Hello, everyone, and thank you for joining us during the Lytham Partners 2024 Investor Select Conference. My name is Roger Weiss. I'm a Vice President of Lytham Partners. During this fireside chat webcast, we welcome Saratoga Investment, New York Stock Exchange, ticker symbol SAR. Joining us today from the company are Mike Grisius, Co-Managing Partner and Chief Investment Officer, and Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer. Also joining us today is Bryce Rowe, Senior Research Analyst with B. Riley Securities, whom we've asked to moderate today's fireside chat. A 20-year veteran financial services analyst, Bryce has followed both banks and BDCs over his career and currently covers a wide array of business development companies at Riley, including Saratoga. Before I turn it over to Bryce, I want to remind everyone that management is available for one-on-one meetings throughout the conference. If you've not already signed up and would like to schedule a one-on-one, please send me an email at weiss@lythampartners.com or visit lythampartners.com/select2024. From there, you can click on the investor registration to make your one-on-one selections. Also, please note that Bryce and I webcasted an analyst roundtable on the BDC group earlier today. A replay link is available on the conference homepage, again, at lythampartners.com/select2024, and click on Presentations in the top left corner. And with that said, Bryce, the floor is yours. Excellent. Thanks, Roger. Happy to be here today with, with Henri and Mike from Saratoga, and figured we'd just jump right into it. So, Henri or Mike, let's, let's just start, by talking about Saratoga's investment focus, you know, the size of companies in which you invest, the competitive landscape, your, your mix of debt investments versus equity, anything that would be helpful for investors to kind of level set Saratoga. Let me take that, Bryce. Thanks for the question, and thanks for having us here this morning. Saratoga invests in what we call the lower end of the middle market. You can see New York City in the backdrop behind me. Most of the businesses that we're investing in are not in New York City. They're smaller businesses than that, generally between about $10 million and $100 million of revenue. That's important in terms of, you know, our approach, because the size that we focus on gives us an opportunity to do a underwriting that's much different than what people who participate in the larger market do when they're underwriting the deal. So we get very close to the companies that we invest in and lend to. We also have an opportunity to get to know the management very, very well and and do, you know, very thorough diligence. But also because there's so many businesses that occupy that landscape, literally hundreds of thousands of businesses, it offers us an opportunity to be very selective and find, you know, the very best businesses to invest in and lend to. Now, we are generalists, so we're in lending to a wide variety of businesses in different industries as well. The common characteristics, though, that we look for are businesses with durable revenue streams that are generally recession-resistant, they have high margin profiles, and they're managed by management teams that have a proven track record of success. Most of those businesses that we're investing in, lending to are, private equity-backed, and that's probably 80% of the portfolio. 70%-80% of the portfolio is private equity-backed businesses. In other cases, we'll lend to and support businesses that are where we're directly supporting the ownership group, and that's worked out real well for us. In terms of subspecialties, we definitely have subspecialties within the software space, in the education space, and healthcare, but generally looking for businesses with some of the attributes that I described. In terms of the competitive landscape, it's kind of interesting because I've been doing this for, you know, virtually all of my career, and the marketplace has changed quite a bit during the time that I've been participating in it. Once upon a time, BDCs, and you might be familiar with this, Bryce, were mostly doing mezzanine loans. And that was a time when the senior banks were much more aggressive, much more active, lending to middle-market businesses where we participate in the marketplace. And that's changed a lot. Banks have largely left that marketplace. And so once upon a time, where BDCs would do a mezzanine loan because they essentially do a structure where the banks would do kind of the least risky part of the capital structure, and the BDCs would come in and provide a mezzanine security to kind of stretch the debt dollars to get a transaction done. That's changed a lot. The vast majority of what we do is dollar one, first lien loans, basically coming in where the banks have left a void in the marketplace. And we're largely competing against therefore private funds and other BDCs like ourselves. So, we think the competitive environment has worked in our favor and moved in a direction that's very positive for us. It's enabled us to get the kind of risk-adjusted returns that we've produced over time. And Mike, you know, it's interesting, Roger and I talked about that in the analyst roundtable that he referenced, you know, the private credit having, you know, kind of taken market share from the commercial banks as regulations, you know, have not allowed them to do what they might have done, you know, 20, 30 years ago. And so Saratogas of the world are certainly stepping in and providing the financing for that. Can you speak also to just the portfolio mix, you know, debt versus equity, and how you like to kind of go into it in an investment? Sure. And thanks for that question because it's an important feature to our success, we think, as well. Obviously, our shareholders are largely looking for dividend for their return, and so we're gonna populate our portfolio with primarily debt securities that give us that interest income that we, of course, pass on to the shareholders in the form of dividends. But where we play in the marketplace, we have an opportunity to augment our returns quite meaningfully by co-investing in the equity of most of these businesses. And it's kind of interesting because you do the work, and we do a lot of rigorous work to get comfortable with any new investment opportunity that we have. If you were to draw a Venn diagram between the attributes that you like in a debt security and an equity security, there's usually a pretty significant overlap. And in our end of the market, it's pretty common that you have an opportunity to co-invest in the equity. So we'll do a lot of work to get comfortable with the debt, and very frequently raise our hands to get a chance to co-invest in the equity. You know, there's two things that are great about that. One, it's a natural hedge against any challenges that you may have in the portfolio. Just when you populate a debt portfolio, you're naturally gonna, you know, experience some of that. But in addition to that, it can augment your returns quite meaningfully. In our case, the returns that we've achieved through the equity investments have been quite substantial and have allowed us to, you know, generate gross unleveraged returns on almost a billion-dollar worth of exits that approach about 16%. And that's just on a gross basis without taking into account the gross up in leverage that you would experience as well. Okay. Yeah, that's helpful, helpful context. So maybe step back a little bit, just a brief history of Saratoga. How did it come to be? You know, what's changed over time? And then curious kind of when both of you all joined, joined the firm. Sure. Saratoga has a unique and very rich history. And it's really, and Saratoga Investment Corp. is an offshoot of a firm called Saratoga Partners, which was an active investor in middle-market companies for years, going way back. And its lineage actually goes back to an investment bank called Dillon Read that was founded in the 1800s, so a really rich history. And the Saratoga Partners platform, in the financial crisis, sort of discovered it's called an orphan BDC that was quite small, and they had an opportunity to make an investment in that BDC that was somewhat floundering, and took over management of the BDC, and that was in 2010. And at the time that they took it over, it was only $80 million of assets. And I think the Saratoga Partners guys had been very successful investors in the middle market. They saw an opportunity to you know, augment their platform with a debt-oriented platform. So accomplished that in 2010. I joined them in 2011 with a background in working through BDC platforms throughout my history. So, together since that time, and Henri, I'll let you you know, chime in terms of your experience, but together, since that time, we have grown the platform, you know, we think the right way. When you see a BDC grow too fast, that's you know, something that you should be you kind of have your eyes open toward. It's really not the right way to grow your platform, we think. So we, we've grown it from that $80 million mark to a little under $1.2 billion in assets at this point. So over that 13-year timeframe, kind of steady eddy progress, building the platform, creating relationships and deals beget deals, but doing it kind of very methodically and very carefully, and I think that's a big reason that we've produced the track record that we have over time. Henri, I'll give you a chance to get some airtime as well. Well, just to echo Mike, Bryce, thank you so much for having us today. This coming March, I will actually have been at Saratoga for 10 years now. As you know, I'm the CFO, the CCO, treasurer, and secretary, and a lot of hard work has gone into growing this BDC into the company it is today. I think as you can also, Bryce, see from our management, our investment, and our finance ops, team tenures that we always show in our investor presentations, there's a real history of stability in people for Saratoga, which is a really big strength of ours. As Mike always says, "The most important thing about a BDC is its team and its people," and we're very, very proud of both of those. That's great. Yeah, we actually had a conversation with another BDC earlier and talked about culture, and I know that's something you all have focused on quite a bit in your public calls, and so appreciate, you know, appreciate that for sure. Maybe, Mike, one more here for you, just talking about sourcing of investments. I know it's something that you focus on quite a bit. Can you talk about how you source your investments, and then maybe how the sourcing mechanism has really changed over time? Oh, absolutely. So we have two people that are full-time dedicated to trying to find new investment opportunities and develop relationships for us. And of course, that's changed over time. When we started, there was not a business development function. We were just relying on the relationships that we had in the marketplace, and we were quite small. What's been wonderful to be a part of is that as we've grown, as I mentioned earlier, deals beget deals, and every time you make an investment, you meet new people, you get an opportunity to you know, learn more about an industry. The combination of those things typically gets you deeper into a marketplace, and very frequently create deal opportunities. So, you know, you do something with one firm and you have a successful outcome, and they'll call you again next time they're looking at an investment opportunity. You get to know accounting firms along the way, and they may know a business that they think is quite good, that they can, that they'll refer you to, or a Quality of Earnings firm or, you know, groups like that. So we are sourcing our deals through a combination of direct, you know, calling efforts from the business development group, but also largely from the contacts and relationships that we've built over the years. I think that's really a differentiator in terms of where we play in the market vis-à-vis, let's say, the large BDCs, where there's, you know, a smaller group of private equity firms that they generally court and, you know, kind of chase a lot of the same deals. In our marketplace, it's so vast, and there's so many companies out there, we feel that you can frequently find deal opportunities, investment opportunities, that aren't as competitive, and you can do primary diligence, and I think that's worked out really well for us. So sourcing is, you know, a key element of our success, we think. Yeah. Okay, helpful. And maybe that kind of leads into your track record. You guys have an excellent track record of delivering, you know, good credit quality, good underwriting, good value, and that's really evidenced by the growth in book value per share or net asset value per share. You know, that's up 30%, more than 30% over the last 10 years, 20% over the last 5 years, and that's really, you know, my primary measuring stick for BDC. So can you talk about, you know, the investment approach that has supported such strong NAV growth? Absolutely. And, you know, first and foremost, we believe very strongly that you make money in credit by not losing money. And so we've got a very proud track record of not losing money over time. And I think where people have lost NAV, it's generally, you know, that's the cause of it, by and large. For us, what's been wonderful is not only have we kept our losses at very, very low on a net basis, when you look at the portfolio relative to the gains that we've had on our equity co-investments, it's resulted in a really strong outcome, which has allowed us to grow that, you know, net asset value over time. Yep. Okay, okay. And then maybe... You know, we're talking about underwriting and credit quality. Can you talk a little bit about how credit quality looks today? You know, we've got a bit of an uncertain macro backdrop, so just kind of curious what the portfolio looks like today. Yeah, and currently, we're working on some that are having a few challenges, but in terms of the overall portfolio, it's performing exceedingly well. We look at metrics like... I mean, we're getting very real-time financial reporting from all of our portfolio companies, so we're monitoring that very carefully, as you can imagine. But we look at metrics like, you know, how is revenue performing versus budget? How is EBITDA or cash flow characteristics, whatever the underwriting characteristics are, as compared to prior year at the same time, as compared to the prior quarter at the same time? And in our portfolio, the vast majority of our companies are performing at or above prior periods in that respect, and that's kind of one measure that gives us confidence in the performance of the businesses. We also are coming in generally in a lower part of the balance sheet, i.e., less leverage than what we see in the marketplace in general. So that gives us sort of an underpinning of support in our portfolio as well. So overall, we feel good about how our portfolio is performing. We have our eyes wide open to the current marketplace. We're never momentum investors, so we're never thinking about... We get this question frequently, where people say: "What inning is it in the economy?" And it's like, gosh, if I could forecast that, you know, maybe we'd be doing something different for a living. But instead, when we do our underwriting, we're looking at every deal as though there's a recession that's on its way. And so every single portfolio company, we're sort of vetting in that fashion, and we're looking at, for instance, how did this industry perform in the last downturn? If it performed badly, or if it performed at a certain level, let's run a scenario where, you know, sales declined by that much, and will the balance sheet still hold up under that scenario, et cetera. So we're always looking at every deal that we put in our portfolio with that context, and I think that's been one of the reasons our portfolio's held up so well. Maybe, maybe let's shift to a discussion about the dividend. Obviously, you know, investors and BDCs care about the dividend quite a bit, and are looking at dividend yield as a, you know, as a, as a potential trigger to get involved. So the current dividend currently sits at $0.72 a share on a quarterly basis. That's meaningfully higher than where it was pre-COVID. Probably worth kind of addressing the decision to suspend the dividend briefly at the onset of the pandemic and really to rightsize the dividend in the second calendar quarter of 2020, I'm sorry, 2020. But do want to ask, you know, how you think about the dividend? You know, can you speak to some of those decisions back in 2020? I just want to give, you know, kind of viewers a sense of the dividend and, you know, and where it could go from here. Yeah. It's, it's a very good question, Bryce, and a very important one because we continuously are thinking about assessing, discussing the dividend, and so many different factors play into our decisions. But if you think back to March, April 2020, when we were making the dividend decision at that time, the world was a pretty scary place. This was, you know, in the midst of COVID just starting. Everyone was sitting at home. No one was even going to stores or purchasing anything. The stock market had just plummeted at that point in time. So it was a pretty scary, scary place, and we had to make a decision in the midst of all that craziness. And so at that point in time, in April, we prioritized liquidity, and we prioritized capital as probably the most important things at that point in time. And our view then was, if we are right, we'll be grateful because we would've strengthened the BDC, we would've built up some further liquidity, some further capital. And if we were wrong, we would also be grateful because economic conditions had improved, probably the stock market had recovered, you know, probably portfolio companies were doing okay through all of that. And, you know, when you sort of rolled forward three months later, based on the changes that we saw in conditions, you know, in those following three months, we then had the opportunity in our next quarter to rightsize the dividend, and we switched it back on. And we've, as you said, been increasing it significantly since then, growing it each of the last 14 quarters. So it's continued to grow, quite significantly since that point in time. Henri, what's fueled that increase? And then maybe- Yeah ... you know, give us a sense for how, you know, how you're positioned- Yeah ... to continue to cover the dividend. You've got massive dividend coverage at this point. Yep, yep. No, that's right. There's a couple of factors probably driving this growth, and that includes both interest rates and our assets under management or our AUM. Interest rates play a significant role for us in our portfolio because 99% of our interest-earning assets are variable rates, so they reset monthly or quarterly, depending upon the specific portfolio company. And then our AUM also has grown significantly in the last two years. It's up 68%, I believe, the last two years, and 13% the last twelve months. So both of these factors are contributing significantly to our growth in net interest margin, and that obviously drives up our NII. And currently, as you mentioned, we have a pretty healthy cushion for our dividend coverage. We're outearning the dividend of $0.72 currently by about 40%. And when you sort of think of those two factors, we view the AUM growth as sustainable, especially as we have a pretty healthy pipeline and origination process, as Mike outlined. But we are definitely more cautious when it comes to rates. You know, who knows? And we never try to predict rates. Who knows where it's going to go in the next 12-24 months, but if anything, it's probably gonna be downwards, and obviously, that will shrink our NIM or net interest margin, as all of our debt is fixed. Now, the good news is that $320 million of our debt is callable in the next year, so that does mitigate reducing rates, as we can effectively refinance that debt at the lower rates. Most of the other debt we have is well below 5%. So, you know, we do have ways to address the fixed rate nature of our capital structure that will help offset some of the reducing NIM because of interest income coming down, but we still want to be cautious in managing that difference between our NII and our dividend. But you know, the large current gap with the dividend that we have makes us feel well-positioned so that we continue to cover and exceed the dividend and earnings that we have at the moment. Okay. You know, question along those lines. I mean, obviously, BDCs are required by regulation to distribute the bulk of NII to shareholders as a dividend. But you have this interesting aspect of a BDC that you can actually spill over some of that excess earnings and pay an excise tax on it. So you've outearned the dividend, you know, quite measurably over the last year. Can you kind of talk about that spillover position and how you think about managing it? Yep, yep. Yeah, I mean, what's interesting is people sometimes think or say that BDC taxes are simpler or easy because, you know, it's a RIC structure, it's not a corporate structure. But the reality is that it's actually quite a complex tax structure that does actually allow a great opportunity to do some tax planning. And that's something we always focus on a lot. So to start off with, dividends are actually calculated on taxable income, not NII, right? So there are sometimes differences between the two that, you know, one can potentially manage in sort of managing that spillover. And then, also, your tax obligation is actually calculated at your fiscal year-end, but any dividends paid for 8.5 months after that is actually then counted as a reduction of that previous obligation. So in effect, you can also manage that difference in, as you said, you call it spillover, Bryce. Now, we have been increasing our spillover over the past couple of years, as we feel this allows us to reinvest that capital into the business, generate a strong return for our shareholders. And the first couple of dividends that we had in this past fiscal year went towards our spillover, so no special dividend was required at the end of last year. That's the spillover piece of it, but then there's also an excise tax, as you said, of 4% that is owed on any undistributed amounts, and that's measured at the end of December, so calendar year. And we will be paying that in the next couple of months. The way we think of excise taxes and that spillover and paying taxes on it is, it's effectively a way that we continue to finance our growth, and, and we use that money on new investments or follow-ons. It's effectively, if you think about it, a 4% debt, and we're earning, you know, 11%-12% on average at the moment on that. So it's pretty cheap in the current rate environment. So we don't mind the spillover and haven't minded it for many, many years. But looking ahead to later this year and the spillover, we'll obviously be assessing it again. We'll be determining whether a special dividend could be, might be required or not, based on the dividend payments that are coming up in the next sort of three quarters or so. And if so, if a payment's needed, and this year it could potentially be the case, although we haven't had a special dividend in many, many years. But because we're overearning our dividends so much, that could be the case this year. We'll then obviously determine the form and the size of any special dividend later this year. Got it. But bottom line is, you've got nice dividend coverage at this point, and some spillover that that can act as a cushion, if need be. Yep, exactly. Which is great. So maybe, maybe we'll talk a little bit next about the capital structure. First, just wanna get a feel for kind of the regulations that govern the amount of leverage a BDC can use, and then can you speak to Saratoga's various sources of financing? I know it's a little bit different of a mix than you might see from most BDCs. Yeah. No, absolutely. I'm so glad you highlight that, Bryce. So firstly, to answer the question on the regulations, effectively, your debt to equity cannot be more than 2 x from a regulatory perspective, and that calculation excludes all SBA debentures, of which we've got quite a few, because we have three SBIC licenses, one that's now in wind down, but two active ones. So it's all of our non-SBIC debt that you would include in the numerator. And so the question is, what happens if you breach that leverage? And what it would mean is that effectively, you cannot pay any dividends, and you cannot issue new debt while you're over 2 x, and that's why it's obviously an important, very important calculation. Now, over the years, our leverage on a net regulatory basis has sort of ranged from being well below 1x for many years, sort of 3-4 years ago, to more elevated, slightly more elevated, where it is today, around the 1.5-2x level from a regulatory perspective. We continue to, as you've seen, and if you track us, really like to raise equity when we can. And as a reminder, this management team owns 12% of the BDC's equity ourselves, which I think is one of the largest management team ownerships in the industry. So we're big shareholders ourselves. We participate in every investment we do, as Mike always says, you know, 12 cents of every dollar that we put to work is management's own. And so we use every opportunity to raise equity at or above NAV. And just in the recent six months, we've raised almost $50 million of equity, which has obviously helped reduce the leverage. Now, that's the equity leverage sort of relationship. But with regards to our actual financing sources, we've been really proud about how we've managed to diversify our sources of debt over the years. And that's really helped us a lot as markets, as you guys know, react differently at different times. You know, sometimes one market, the public market, might be open, the private market might be closed, vice versa. Public market might be closed, SBIC debentures are available through the SBA. Our sources of financing have really expanded, and we find ourselves now having public Baby Bonds, private Baby Bonds, all of which are callable, which is a very, very important characteristic of debt in our mind because it gives us flexibility. We have unsecured institutional notes that we issued a couple of years ago. We have SBA debentures, which are long-term, fixed-rate, really much, much cheaper financing than we can get in the public markets. And then we have a small $65 million credit facility. So this borrowing base variable credit facility that many BDCs have and use, we actually only have a very small piece of that. Most of our debt is not that credit facility type debt. For us, probably the most important thing about our financing and capital structure, which is very similar to when we do investments on the asset side, how we think of things, is that structure for us is more important than rates. So when you look at the structure of all of our debt across the board, they've got no covenants such as tangible net worth covenants, EBITDA covenants, et cetera, that can be tripped in, you know, tough financial conditions. Our credit facility has no recourse to the BDC, which has always been really, really important to us, so that it's isolated, separated, you know, completely separate SPV. All of our debt is long term, so it matures sort of two-10 years out. As Mike mentioned earlier, you know, having taken over management of this BDC, and it was due to a capital structure where they had issues, and they had covenants and things that got tripped, it's always our top priority to ensure that the nature of our capital structure is just very sound, it's very secure, and is sound and secure in all market conditions. Cheaper rates is important to us, but it's definitely not our top priority. Yeah, and, I mean, I think you might have just answered my next question, but if you have anything to add here, then certainly do. So, I mean, you addressed the fact that you've got more elevated balance sheet leverage today. You know, can you talk about maybe why you're comfortable with it? And I've certainly heard what you just said about kind of the- Yeah ...the nature of your financing sources, but is there anything else to it? Yeah, I would add, and Mike, please jump in as well, but I, you know, I would add probably the timing of when we can raise equity often plays a part in the leverage and sort of our capital structure. But we definitely are cognizant of our leverage. We've raised $50 million of equity recently, as I mentioned. And as I said, it's part of the structure of our debt. But also the fact that 85% of our assets are first lien, and they're in structures where we offer the only lender, we have protective covenants and asset documents ourselves, as Mike spoke about earlier. So, you know, we don't believe all leverage is created equally. We also feel that the nature of our assets and our liabilities help mitigate the current higher leverage levels that we're just currently experiencing. Yeah, and I, the only thing I'd add is just as we, maybe to not add, but re-emphasize as Henri said, we think about the right side of our balance sheet, the debt, just as carefully as we think about the left side of our balance sheet. And we think that even though the leverage level on an absolute basis compared to some other BDCs is a bit higher, if you look at it in totality in terms of the diversity and the quality of our portfolio, and the fact that nearly, you know, the vast majority of our portfolio is in first-lien deals that are in a very comfortable spot in the balance sheet, we think the, our overall balance sheet of our BDC is, in a good place. It's a very manageable place. Okay. Okay. All right, last one for me. You know, Henri, you just talked about having raised some equity, and you've actually used an at-the-market program. You know, interestingly, you're subsidizing those issuances at the kind of the management or external manager level so that the equity is delivered to the BDC at NAV. And that's important. I think investors need to kind of understand that. Can you talk about, you know, why you're subsidizing? Yeah. Well, there's probably a couple of reasons and things to focus on. I think firstly, as I mentioned earlier, we're big shareholders ourselves. So we have a belief as shareholders of the BDC that more equity over time, raised accretively, is good for the BDC. It's good for all shareholders. It strengthens the BDC. And so as being big shareholders ourselves, you know, we feel that even while we're trading maybe close to NAV but not at NAV, because having more equity and strengthening the capitals through more equity is important, we're willing to put our own money in if that helps getting the amount that the BDC receives at or above NAV. And again, that helps the BDC become stronger, and so that's exactly what we've done over the last two quarters. We subsidized, you know, any shortfall there was between NAV and what the stock was trading at, at the time. When we issued the equity, we mainly did block trades, so, you know, it was sort of singular days of activity, not every single day. But, you know, we put our own money in, subsidized it. Didn't receive any shares for it or anything, right? This is just a pure subsidization to allow the BDC to receive NAV or even in some cases, slightly above NAV, and help reduce leverage and help to strengthen the capital and equity side of the balance sheet. So, yeah, so that's really the reasons we did it. Okay. I mean, very, very powerful message you're sending to, to investors, for sure. Great. Thanks, Bryce. I think that's all I have. Appreciate you guys taking the time, and certainly, look, the investors will look forward to taking some one-on-ones, here a little bit later. Roger, I'll turn it back to you for exit comments. Thanks, Bryce. Thank you, Mike. Thanks, Henri. Thanks, Bryce. Bryce, Mike, Henri, we really appreciate you taking the time today to join us. I learned a lot about Saratoga, and I'm sure both existing investors and potential investors have as well. As we wrap up, two quick reminders. To anyone out there who has not already signed up for a one-on-one, again, please send me an email at weiss@lythampartners.com, again, or visit lythampartners.com/select2024 and click Enter Conference Site button. Don't forget about the BDC Analyst Roundtable that Bryce and I participated in earlier today. Webcast links are available on the conference homepage at lythampartners.com/select2024, and click Presentations in the top left corner. I hope all of you can join us and check it out. Again, Mike, Henri, Bryce, thank you so much again. We hope you all enjoy the conference. Thank you. Thanks, Roger. Thanks, Roger.