Casey Alexander: All right. Thank you. My next question is for Mike. Mike, looking at the fact that all of your new issuance in this quarter was follow-ons. I’m curious, do you have what you would call a higher bar for new investments than you have for follow-ons? And is it more important in this environment with what you see coming at you economically to make sure that you’re more supportive of existing portfolio companies as opposed to new companies, which you don’t have that history with?
Michael Grisius: Really good question. And the answer, very succinctly is yes. We certainly, first and foremost, want to make sure that we’ve got capital available to support our existing portfolio companies. There’s not a better call you can get in our industry than a call from a borrower who is performing really well. You know them really well. You like the ownership group, and they’ve got an opportunity to continue to grow their platform and they’re looking for additional capital to put to work. So we did that very successfully this past quarter. It’s a big part of what we do just institutionally, if you sort of look at the playbook that we operate under very often, we’re making a bit smaller investment as we’re getting to know a portfolio company.
And then most of our deals and certainly almost all of our best deals have been ones that have started off small and have become much more sizable. Now having said that, we still are seeing good actionable opportunities. And it so happens that just this past quarter, we didn’t get any that really — or didn’t find any that really met our underwriting bar. Some of that was due to the fact that we just have a really high standard to begin with. Are we thinking even harder now about businesses that — what the outlook for a business could be if we were to go through an even a difficult economic time, yes, we are. And certainly, that’s probably affecting our bar at the margin. But generally, we have a high bar to begin with. And I think most of the fact that we have fewer portfolio companies this past quarter is sort of reflective of just M&A activity being down.
Now having said that, our business doesn’t operate sort of like a switch. It just — it’s really hard to predict how these things work. Right now, our pipeline of new portfolio opportunities is quite full. We’re seeing a lot of things that we think are really interesting. In fact, I’d add to it, Casey, while I’m on that topic, we’ve been doing this for a long time. Now is a great time to be investing in new portfolio companies. If you see a deal that’s in market right now, first of all, it means it’s performing well, and it’s performing well in a market where the company is producing really solid cash flow growing, and it’s doing that despite facing growing pressure from a cost standpoint and you get a chance to underwrite that with some of that kind of right in front of you.
You also get a chance to underwrite it and lend capital with better pricing and less competition than what we’ve seen just six months ago. So it is a really nice time to be investing capital. For those deals that meet those standards that are probably slightly higher than what they usually are, and they’re already — the standards are already really high to begin with.
Casey Alexander: All right, thank you. Appreciate you taking my questions. Thanks Mike.
Michael Grisius: Thanks Casey.
Operator: Thank you. Our next question will come from Robert Dodd of Raymond James. Your line is open.
Robert Dodd: Hi, guys. And congratulations on the quarter. One sort of a follow-up to Casey actually. On follow-on investments being a greater portion of the mix. I mean all the credit and knowing the borrower I understand. So the other question though is when doing a follow-on, do you get the opportunity to put incremental equity into an investment where you’ve already got an equity investment? Or is it the equity goes in day 1, the follow-ons are debt only? I mean, just trying to get a feel of so much of your performance historically has been generating realized gains on equity, et cetera. If you shift on to follow-ons, are you at the margin losing a little bit of opportunity to keep equity at some portion of the portfolio that you want to target?
Michael Grisius: Yes, it’s an interesting question. So here’s how we think about it. And the answer is that it depends. So in some cases when an existing borrower is looking for more capital to grow, the capital that they need requires both debt and equity. There’s a portion that makes sense to fund with debt, but also we need to step up with additional equity. In those cases, we have co-investment rights for our equity, and we typically almost always participate and co-invest alongside the control owner. So when that happens, we’re co-investing along the way. Now in other cases, they’re looking for follow-on capital and the business is performing so well that when you look at the capital structure pro forma for whatever the growth initiative is, it may be an acquisition, it may just be growth to fuel growth in EBITDA.
When you look at the capital structure, it may not need equity. But if you’re already an existing equity investor, it’s very accretive to the existing equity that you have. So that’s still good news as well. So to the extent that we have an equity investment in an existing portfolio company, whether we’re co-investing along the way or sitting on our current position or our initial position of equity, it typically benefits our initial equity investment very significantly and that’s proven out well over time.
Robert Dodd: Got it. Got it. Yes. I appreciate that color, and I appreciate the classic opening of it depends, which is always the case. On the dividend, I mean, I understand your comment on the earnings power is going to go up materially from here as we get into the middle of the year based on where the forward curve is, I understand retaining some to grow NAV, et cetera, but the BDC rules are what they are, right? So you can’t just keep by the distribution requirements. And given an increased dividend but potential earnings power that — not putting words in your mouth, but could get to like $1 per share kind of per quarter in future quarters. You’re going to generate a lot of spillover income in a hurry. So what are your thoughts on how you would handle that if rates do stay higher for longer, that at some point, it’s a good problem to have, but it becomes a problem if you build up too large a bucket on spillover, if there’s a big earnings dividend missed.
So can you give us your thoughts there?
Christian Oberbeck: Sure. I think as you point out, I mean, I think these are the type of problems we like to work on. Absolutely, you’re right. I mean there are hard rules. You have to — you’ve got kind of a two-year period to pay all the — pay out your high percentage of income from, and we have a certain spillover equation right now, which is fortunately not — we’ve got a lot of room in it. And — but ultimately, if our earnings do increase, as you outlined, that amount of spillover will increase. And then ultimately, all this has to be paid out to shareholders. So in the meantime, right, it would build NAV and so the shareholders are going to get it one way or the other, right? They’re going to get either through NAV or through dividends along the way.
I think the biggest issue, right, is what’s going to happen next in our economy. I mean everybody knows we’re in an inflection point to sort of an unprecedented environment, right? We’re kind of in a higher for longer rising rate environment, inflation, all these type of things. No one has seen that for 40 years, experienced that systematically, consistently, you’ve got a very hawkish position from the Fed, which is more aggressive than the market. So there’s just a lot of questions to what’s this all going to look like. If we have sort of this rising rate environment, followed by massive cuts back down to a hyper stimulative environment, which is — that’s one scenario. I don’t know what the odds of that scenario are. We have to be prepared for that.
We don’t want to get too far out on that and then you could have a difficult economy. And so all those are still questions. Right now, as you can see, we’re up 26% on dividend and 33% on earnings. So that’s not too big a problem for us right now. In another quarter, we’ll see how that goes. As you know, from the embedded increased interest rates, right, there’s some base increase built in just doing the math where interest rates were at the end of our quarter versus the average during the quarter. So all this is building. And — but you look at the forward curves, I said there’s a battle between them, is the Fed going to hold it like they say? Or is it going to come off like the market says. And I saw an interview with Larry Summers recently, and he said he thinks it’s going to be relatively more towards the Fed than towards the market.
And it’s very hard to tell that. And so we’re just going to have to make these decisions over time. And fortunately, we’re in a very good position to make these decisions, right? I mean we have these increased earnings. We’ve got lots of spillover room, and we can watch and see. And I think in an earlier question from Bryce, I mean, there’s an ability to do dividend payouts that aren’t permanent and there’s ways to do it that are permanent. And I think what we’ve been attempting to do is to give our shareholders confidence in a dividend level that they can depend on. And that’s something that we’re working to do to say, look, you can depend on this dividend and the excess is going to be going into NAV for a period of time, but you’re going to benefit it from it one way or the other.
Henri, do you want to add to that.
