Michael Grisius: Sure. And it’s hard to give — be too general. But if I think about the deals that we took a hard look at and decided to pass, the majority of them were businesses that we just did not feel met our credit bar. So it wasn’t that the leverage metrics or the pricing in and of themselves were the reason that we passed. It was more just that we didn’t see businesses that really met our credit bar. That’s not 100%, but that’s the majority of the case. We probably lost a couple of deals at the margin and competition, but — more than anything, we looked at things that we passed on. Now what does that mean? This is just us kind of observing through our own lens, right? It feels like the quality of the businesses that are in the marketplace right now, all else equal, are not as strong perhaps and it could be that some of the stronger businesses people are deciding to hold on to until they see a more favorable market.
But I don’t want to say that definitively — just it’s — our observation has just been that we haven’t seen as many quality deals. Yet at the same time, we always are self-reflective do we feel like we’re doing a good job on the business development front? Absolutely. I mean we have really worked hard over the last dozen plus years to develop a very significant presence at the lower end of the middle market. And we feel like, of course, there’s plenty of opportunities to expand that, but we do feel like we’re getting a healthy look at what’s out there in the marketplace.
Robert Dodd: Got it. I appreciate that color. You gave us incremental color on Knowland where performance is improving a little bit in Pepper Palace whole process in place. On Zollege, which is obviously the biggest markdown in the quarter, is there anything underway on that? Or is it you’re satisfied with how the business is being operated, et cetera. And it’s just going to take time for everything to play out? Or is there something underway on that business as well in terms of either improving the mark of the alternate.
Michael Grisius: Yes. No, it’s a good question, especially given that the mark changed pretty significantly in short order — and I’ll comment to that for a second, too. I mean some of that was that the private equity sponsor made a decision that they were no longer going to support the business. That was just a decision they made. And as a result, it was Orphan is probably a stronger word, but I’m not too strong aware. I’m not finding another one. But as a result, since it no longer had that support the management team started to make — undertake some actions that we felt made things worse a little bit desperate in terms of the course of action it takes. So things got worse pretty fast and we reacted very quickly to get in front of the founder former owner and a person who was a Board member of the business to start engaging with him to jump in and start operating as the Chief Restructuring Officer, which is what he’s doing now.
And we did take control of the company, and we’re in active discussions with him and have sort of a general framework for an agreement where he will be investing dollars in that business. And he and some of his old team will be focused on resurrecting the profitability levels that that they enjoyed in the past. We — the good news is that when we look at the business, we think a lot of the core fundamentals that we liked about the business initially remain in place. And so we feel like much of the underperformance was strategic decisions that were not right, mismanagement in a lot of respects. And then if we can get things back on track, i.e., undertake some of the approaches that the company has successfully done in the past, that there is a good chance.
I mean, we’ve got to do it. There’s a lot of wood to chop, but there’s a good chance that we can get the business back to what it looked like before. And our — the founder and former owner has a lot of confidence at this juncture that it can do much, much better than that even. So we’ve got work to do, but we have a reasonable level of optimism that we can work hard together to recover some value for our shareholders.
Robert Dodd: Got it. Thank you. I love you. Appreciate the color.
Operator: Thank you. One moment for next question. Our next question comes from the line of Mickey Schleien of Ladenburg. Your line is now open.
Mickey Schleien: Good afternoon everyone. Chris, in this call, everyone’s mentioned the uncertain outlook for the economy. This current quarter, you received a nice repayment from Netreo. So I’m curious whether you’re thinking about taking those proceeds to take some leverage off the balance sheet, given the uncertain economic outlook or do you think the pipeline is interesting enough to reinvest those proceeds?
Christian Oberbeck: Well, I think as you can appreciate, we’re always looking at our capital structure and our liability structure. And we have a number of our debt instruments are callable. And so we do have the flexibility to call some. We do have some revolving credit that we can repay. We also want to be mindful of what the replacement cost would be if you repay them. And so we are obviously taking all that into account. I think in terms of the uncertain environment, we kind of always — maybe it’s more uncertain today than it was before, but that’s not really what drives our investment activity. Our investment activity is generally more driven by the quality of the companies that either we find or come our way, as Mike indicated earlier.
And we haven’t really seen them this past quarter. We did see in the quarter before. So we’re always on the lookout, and we want to be prepared and ready to support our existing portfolio companies or make further investments. And so with that said, we don’t have a specific plan for the repayment proceeds for Netreo, but we’re always evaluating both the asset opportunity side and the liability optimization side.
Mickey Schleien: I understand. Thanks for that explanation. And a follow-up sort of right hand side of the balance sheet question. As expected, your undistributed taxable income climb meaningfully last year. And if I’m calculating it correctly, it’s well north of $3 a share. So that’s resulting in also some meaningful excise tax accruals I don’t — off the top of my head remember when the Board needs to decide what to do with all that UTI. But can — are you leaning more toward retaining it and doing a deemed distribution or rewarding shareholders for their patients or something else that’s not occurring to me?
Christian Oberbeck: Well, I think that’s a good and important question. I think as you rightly point out, our overearning of our dividend is creating incremental retained earnings and the excise tax is a reflection of that. I think one characteristic of having that outstanding is that the cost of the excise tax is 4%. And so if you consider this character of liability as a debt, a 4% rate on that debt is actually quite a good rate in today’s environment. So I think it’s advantageous to run — to utilize that source of capital, if you will. I think you may recall, Mickey, since you’ve covered us for so long, there was a period of time where we had almost no spillover. And I think at that time, we were actually borrowing on some of our SBIC capital at substantially less than 4%.
So 4%, not that many years ago was not — was actually sort of a high rate relative to some of the things we were able to access. So that’s one characteristic. And as you rightly point out, we are building a taxable income. There’s some that gets deferred and some that needs to be paid, and I think that’s an ongoing discussion internally as to how we address the amount that is paid and that will be something coming probably later in the summer is when we’ll make our final determination on that.
Mickey Schleien: I understand. Those are all my questions this afternoon. Thanks for your time.
Christian Oberbeck: Thank you.
Operator: Thank you. This concludes the question-and-answer session. I would now like to turn over to Christian Oberbeck for closing comments.
Christian Oberbeck: Well, I’d like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
