one more as compared to the end of the first quarter at 75 unique portfolio companies with an average par balance of $2.6 million.

Turning to Slide 11. In aggregate, investments on nonaccrual status for nine investments at the end of the second quarter of 2024, representing 0.5% and 4.5% of the company’s investment portfolio at fair value and cost perspective. This compares to seven investments on nonaccrual status as of March 31st, 2024, representing 0.5% and 3.2% of the company’s investment portfolio at fair value and cost respectively.

The main driver of this increase was due to placing an additional security of QualTek on nonaccrual. We’re able to exit our entire QualTek position shortly after the quarter-end, but during the course of the quarter, the buyer for the company made a number of changes to the purchase price that also resulted in our security receiving less than par, and therefore, we have included it on a nonaccrual lift for the quarter.

As of today, we have completely exited all QualTek securities and the ultimate NAV impact has been factored into the June 30th financial results. On Slide 12, excluding our nonaccrual investments, we have an aggregate debt investment portfolio of $383.6 million at fair value, which represents a blended price of 93% of par value and is 91% comprised of first lien loans at par value.

Assuming part recovery, our June 30th, 2024 fair values reflect a potential of $26.7 million of incremental net value or a 13.6% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.64 per share of NAV or a 7.7% increase as it rotates to maturity.

Finally, turning to Slide 13. If you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investment, have realized approximately 85% of these positions have combined realized and unrealized mark of 101% of fair value at the time of closing the respective purchase.

As of Q2 2024, we have fully exited the acquired Oak Hill portfolio and are down to a combined $13.8 million of the acquired HCAP and the initial KCAP portfolios.

I’ll now turn the call over to Brandon to further discuss our financial results for the period.

Brandon Satoren

Thanks, Patrick. For the second quarter of 2024, Portman generated $16.3 million of investment income of which $13.9 million was attributable to interest income, inclusive of fixed income from the debt investment portfolio.

This compares to total investment income for the first quarter of 2024 of $16.5 million of which $14.2 million was attributable to interest income, inclusive of fixed income from the debt investment portfolio.

The decrease was driven by lower interest income due to net repayments and sales during the quarter as well as the reversal of $0.1 million or $0.01 per share of previously accrued unpaid interest on a loan placed on nonaccrual status during the quarter, partially offset by higher dividend income from the Great Lakes joint venture.

Excluding the impact of asset acquisition economy, our core investment income for the quarter was $16.2 million as compared to core investment income of $16.5 million in the prior quarter.

Total operating expenses for the quarter ended June 30th, 2024, decreased by $0.4 million to $9.9 million as compared to $10.3 million in the prior quarter. This decrease was largely driven by a decrease in interest expense as a result of the $6.6 million paydown on the 2018-2 secured notes during the quarter as well as a larger $34.2 million paydown on the 2018-2 secured notes in the second half of the prior quarter.

Our net investment income for the quarter increased to $6.5 million or $0.70 per share. This compares to $6.2 million or $0.67 per share for the prior quarter. The increase in NII was primarily due to lower interest expense during the quarter.

For the quarter ended June 30th, 2024, net realized and change in unrealized losses on investments and debt was $12.8 million. This compares to net realized and change in unrealized losses on investment and debt of $1.7 million in the prior quarter.

As of June 30th, 2024, the company’s net asset value was $196.4 million or $21.21 per share, a decrease of $14.2 million or $1.36 per share compared to the prior quarter net asset value of $210.6 million or $22.57 per share.

As of June 30th and March 31st, 2024, our gross leverage ratios were 1.5 times and 1.4 times respectively. For the same period, our leverage ratio net of cash was 1.3 times and 1.2 times respectively. Specifically, as of June 30th, 2024, we had a total of $285.1 million of borrowings outstanding with a current weighted average contractual interest rate of 6.9%.

This compares to $291.7 million of borrowings outstanding as of the prior quarter with the then current weighted average contractual interest rate of 6.9% as well. Additionally, consistent with the prior quarter, the company finished the quarter with $23 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018-2 secured notes as the reinvestment period has ended.

As Ted mentioned, subsequent to quarter-end, we amended and extended our existing senior secured revolving credit facility with JPMorgan. Under the terms of the amendment, the credit facility was upsized by $85 million for a total revolving capacity of $200 million.

Additionally, the applicable margin was reduced from 2.8% to 2.5% and the reinvestment period was extended by approximately two years to August 29th, 2026. This amendment has reduced our overall cost of debt capital and extended the duration of our debt capital structure.

Further, we intend to refinance the remaining $85 million on 2018-2 secured notes outstanding with the proceeds from the upsized JPMorgan credit facility. Finally, the Board approved a quarterly distribution of $0.69 per share payable on August 30th, 2024, to stockholders of record at the close of business on August 22nd, 2024.

With that I will turn the call back over to Ted.

Ted Goldthorpe

Thank you, Brandon. Ahead of questions, I’d like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown in the first half of the year.

Through our prudent investment strategy, we believe we’ll be able to deliver strong returns to our shareholders in the back half of 2024. I would like to thank once again all of our shareholders for ongoing support.

This concludes our prepared remarks and I’ll turn the call over for any questions.

Question-and-Answer Session

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan

Hey, guys.

Patrick Schafer

Hi, Chris.

Christopher Nolan

What was the driver for the realized loss and the unrealized depreciation, please?

Patrick Schafer

Yes. I’ll turn it over to Brandon for the realized. But on the unrealized front, the primary driver is that is QualTek which I talked about a little bit in my remarks. But we ultimately exited the investments sort of right after quarter-end and had to take an unrealized write-down in and around the exit price there that, again, we’ll just flip from unrealized to realized in Q3. But for Q2, it was a significant portion of our unrealized loss.

Brandon Satoren

Yes, that’s right, Patrick. On the realized front, Chris, it was an investment called Tank. We’ve realized it at the mark we had last quarter. So that’s already embedded in partner. It was just a flip from the last two really.

Christopher Nolan

If I’m correct, Tank, was in the old Capitala investments, is that correct?

Patrick Schafer

No. This was an old KCAP like way Legacy 1. It was on non-accrual, it took over the portfolio. We’ve had like a $40,000 receivable or something left from like some states like a state liquidation that finally got resolved. So it’s been running at like almost no value on our SOI for several, several years now.

Christopher Nolan

Yes. No. Okay. I’m getting your portfolio company or excuse me your BDC’s confused. QualTek what should we expect in terms of a realized loss for 3Q on?

Patrick Schafer

The short answer is, it should be all flip from unrealized to realized as we know NAV impact for Q3, Chris. I don’t have the exact quantum of that. We can follow up with you with the exact quantum, but it will be a complete flip for unrealized to realized. So we baked in and again it closed in unlike July 7th or something like that. So the price as of 6/30 bakes in the exit price, but we can follow up with the exact amount that you should expect.

Christopher Nolan

No need. That’s fine. Okay. On the credit facility, the text of the press release says a margin of 2.5% or so. Am I to presume that’s a spread over some sort of index? And if so, what’s the index?

Patrick Schafer

Yes, SOFR. It’s a 2.50 over SOFR.

Christopher Nolan

Great. And final question would be, can you give any sort of perspective as to what the BDC M&A market might be evolving like given many BDCs are starting to see asset quality deterioration in this quarter?

Ted Goldthorpe

Yes, I would say, I think it’s still pretty quiet on that front. And we are — there is a lot of strategic activity happening in the broader asset space. So you’ve seen two big deals happen this past quarter. And our M&A activities pick up a lot in the broader asset management space. So I’m not sure that applies, I wouldn’t say we’ve seen that in the BDC space, but we are seeing in the 40x space and we’re definitely seeing in the broader institutional space. And the theme is the same. The theme is scale matters. So I think costs keep going up, the pressure on fees. So I think a lot of firms are having to put a lot of money into distribution in terms of expenditure. So I think the themes are becoming more pronounced. So I think some people in 2020 had issues with credit, I think now it’s much more people had issues with scale. So I think you will see a lot of M&A over the next 12 to 18 months. But that’s a comment more broadly around 40X in around asset management as opposed to just BDCs.

Christopher Nolan

Got it. Okay. That’s it for me. Thanks, guys.

Ted Goldthorpe

Thanks, Chris.

Operator

(Operator Instructions) And your next question comes from the line of Deepak Sarpangal, with Repertoire Partners. Your line is open.

Deepak Sarpangal

Thank you. Hi. Good morning.

Ted Goldthorpe

Hi. Good morning.

Deepak Sarpangal

So a few questions. On the recent quarter, obviously, we’d all like to see zero markdowns at any given point in time, but that’s essentially impossible. Curious, I know QualTek was one of the big drivers. It did seem like a lot of it was like a lot of the weakness has been primarily in the high-tech industry parts of your portfolio. Is there something broader that you’re seeing? I know that, that’s the size of that has come down now, which is good. But is there anything else, any other context with respect to that? Because it looked like there were a few of them that?

Ted Goldthorpe

Yes. Sounds good. That’s actually a very perceptive question. I would say QualTek is not really a tech company. And again it’s a long-term legacy position and we’ve now exited it. I will say across our tech portfolio, which is generally speaking, enterprise software, so recurring cash flow, I will say that they’ve definitely seen two factors that impact them. One is sales cycles becoming longer for new sales. So their existing base of business is still turning along. But number two is this AI theme and the spenders in AI, they are taking away a little bit of the budgets for what I call traditional software, it feels like, just looking at our portfolio companies. And then number three is, there has been some very, very company-specific events that have impacted some of our company — some of our companies in the broader space. I mean, obviously, I mean that was the CrowdStrike example that’s actually happened in a couple of other situations. We had a specific investment in a company that had a cyber-issue this quarter that we think is totally — we think it’s a temporary markdown. We think the company is totally fine. But there is some idiosyncratic events happening in tech that are really like we haven’t seen before. CrowdStrike is the public example, but we’ve seen it on a smaller scale.

Deepak Sarpangal

Okay. That makes sense. And then is there, also, is there anything, I know your business isn’t seasonal, but like it also just so happened that last year, it was like Q2 that was maybe a tougher quarter, but then it kind of reverted. Is there anything maybe just kind of like where there’s like you said maybe there’s company-specific factors or like the overall market just happened to be in a particular position. Is there anything just in terms of kind of like timing that contributes to maybe this being like a tougher quarter than most?

Ted Goldthorpe

Yes. Another really good question. I would say thematically, the banks were really closed in 2020. So post Twitter, a lot of the investment banks were really reticent to take on risk and then you obviously have the regional banking crisis. So we felt like there really wasn’t a lot of issue. Look, we’ve had more loan issuance year-to-date than we’ve had in the last two years combined. It has not really impacted us, as we’re the smaller in the market. So we haven’t seen the refis that some of our larger peers have seen. Coming into this year, our portfolio, our pipeline is not that great. We were incredibly busy up until June, and our pipeline slowed down again. And the theme there is there’s just not a lot of new LDO activity. So when you’re seeing M&A pick up broadly and you’re seeing the investment banks comment on M&A. We’re not seeing it on the private equity sponsor level. So exits are hard. Prices haven’t come down that much. Financing costs are higher and the economy is slowing down. So I think we’re seeing like our pipeline for new M&A activity in LDOs is pretty anemic. So I think that will pick up. Like if you look at our portfolio today, a very large percentage of them are supposed to go for sale in the fourth quarter. Now again that was the same thing last year. That doesn’t mean they’re actually going to transact, but there is a very, very large pipeline of companies in the middle market that need to be sold over the next one, two, three years. So this should revert to I mean at some point.

Deepak Sarpangal

Okay. And then this is somewhat of a random question.

Ted Goldthorpe

I wouldn’t say. So, Deepak, I wouldn’t say it’s seasonal, it’s more thematic, I would say.

Deepak Sarpangal

Okay. Yes, that makes more sense. And this question is a little bit more random, but I noticed that one thing I do like that again the joint ventures and CLO parts of your portfolios are smaller and continuing to get smaller. In your fair value disclosures and assumptions it looks like you kind of value those with discount rates of over 20% on a weighted average. I’m glad that’s conservative. It does seem like a high discount rate. Can you maybe explain a little bit more about how you come up with that and how to think about that?

Patrick Schafer

Yes, Deepak, this is Patrick. So the short answer is for all those valuations, we send those out to third parties to be valued. So third parties are kind of coming up with the discount rates. But the reality is CLO equity and that’s kind of generally where discount rates are coming from not as much like Great Lakes joint venture, but really more so the other CLOs. (indiscernible) is a very opaque market and where spreads are right now liabilities came down a little bit, but not nearly as much as spreads have come down. So like the return to equity in CLO land has been relatively compressed, which means you need to kind of price at a much higher discount rate. So and again it’s not like the most obvious of answers, but just in the CLO market in order to get potential buyers to transact you really need to have a very healthy discount rate to that back end of (Technical Difficulty) because of where like the liability asset spread is on BSLs.

Deepak Sarpangal

Okay. And then I know that.

Patrick Schafer

As you mentioned, it’s a very small portion of our book and obviously will get smaller. Our Great Lakes joint venture, which is the biggest piece of that is not valued at a 20% discount rate. All the individual loan within their joint venture are valued at their own individual discount rates that then kind of rolls up into a joint venture valuation. And I don’t know the exact numbers off the top of my head, but those are all substantially lower than 20%.

Deepak Sarpangal

Yes. And again in the relatively smaller cases where you’re using EBITDA multiples. It does look, again, I know that these are not necessarily apples-to-apples, but to what extent are the businesses that you’re valuing like just lower multiple businesses versus maybe just like better priced investments. And the reason why I ask that is like for example like your multiples are like by far the low, which is a good thing, I think. But by far the lowest like if you look at the, one of the larger BDCs, Ares, it’s more like 11 times or 13 times, I think, in terms of those EBITDA multiples. Now I know like those could be like software businesses or something like that. But I’m just curious is there anything else that accounts for that?

Patrick Schafer

No, another good question. So I’d say a couple of things, which is one, I think, generally trying to be pretty conservative on our valuations, particularly on equity securities, which is what you’re referencing just because, again, like equity can tend to be volatile. So we need to be on the SOFR side. I think the other little bit of a nuance there is generally speaking our equity positions are tended to be some of the acquired portfolios from either Harvest or Garrison or even like KCAP where the bars themselves are probably a little bit smaller. And so we do tend to try and factor in a little bit of a like size discount in terms of size of the portfolio company relative to a peer set and where we think of valuation multiples should trade. So again I think the combination of being able to conserve out the multiple and like if you are using Ares as the example they’re going to have much larger portfolio companies. So they’re kind of, I guess, able to or probably can look more similar to like the actual peer set from a valuation multiple perspective as opposed to ours we tend to apply a meaningful discount to where the peers trade just to factor in the fact that they’re smaller companies and the peers.

Deepak Sarpangal

Great. I think that’s all my questions. I am glad to see that you’re continuing to take advantage of your undervalued stock. And it’s not every company that demonstrates that kind of savvy capital allocation and especially in the BDC space. So thanks and look forward to more ahead.

Ted Goldthorpe

Thank you.

Patrick Schafer

Thank you.

Operator

(Operator Instructions) And your next question comes from the line of Steven Martin with Slater Capital Management. Your line is open.

Steven Martin

Hi, guys. You’ve addressed a lot of my questions. Can you comment on what the current trend is in amendments, extensions, waivers, et cetera?

Ted Goldthorpe

Yes. I don’t think we’ve seen a material pickup in amendment and waiver activity. So again a lot of companies who are not fully levered were having trouble, not trouble, but they were asking for extensions for the last couple of years. Now the market’s kind of normalized. And so there is some repricing activity. And to the extent, we’re not willing to do it. There’s other lenders who have to do it. So I don’t think there’s been , I mean, obviously, we have some normal course amendments going on. I don’t think we’ve seen a material pickup in amendment activity. Actually, it’s pretty honestly like this quarter has been relatively muted.

Steven Martin

Got you. Can you comment on the nature of your PIK income, it’s been relatively flat, is it penalty? Is it a little extra income? Are you eventually collecting? What’s the status?

Patrick Schafer

Yes. The answer is — hey, Steve, it’s Patrick. The answer is it’s a little bit of all of the above. So there are some instances that have been historically where a lot of it was coming out COVID where you get an extra 100, 150 basis points of pricing concession for a covenant relief for a maturity extension or something and that typically came in the form of PIK. And so you have, whatever it is, 80% of your spread in cash and the extra 100, 150 basis points you get is more PIK. So there’s a combination of that. I think more recently and there’s three good examples of this that we’ve done in the last handful of months. Riddell which was done at the end of Q1. And then Princeton Medspa and Care Connectors are the two business as names that were the new portfolio company, those two were the new portfolio companies in this quarter where we as BC and Portman collectively, we did effectively like a two security unitranche where we provided, let’s call it, 80% of our capital in the form of a senior secured first lien loan and then 20% of our capital in the form of some kind of structured equity solution. And so that equity piece itself is all PIK. But the way we look at the investment is a combined investment in both the term loan and the preferred equity. And so from a cash PIK component in terms of our investment in the bar, in aggregate, it’s probably something like 80-20, 85-15, type of a split, but on those two securities themselves happen to be all PIK because they’re structured equity. So the answer, Steve, is we look at both cash and PIK like a collective investment. And so more often than not, it is a little bit of extra PIK in addition to cash coupon for a borrower, but there are some instances like the handful of deals or three deals that we’ve done recently where technically one here is PIK, but we did it as strip between first lien and that is all cash and the preferred equity that’s all PIK. So it kind of blends to, again, more something that makes more sense in terms of like 85-15 or wherever you want to think about a cash PIK.

Steven Martin

Okay.

Ted Goldthorpe

You know I’d just point out that there’s a little, it looks like PIK increased by 1% this quarter-over-quarter. There’s a little bit of a down major effect there. The reality is PIK only increased — PIK increased by less than 200 million.

Steven Martin

Right. I was more commenting on the last couple of quarters, it’s been around the $2 million level. So I was curious as to the composition. On the unrealized, Ted, you said spreads have tightened over the last couple of months. If spreads have tightened versus the prior four or five quarters where they were wider. Are we seeing or shouldn’t we see a recapture of some of our unrealized losses?

Ted Goldthorpe

Yes, it’s a good question. I mean there’s a bit of a lag. So I’d say a couple of things. Spread compression always starts at the top. So we’ve seen spread compression at the big cap level. And obviously, over time, that will trickle into our market. So that should be a tailwind for valuations. And again, Patrick gave some color around NAV upside in our book right now. And so I think it should filter through. There’s always a lag though. So spreads have really come down pretty aggressively over the last say three months. And again the way our valuation methodology works is there’s a bit of a lag on our matrix. So there should be some tailwind there. Obviously recent volatility excluded like in the markets.

Steven Martin

Got you. With respect to position sizes, the last couple of deals you’ve added, Riddell as an example. You’ve taken very little of the deal, is there a reason why the position sizes you’ve added are seem to be much smaller?

Ted Goldthorpe

Yes. I mean, Steve, I think the simple answer is I think our view on BDC specifically is that they should be very well-diversified portfolio. I think where we sit from a leverage perspective, invest capital perspective, I don’t think we need to put out significant amounts of capital. And so for us, we’ve been focused on trying to continue to run a diversified book and, in our opinion, being able to take smaller bits of more deals is more advantageous for our shareholders as they’re able to invest in, again, a more diversified portfolio over any individual deal becomes less impactful either positive or minus and increase a lot more consistency of results.

Steven Martin

All right. Thanks a lot.

Operator

And we have no further questions at this time. I would now like to turn the conference back over to Mr. Ted Goldthorpe for closing remarks.

Ted Goldthorpe

Thank you all for attending our call. And as always please reach out to us for any questions, which we’re happy to discuss. We look forward to speaking to you again in November for our third quarter conference call and we hope all of our shareholders and stakeholders have a very good end of the summer. Thank you.

Operator

And ladies and gentlemen this concludes today’s call and we thank you for your participation. You may now disconnect.