BlackRock TCP Capital Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 9 speakers on the call.

Operator

Welcome everyone to BlackRock TCP Capital Corp's First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen only mode. A question and answer session will follow the company's formal remarks. I will repeat these instructions prior to the Q and A session.

Operator

And now, I would like to turn the call over to Katie McGlynn, Director of BlackRock TCP Capital Corp. Investor Relations team. Katie, please proceed.

Speaker 1

Thank you, Sierra. Before we begin, I'll note that this conference call may contain forward looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance. Forward looking statements involve risks and uncertainties and actual results could differ materially from those projected. Any forward looking statements made on this call are made as of today and are subject to change without notice. Additionally, certain information discussed and presented may have been derived from 3rd party sources and has not been independently verified.

Speaker 1

Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the Q1 ended March 31, 2023. We also posted a supplemental earnings presentation to our website at www.pcpcapital.com. To view the slide presentation, which we will refer to on today's call, Please click on the Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the company's Form 10 Q, which was filed with the SEC earlier today.

Speaker 1

I will now turn the call over to our Chairman and CEO, Rajvi.

Speaker 2

Thanks, Katie, and thank you all for joining us for TCPC's Q1 2023 earnings call. I will begin today's call with a few comments on the market environment and provide an overview of our Q1 results. I will then turn the call over to our President Chief Operating Officer, Phil Tsang, who will provide an update on our portfolio and investment activity. Our CFO, Eric Cuellar, will then review our financial results as well as our capital and liquidity positioning in greater detail. I will then conclude with a few closing remarks before we take your questions.

Speaker 2

As you all observed, market indices were generally down across the board in 2022. However, even with the broader market weakness during the year, Private credit assets generally held up well, further demonstrating the resiliency and stability of the asset class in different market environments. During the early part of 2023, we saw notable recoveries across most asset classes from their respective 2022 performances. Market stabilized as we entered the year, but by the latter part of Q1, struggles that emerged in the banking sector understandably shook investor confidence And drove a volatility that continues today with now several bank failures crystallized. Notwithstanding the broader social and economic implications, Weakness and even turmoil in the banking sector is hardly a new dynamic to established private market participants.

Speaker 2

Rather, it is a dynamic we have benefited from For most of our nearly 23 years lending to middle market companies, we continue to look in ever greater numbers for alternatives to traditional forms of financing. While it's too early to say when the current situation will be fully resolved, we believe the reaction to recent events in the banking sector will likely make it even less efficient Unless economic for banks to lend to the middle market and therefore further support if not accelerate the opportunity for well positioned private credit lenders such as ourselves. In addition, the swift collapse of several banks and ongoing concern with the sector has been a reminder to borrowers of Benefits of working with a direct lender like BlackRock. Direct lenders can act quickly when needed and have locked up or permanent capital that facilitates Stable long term financing solutions to borrowers that remain available during periods of market dislocation. We have seen this firsthand many times, including during the early days of COVID and again more recently this past quarter with the few portfolio companies we have that had cash deposits with Silicon Valley Bank.

Speaker 2

When the news about the challenges that the bank started to spread and these companies had difficulty accessing their liquidity, Our team was in position to provide short term liquidity had it been required. Fortunately, the Fed stepped in to backstop their deposits And ultimately, our capital was not needed, but our ability to work directly with these borrowers and to act quickly were further reminders of the value that private credit managers can Now I'd like to turn to our Q1 highlights. We delivered strong net investment income of $0.44 per share in the Q1. Given the floating rate nature of our portfolio, our net investment income continues to benefit from higher base rates as well as wider spreads on new investments, resulting in a run rate NII that is among the highest in TCP's history as a public company. In recognition of the higher ongoing earnings power of TCPC, Primarily to provide the rate environment, our Board of Directors today announced an increase of $0.02 per share to the quarterly dividend distribution.

Speaker 2

The 2nd quarter dividend of $0.34 per share will be payable on June 30 to shareholders of record on June 16. As a reminder, our Board has always taken a disciplined approach with regard to the dividend, given our emphasis on stability and strong coverage through our recurring net investment income. Throughout TCPC's history, we have consistently covered our dividends with recurring net investment income. This commitment remains important to us And even accounting for the dividend increase declared for the Q2, our Q1 dividend coverage ratio would have been up approximately 129%. Phil will discuss our Q1 investment activity in more detail.

Speaker 2

But in summary, we are being disciplined in deploying new capital in this uncertain environment, while also selectively taking advantage of the more lender friendly investment environment. We reviewed a substantial number of transactions during the quarter And deploy capital in a small percentage of those opportunities. Given the slowdown in private equity deal volumes, we are reminded of the benefits of our channel agnostic Our pipeline remains healthy and given our direct relationships with management teams and other industry participants, We continue to find attractive opportunities to the current environment. Finally, the credit quality of our portfolio remains solid, With loans to just 2 portfolio companies on non accrual as of the end of the Q1, totaling just 0.3% Total investments at fair value, among the lowest non accrual levels in TCPC's history as a public company. Auto Alert, which was placed on non accrual in Q4 of last year, was successfully restructured in Q1 and our loans are now back on accrual status.

Speaker 2

While still early, it appears that some of the macro headwinds that have been facing the company since the onset of the pandemic appear to be abating, We have been encouraged by Auto Alert's relative performance year to date and post the completed restructuring. Looking back at our historical performance as a public company, Since 2012, we have generated a 10.3% annualized return on invested assets A total annualized cash return of 9.3%. We believe this performance remains at the high end of our peer group and reflects our ability to consistently identify attractive opportunities at premium yields and deliver exceptional returns to our shareholders across market cycles. Now I will turn it over to Phil to discuss our investment activity and portfolio positioning.

Speaker 3

Thanks, Raj. I'll start with a few comments on our existing portfolio and then move on to highlight our investment activity during the Q1. We continue to emphasize strong portfolio management and credit monitoring procedures for our existing portfolio companies. As a reminder, our investment team members specialize across industry verticals and are responsible for sourcing investment opportunities, underwriting and structuring those opportunities and then monitoring them until exit. We view this as an advantage as it ensures that the relationships and the knowledge developed during the deal sourcing process Enduring the deep private equity like due diligence process can be leveraged throughout the life of the investment.

Speaker 3

Our investment teams are continuously engaged in dialogue with owners and operators to assess both current and projected performance relative to our original underwriting functions. In addition, deal team members review portfolio company performance with senior members of the investment committee on a quarterly, if not more frequent basis. This process helps us proactively identify investments that may require more engagement with management to ensure our loans remain well protected. Given the higher rate environment, higher input costs and general uncertainty in the economy, we are working with few companies to help them navigate slower revenue growth and or margin pressure. However, we recently completed our quarterly review process And are pleased to report that the portfolio generally remains in good shape.

Speaker 3

In fact, despite the margin pressure facing many companies across the market, The majority of companies in TCPC's portfolio with the cash flow underwriting continue to report positive EBITDA growth. We believe our portfolio is well positioned given our emphasis on companies and established business models that have a reason to exist And our core to their underlying customers make these companies more resilient through difficult macro environments. At quarter end, our portfolio had a fair market value of approximately $1,700,000,000 88% of our investments were senior secured debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk. We also continue to emphasize companies in less cyclical industries. The portfolio at quarter end consists of investments In 143 companies, an all time high for TCPC, our average portfolio company investment was 11,600,000 As the chart on Slide 6 of the presentation illustrates, our recurring income is distributed broadly across our portfolio It is not reliant on income from any one company.

Speaker 3

In fact, more than 90% of our portfolio companies each contribute less than 2% to our recurring income. 86% of our debt investments are 1st lien providing substantial downside protection And 94% of our debt investments are floating rate, an important benefit, of course, in this higher rate environment. Moving on to our investment activity, our deal source channel agnostic approach provides us an important advantage, particularly at a time when we are seeing a Slow down in traditional sponsor backed activity. Our industry focused deal teams continue to identify unique investment opportunities from a wide range of sources, including directly through industry contacts, contacts and management teams. This is in addition to our traditional sponsor relationships.

Speaker 3

In reviewing these opportunities, we emphasize transactions where we are positioned as a lender of influence, which enables us to leverage our 2 decades of experience in negotiating deal terms and conditions that we believe provide meaningful downside protection. These include substantial collateral and tailored In addition, our industry specialization, which our borrowers truly value, bolsters our ability to assess And effectively mitigate risk in our underwriting and when negotiating terms in the credit documentation. Despite the more modest pace of market activity, TCPC invested $76,000,000 in the 1st quarter. Deployment in the quarter included loans to 8 new and 2 existing companies, primarily in senior secured loans. Follow on investments in existing holdings continue to be an important source of opportunity for us, accounting for 45% of total dollars deployed over the last 12 months.

Speaker 3

TCPC's largest investment during the Q1 was a unitranche investment to support the acquisition of World Choice Investments. World Choice owns and operates a diverse portfolio of live dinner and family entertainment attractions across the Southern U. S. The company is strategically located in stable regional tourism destinations, including Pigeon Forge, Tennessee, In which it operates the Dolly Parton Stampede. This market benefits from tourists visiting Dollywood, but also the Great Smoky National The Great Smoky Mountains National Park, which is the most visited national park in the country.

Speaker 3

We view this as an attractive investment opportunity Given the company's demonstrated and stable growth over the past 15 years, including steady performance during the Great Financial Crisis, Due in part to its low fixed cost base and strong free cash flow generation. Over World Choice's 30 plus year history, they have consistently delivered high attendance and revenue growth, which has established them as the leading entertainment option with minimal direct competition in each of its core markets. Our 2nd largest investment in the quarter was a 1st lien loan to support the acquisition of Finder. Founded in 2013, Finder is a Leading digital asset management vendor. We view this investment as an opportunity to lend to a premium product and its well Positioned to benefit from strong tailwinds for products that enable sales, marketing and commerce.

Speaker 3

We also view our loan as well covered Given strong visibility on cash flows and Finder's significant and diverse customer base. New investments in the Q1 were offset by total dispositions of $19,000,000 The overall effective yield on our debt portfolio increased to 13.1% compared with 9.1% 1 year ago, reflecting the benefit of higher base rates and wider spreads on new investments. Investments in new portfolio companies during the quarter had a weighted average effective yield of 13.3%, exceeding the 13.1 Given further pullback in banks' ability to lend in this environment, Exacerbated by the regional bank turmoil in the Q1, we are continuing to benefit from a more lender friendly investment environment With improvements in both pricing and terms relative to just 12 months ago. Post quarter end, We have seen a modest pickup in activity and have been investing selectively, maintaining our underwriting discipline while being mindful of the inflationary environment. We emphasize companies that have significant pricing power to pass on higher input costs, including increases in their cost of capital.

Speaker 3

It's also important to note that we do not underwrite superfections. We seek to build in sufficient buffers to ensure companies can withstand changes in the microenvironment, including higher costs without impairing their ability to service our loan. Our pipeline remains healthy And the yields on investments in our pipeline are generally in line with our current portfolio. To date, we've had limited prepayment income in the 2nd quarter. Let me now turn it over to Eric to walk through our financial results as well as our capital and liquidity positioning.

Speaker 4

Thank you, Phil. As Raj noted, our net investment income in the Q1 benefited from the increase in base rate since March of last year. Net investment income of $0.44 was up 29% versus the Q1 of 2022 And exceeded the 1st quarter dividend of $0.32 per share by 34%. Today, we declared a 2nd quarter dividend of $0.34 per share, an increase of $0.02 per share over the 1st quarter dividend. This is our 2nd dividend increase in the last three quarters.

Speaker 4

We remain committed to paying a sustainable dividend That is fully covered by net investment income as we have done consistently over the last 11 years. Investment income for the Q1 was $0.87 per share. This included recurring cash interest of $0.76 Recurring discount and fee amortization of $0.04 and PIK income of less than $0.03 Notably, PIK income was only 3% of total investment income. Investment income also included $0.02 of dividend income, A penny of other income and a penny from prepayment premiums and accelerated OID and exit fees. As a reminder, we amortize upfront economics over the life of an investment rather than recognizing all of it at the time the investment is made.

Speaker 4

Operating expenses for the Q1 were $0.34 per share and included interest and other debt expenses of $0.20 per share. Incentive fees in the quarter totaled $5,400,000 or $0.09 per share. Net realized losses for the quarter were $30,600,000 or $0.53 per share, resulting primarily from the reorganization of our investment in Auto Alert. However, given the stronger performance by Auto Alert over the last few months And the improved capital structure after the restructuring, our investment in Auto Alert had a net appreciation during the quarter and is now back on accrual status. Net unrealized gains in the Q1 totaled $28,000,000 for $0.48 per share, primarily reflecting a $36,200,000 reversal of previously recognized unrealized losses From the Auto Alert reorganization, partially offset by a $3,200,000 unrealized loss on our investment in Astra acquisition And a $2,900,000 unrealized loss in Aventiv.

Speaker 4

The net increase in net assets for the quarter was $22,700,000 or $0.39 per share. We have a robust valuation process And substantially all of our investments are valued every quarter using prices provided by independent third party sources. These include Quotation Services and Independent Valuation Services. And this process is also subject to rigorous oversight, including backtesting of every disposition against our valuation. The credit quality of our overall portfolio remains strong.

Speaker 4

A total of only 2 portfolio companies were on non accrual at the end of the Q1, representing 0.3% of the portfolio at fair value And 0.5 percent of cost. Now turning to our liquidity. Our balance sheet positioning remains very strong And we ended the quarter with total liquidity of $307,000,000 relative to our total investments of $1,700,000,000 This included available leverage of $208,000,000 and cash of $99,000,000 Unfunded loan commitments to portfolio companies at quarter end equals 7% of total investments or approximately $109,000,000 Of which only $34,000,000 were revolver commitments. Our diverse and flexible leverage program includes 2 low cost credit facilities, 2 unsecured no issuances and an SBA program. Last month, Fitch reaffirmed TCPC's investment grade rating with a stable outlook.

Speaker 4

Our unsecured debt Given the modest size of each of our debt issuances, We are not overly reliant on any single source of financing and our maturities remain well laddered. Additionally, we are comfortable with our current mix of secured and unsecured financing and do not have any immediate financing needs. Combined, the weighted average interest rate on our outstanding borrowings increased modestly to 4.19%. This compares with 3.26 percent at the end of 2021. That is an increase of only 93 basis points over the last 15 months, while base rates increased approximately 480 points during that period.

Speaker 4

This is the result of having over 70% of our borrowings from fixed rate sources. Now, I'll

Speaker 2

turn the call back over to Raj. Thanks, Eric. As a reminder, our Annual Shareholder Meeting will be held virtually on May 24, and all of our shareholders are invited to attend. Consistent with prior years and in line with many of our BDC peers, We have included in our proxy a proposal for shareholder approval to issue up to 25% of our common shares The purpose of the below NAV issuance proposal on our proxy is to provide flexibility. To be clear, at this point, we do not intend to issue equity below NAV and certainly not unless it is accretive to our shareholders.

Speaker 2

This is the equivalent of an insurance policy, which our shareholders have approved every year since we've been public. Even as the economic outlook grows increasingly uncertain and market volatility persists, we are confident in our proven strategy and approach to investing That has delivered strong risk adjusted returns for our shareholders throughout different economic environments. We believe we have demonstrated a consistent ability to execute throughout the credit cycles, enabling TCPC to deliver for our shareholders both periods of economic growth and contraction. This also makes us a reliable partner for our borrowers and further helps us to attract appealing investment opportunities. And with that, operator, please open the call for discussions.

Speaker 2

Questions?

Speaker 1

Absolutely.

Operator

Our first question comes from Roderick Baugh with Raymond James. Please proceed.

Speaker 5

Hi, guys. On if I can go to auto, obviously, the company is structured. It was marked up in the quarter, right? So do you think how can I put it? Was the restructuring too aggressive Since you restructured it, wrote off a lot, converted it to equity and then effectively immediately wrote the equity up.

Speaker 5

So can you give us any thoughts on how it was repositioned and was it restructured?

Speaker 2

Thanks, Matt. I hear you saying, I'll try to add a little color. I think the short answer is The restructuring, we hope and from early indications, may prove to be good timing. This was a good business That had an impact coming out of COVID that was tied to supply chain issues, a fairly robust Demand side for autos and used cars in particular and that essentially resulted in it being Able to mitigate this value proposition where they help dealers create demand and differentiate themselves When that's more valuable. As we came so it was a good business, but really a challenged balance sheet by factors coming into this environment.

Speaker 2

The business and as we think about the restructuring, the 2 kind of went in different directions. The business environment improved for it, ironically, in this environment Where there is more inventory on dealerships and supply chain issues abated, That helps them become more relevant again and the trends are showing that out of the box. And similarly, the balance sheet That was a challenge. It was something that we were able to be part of a solution to fix. So I don't know that it was too aggressive.

Speaker 2

I think time will tell Unless when you say aggressive, you mean in our favor. I do think that it was well timed, that it was something that we Try to avoid doing by finding and working in conjunction with the company and its owners to a solution. I think the nature of the restructuring being Relatively quick and efficient after a number of other types of processes were in place does highlight the benefit of doing this when you're one of Few lenders are 1 of 1. You can just do this much more efficiently than the large scale restructuring. But I think hopefully that What we're able to do is give the business the running room and the capital structure and liquidity to achieve its highest value, especially as those Demand factors and economic factors are moving back in its favor.

Speaker 5

Got it. Got it. Thank you for that additional color. I mean just the other one, so it's back on accrual now. Was it on accrual status for the full quarter, Partial quarter or just packet at the end?

Speaker 4

It was right at quarter end. So there was no income recognized during Q1 From Auto Alert.

Speaker 5

Got it. Thank you. And then the other one on credit quality, just to Based on Phil's prepared remarks, you said the majority of companies have positive EBITDA growth. Presumably, some don't. Obviously, the recurring revenue business is one thing, but you mentioned that we're underwritten on a So can you give us any color for that?

Speaker 5

Is that EBITDA decline for whatever proportion of businesses is, is that new? Is that was that expected? Is that a result of macro or idiosyncratic issues? Anything we should be watching out for in the rest of the portfolio? I guess, is the real question.

Speaker 3

Yes. Thanks, Robert. So I would say that you're right. It was the majority and it's a meaningful majority Our cash flow thesis loans have seen EBITDA growth. There are, of course, Some businesses in our portfolio, which have been impacted by what the Fed is doing and the Fed has been very explicit about trying to slow growth And the inflationary environment has been quite meaningful.

Speaker 3

And so not all companies are seeing EBITDA growth, just the vast majority. So are we concerned at this point? We feel like we have sufficient margin there in these cash flow loans. And just because they're seeing some either flat year over year or sequential EBITDA or in Some cases down. Most of these situations are areas where we're terribly concerned or hit our watch list.

Speaker 5

Got it. Thank you. That's it for me.

Speaker 3

Thanks Robert.

Speaker 1

Thank you

Operator

for your question. Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please begin.

Speaker 6

Hey, guys. Have you guys had entered into any discussions with your banks providing your facilities in terms of change of haircuts or change in terms?

Speaker 4

No, we haven't needed to And neither have they approached us regarding that.

Speaker 2

Yes. And just for some context, our business even before the TCPC, which was public, has been doing leverage loans and facilities for over 2 decades. So I think We try to think about the right type of structures, flexibility, etcetera. So we're not on the wrong side of the banking discussions, but there have been no discussions

Speaker 6

Any consideration in terms of adding additional credit lines?

Speaker 2

I think we are comfortable where we are in terms of capital structure today. I think we're always in conversation with various Providers for flexibility and additional sort of thinking about diversifying the capital structure. So there will always be consideration of when and if that makes sense. But I would just emphasize the point that we feel very well We are covered today and are very appreciative of the banks we work with being good financing partners.

Speaker 4

And we do have accordion Both of the facilities, one thing we do always look at is continuing to add perhaps other banks to the lineup within the facility. And so that's a regular thing we do.

Speaker 6

One of the things that occurred in the last banking crisis was Banks basically cut off the lines of credit. And I'm not saying that that's happening What's going to happen? But just sort of as an insurance policy, would BlackRock, your parents, Be able to backstop if the worst came to worst and the banks start cutting off credit lines?

Speaker 2

I think that's a question I will not answer For BlackRock, I like my job here. But I would say that when you go back through the prior crises, The one thing I would say is that private credit assets have just held up very well. I mean, at BDC, even the marks to NAV Have not dropped historically as much as other credit or even liquid asset class. I think there's a benefit to the lockup structure and the permanent capital nature. There's a benefit to the way we underwrite that allows us Keep a good and healthy portfolio and take protective actions.

Speaker 2

I think our lenders see that historically and have It's seen our ability to protect their capital. So while I won't answer the question on the BlackRock Side of it, I will say that historically, even the worst crises, it wouldn't have been needed or it wasn't needed. And we take encouragement that, that we can kind of conduct the business the same way and hope for the same type of protections going forward.

Speaker 6

Sounds good. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Ryan Lynch with KBW.

Speaker 7

Please proceed. Hey, good morning. Thanks for taking my questions. First one I had, I know the deal opportunity environment is really strong today, just with the availability of capital being a little bit Limited out there. You guys, I think, probably put out some really high quality loans this quarter, I would guess.

Speaker 7

But is there any point where you guys look at the balance Leverage and look to manage your level of deployments based on your leverage range and are we getting to that point yet?

Speaker 2

So let me answer it this way. We have definitely we haven't given formal Targets on our leverage range, I think we have historically given some guidelines of where we're comfortable. We absolutely look to maintain buffer And in the leverage facilities, we don't use leverage as part of our investment decision. It's really a portfolio optimization tool. I would say that the other thing we are very conscious of is maintaining the investment grade rating.

Speaker 2

We have a frequent, I think, healthy dialogue with the rating agencies. And so in the current environment, a couple of things. One is, Given where we're underwriting, I think you can see that from the current portfolio and the new deals, even the leverage we have is It's a great environment on an unlevered basis and the leverage I think is helpful, but we are not going to push that In any way that compromises the balance sheet, the ability to protect our portfolio or our investment grade rating. And without giving formal guidance on a target range, I'll leave it at that for where we are levered today and how we're thinking about operating in the current environment.

Speaker 7

Okay. That's fair enough. And then kind of looking back So some of your prepared comments, you kind of talked about with the current kind of mini banking crisis we have going on. I think you said it will further reduce Thanks, willingness to lend the middle market companies. I would love to just hear you provide some more thoughts on 2 areas In regards to this, one, how much today or in the past 2 years Are you actually competing with banks for deals?

Speaker 7

So the extent that banks pull back, that would obviously be a beneficiary to your peers If there are meaningful competitors in your space, I'd love to hear how, if at all, banks are really in the space that you're competing with For deals that you're actually putting in portfolio, number 1. And then secondly, on the flip side, if banks You potentially pull back from lending, which is nothing quite weak. How do you think that impacts Your portfolio companies or borrowers that may have additional lines of credit outside of your debt with banks.

Speaker 3

Thanks, Ryan. So I'll address the first part of the question. We do compete on occasion directly with banks. Those are more the, I'd say, regional banks Who are committing and underwriting, let's say, loans of anywhere between 200 to 300, 400 maybe in terms of tranche size and they'll put together their own solution and try and syndicate that deal out. So that's one part of the market and that is part of the market given that we compete with given our focus on the core middle market.

Speaker 3

Then there's another part of the market where the banks participate and that's on the larger cap direct lending side. Clearly, the $1,000,000,000 $2,000,000,000 $3,000,000,000 $4,000,000,000 unit tranche deals that you're seeing now that some of the large cap Direct lenders are focused on. That is competing head on with what The large cap banks would otherwise be doing. So I would say that For us, the competition is more on the regional side. The likes of SVB and First Republic and so on, those aren't Thanks.

Speaker 3

That typically trap in middle market direct lending, but there's certainly others that do on the regional side. And the fact that they are we expect them to be more constrained either for their own risk management or from a regulatory standpoint, We think it will benefit us. And even if those regional banks do come in the market, we think it will be Perhaps, they'll pull back on risk, maybe be less aggressive on quantum or terms, Or maybe they'll want to do it on a best efforts basis, which obviously is less reliable for borrower in terms of execution. And that's where direct lending comes into play, where we can provide certainty of execution, And we've done that for the better part of 2 decades now.

Speaker 2

Yes. And I'll try the second part of the question. I think you were asking about if they pull back Revolvers and liquidity and things of that sort, how does that impact companies? I think that if you think about what's happened to the banks over the last two decades, There was an effort with my former employer, I was part of it as a learning experience to do what we do directly. And they're just not built for that long term type solution, but they did they were effective and we partnered with a lot of regional banks and others On the short term revolvers and facilities, and I think that's been a good place for them.

Speaker 2

These are asset backed, very, very well protected and Essentially, Swinglines, if you will. To the extent we they pull back from that business, which I think is really more their core Competency and a big part of their relationship effort with companies, I think there will like many, many cases in the past with financing markets, Necessity will drive a creative solution and that may be something that we do as part of it, maybe partnering with other types of parties. For where we sit right now, the cost of capital for those solutions is below our targets. It wouldn't be appropriate for this business unless that changes. But that doesn't mean there aren't private market solutions or some hybrid or something that comes up to the extent demand is there and there is a good place to Obtain risk reward type financing opportunities and that's happened time and time again.

Speaker 2

I would imagine there'd be something like that that emerges. It's too early to tell. It's also unclear where the banking sector ends up, but I think them exiting that type of business would be A more wholesale change in their business model, which we don't see or anticipate or even hear about in the current environment.

Speaker 3

Yes. And I'll just add, one of the things we've seen due to some of the pullback, Especially from the larger banks is that as our portfolio companies continue to grow, obviously, they're making tuck in add on acquisitions, They're growing their cash flow tremendously and they at some point may be right for a refinancing by 1 of the larger banks. But given what's going on, we expect them to stay in our portfolio longer and we can continue to finance them Given that we know the business really well and as you've seen as we've talked about quarter over in the recent quarters, the amount of origination that we get out of our existing Portfolio continues to be pretty high. I think it's 45% over the last 12 months and that's partly due to us, the existing lenders providing that solution for the borrowers instead of them going out and getting cheaper cost of capital from the banks And what would have been the case 1 or 2 years ago.

Speaker 7

Okay. Understood. I appreciate the time today.

Speaker 4

Thank you. Thanks, Ryan.

Operator

Our next question comes from Kevin Foltz, JMP Securities. Please proceed.

Speaker 8

Hi, good morning and thank you for taking my questions. Just one question for me relating to Edmentum. You've obviously seen the headlines around the adverse impact that AI is having on the online education space. Some publicly traded education platforms are More than 60% year to date. I was curious if you could share your high level thoughts on the impact that AI is having on Edmentum's business model, They're experiencing the same degree of disruption that other online education platforms are facing.

Speaker 8

I'm just trying to get a better understanding around the movement in fair value marks for the company and what the outlook is Thanks.

Speaker 2

Yes. I can give you some perspective, because we've talked about it and then time will tell. But I think If you think about what Edmentum has successfully done in moving its business forward, Over time, it's made a big push from going from analog to digital. Obviously, that's where the market is going for at Tech. And they've done a very good job, I think, Proactively, I'm going from broader based assessment and targeted content to much more personalized assessment And targeted content to move students forward from a baseline from where they are to a baseline or ahead of it.

Speaker 2

A big part of that Value proposition going forward is the ability to do that very proactively and in a very targeted manner. And not surprisingly, some AI Type of technology is actually additive to that. It gets it makes it a more robust function. So the product set will certainly Incorporate that and Mentum as a company, I should let the CEO who is exceptional in his field speak to it directly, but Even before AI became kind of the topic of the day, we're exploring incorporating that into their product set because That is where the market ultimately will go and will benefit from. But I think that makes it a better product, not a less relevant product.

Speaker 2

And that's one that I think will only enhance what they're doing on a personalized basis with students. How that ultimately rolls forward, I think time will tell. But From a point of view of the thinking at the company level, they've been thinking about AI and incorporating it for quite some time now. And I haven't tracked the other online education performance. I don't think they're necessarily comparative businesses.

Speaker 2

But at least from my perspective, it's something that would be additive to what they do and they certainly see that that way as well.

Speaker 8

Okay. I appreciate the insight, Raj, and congratulations on a nice quarter.

Speaker 4

Thank you.

Speaker 2

Okay. We appreciate your participation on today's call. I would like to thank our team for all the continued hard work and dedication. I would also like to thank our shareholders and capital partners for their confidence and their continued support. Thanks for

Speaker 4

joining us. This concludes today's call.

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BlackRock TCP Capital Q1 2023
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