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New Mountain Finance Corp (NYSE:NMFC)
Q3 2019 Earnings Call
Nov 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the New Mountain Finance Corporation Third Quarter 2019 Earnings Call and Webcast. [Operator Instructions].

I would now like to introduce Mr. Robert Hamwee Chief Executive Officer. Please go ahead.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Thank you. And good morning everyone and welcome to New Mountain Finance Corporation's Third Quarter Earnings Call for 2019. On the line with me here today are Steve Klinsky Chairman of NMFC and the CEO of New Mountain Capital; John Kline President and COO of NMFC; and Shiraz Kajee CFO of NMFC. Steve Klinsky is going to make some introductory remarks.

Before he does I'd like to ask Shiraz to make some important statements regarding today's call.

Shiraz Y. Kajee -- Chief Financial Officer

Thanks Rob. Good morning everyone. Before we get into the presentation. I would like to invite everyone to today's call and webcast are being recorded. Please note that they have a copy of the mountain Finance Corporation, and it's funny any unauthorized broadcast many forms strictly prohibited. Information about the audio replay of this call is available in our November 6 earnings press release. I'd also like to call the attention to the customers safe harbor disclosure in our press release. Now page two of the slide presentation was our info looking statements. Today's conference call and webcast may include the forward looking statements and projections Can we ask you to refer to our most recent filings with the SEC for pulling factors that could cause actual results to differ materially from those statements and projections, We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout call please visit our website at www.newmountainfinance.com.

At this time I'd like to turn the call over to Steve Klinsky NMFC's Chairman who will give some highlights beginning on Page four of the slide presentation. Steve?

Steven B. Klinsky -- Chief Executive Officer and Chairman

The team will go through the details in a moment but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended September 30 2019 was $0.36 per share above the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance's book value was down $0.06 to $13.35 per share reflecting generally stable financial market conditions and limited portfolio company valuation changes. We are also able to announce our regular dividend which for the 31st straight quarter will again be $0.34 per share an annualized yield of approximately 10% based on last Friday's close. The company had a record quarter of net deal generation investing $452 million in gross originations versus moderate repayments of $67 million. This continued significant balance sheet growth was in part funded by our recent equity issuance and keeps us fully levered in our target range. Credit quality remains strong with no new nonaccruals for the fifth consecutive quarter. I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 10.5 million shares today inclusive of the 400000 shares purchased in our most recent equity issuance. Finally the broader New Mountain platform that supports NMFC continues to grow with over $20 billion of assets under management and approximately 160 team members. In summary we are pleased with NMFC's continued performance and progress overall.

With that let me turn the call back over to Rob Hamwee NMFC's CEO.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Thank you Steve. Before diving into the details of the quarter as always I'd like to give everyone a brief review of NMFC and our strategy. As outlined on Page six of the presentation NMFC is externally managed by New Mountain Capital a leading private equity firm. Since the inception of our debt investment program in 2008 we have taken New Mountain's approach to private equity and applied it to corporate credit, with a consistent focus on defensive growth business models, and extensive fundamental research within industries that are already well known to the mountain. Or more simply put, we invest in recession resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk adjusted rates of return across changing cycles and market conditions

To achieve our mandate we utilize the existing New Mountain investment team as our primary underwriting resource. Turning to Page seven. You can see our total return performance from our IPO in May 2011 to November 1 2019. In the 8.5 years since our IPO we have generated a compounded annual return to our initial public investors of 10.6% meaningfully higher than our peers in the High Yield Index and approximately 900 basis points per annum above relevant risk-free benchmarks. Page eight goes into a little more detail around relative performance against our peer set benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have. Page nine shows return attribution. Total cumulative return continues to be largely driven by our cash dividend which in turn is a more than 100% covered by net investment income. As the bar on the far right illustrates over the eight-plus years we have been public we have effectively maintained a stable book value inclusive of special dividends while generating a 10.3% cash-on-cash return for our shareholders.

We attribute our success to: 1 our differentiated underwriting platform; 2 our ability to consistently generate the vast majority of our NII from stable cash interest income in an amount that covers our dividend; 3 our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive appropriately structured leverage before accessing more expensive equity; and 4 our alignment of shareholder and management interest. Our highest priority continues to be our focus on risk control and credit performance which we believe over time is a single biggest differentiator of total return in the BDC space. Credit performance continues to be strong with material quarter-over-quarter credit deterioration in only 1 significant name PPVA which has effectively been an ongoing liquidating trust under Cayman law for a number of years and which has been added to our internal watch list as A3. As our one significantly troubled asset we continue to spend a lot of time attempting to maximize our recoveries from the PPVA entity to state. Given the complex mix of underlying assets and litigation claims while we believe our valuation of $0.74 currently fairly reflects the midpoint of likely scenarios significant volatility exists around the midpoint. For the fifth consecutive quarter and 10 of the last 11 quarters we have had no new nonaccruals.

If you refer to Page 10 we once again lay out the cost basis of our investments both the current portfolio and our cumulative investments since the inception of our credit business in 2008 and then show what has migrated down the performance ladder. Since inception we have made investments of approximately $7.4 billion in 282 portfolio companies of which only 8 representing just $125 million of cost have migrated to nonaccrual of which only 4 representing $43 million of cost have thus far resulted in realized default losses. Furthermore over 99% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Page 11 shows leverage multiples for all of our holdings over $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric the asset-by-asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical fundamental support for our internal ratings and marks.

As you can see by looking at the table leverage multiples are roughly flat or trending in the right direction with only a few exceptions. There are currently 3 names that have had negative migration of 2.5 turns or more. 2 are names we have discussed for many previous quarters the previously restructured Edmentum where operating results and enterprise value continue to meaningfully improve; and Company CO where the combination of improving operating results and ongoing sponsor support through equity capital contribution make us confident about the future prospects of our loan. The new name on the list is the previously restructured Unitek representing 2 different securities CL and CN for a few operational missteps led to weaker financial results in 2019 but where secular trends continue to be strong in the company's key operating division providing us with optimism for improvement in 2020. The chart on Page 12 helps track the company's overall economic performance since its IPO. At the top of the page we show how the regular quarterly dividend is being covered out of net investment income. As you can see we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom of the page we focus on below the line items.

First we look at realized gains and realized credit and other losses. As you can see looking at the row highlighted in green we've had success generating real economic gains every year through a combination of equity gains portfolio company dividends and trading profits. Conversely realized losses including default losses highlighted in orange have generally been smaller and less frequent and show that we are typically not avoiding nonaccruals by selling poor credits at a material loss prior to actual default. As highlighted in blue we continue to have a net cumulative realized gains which currently stands at $18 million. Looking further down the page we can see that cumulative net unrealized depreciation highlighted in gray stands at $58 million and cumulative net realized and unrealized loss highlighted in yellow is at $40 million. The net result of all this is that in our over eight years as a public company we have earned net investment income of $674 million against total cumulative net losses including unrealized of only $40 million. Turning to Page 13. We have seen significant growth in the portfolio over the last year as we've increased our statutory leverage from 0.81 to 1.20 inclusive of our October equity offering. Consistent with this strategy we articulated when we received shareholder authorization to increase leverage. More than 100% of the growth in assets has come from senior securities as through repayments and sales non-first liens have actually shrunk on an absolute basis by $91 million while first lien assets have grown by $1.1 billion.

I will now turn the call over to John Kline NMFC's President to discuss market conditions and portfolio activity. John?

John R. Kline -- President and Chief Operating Officer

Thanks Rob. As outlined on Page 14 after a slow start in Q1 direct lending deal flow in our core sectors has been exceptionally strong throughout the summer and into the fall. New issued loans are priced at attractive levels which support NMFC's investment income targets. We have observed that the enterprise value multiples for the best quality businesses are in the mid-teens with some deals trading for over 20x EBITDA. Overall there continues to be heavy competition for loans to high quality businesses although recently lenders have shown increased discipline on structure and pricing. Additionally there is more caution around financing businesses that have exposure to uncertain end markets. Looking forward we expect transaction flow to be very steady from now until the end of the year and we remain well positioned to select and access the best deals available in the marketplace. Turning to Page 15. Given our current asset liability mix LIBOR has been a headwind in our business. Thus far in 2019 we have seen LIBOR move from 2.8% in early January to 1.9% today.

The forward LIBOR curve currently suggests that three-month LIBOR could decline by 30 basis points in the coming quarters. Based on the sensitivity shown on Page 15 if this does occur decline in LIBOR would represent a modest $0.01 per quarter headwind. We believe that the current spread environment and our improved debt-to-equity mix inclusive of the ongoing ramp of our SBIC investing program will enable us to successfully address this potential downward trend in the base rate. Turning to portfolio activity on Page 16 17 and 18 NMFC had a very strong quarter with total originations of $452 million offset by $111 million of sales and repayments representing a $341 million increase in our portfolio. Our new investments were highlighted by a number of middle market club deals and the expansion of our third senior lending program. Consistent with market trends that I discussed in my opening remarks most of our new deals are fresh buyouts trading at very healthy enterprise value multiples that are supported with historically high amounts of equity as a percentage of the total purchase price.

These purchase price multiples which have steadily increased over the past year enhance the loan-to-value ratios on our loans indicate strong sponsor support and validate the attractiveness of the defensive growth niches that we target. Our average loan-to-value on new originations in Q3 was 38%. Page 19 shows our continued origination momentum since the end of the quarter where we have invested $122 million in new transactions with $89 million of sales and repayments. Notable post quarter end transactions included a new net lease deal originated in our REIT subsidiary and 2 new loans purchased in our SBIC investing program which we continue to expand. Looking forward we have a solid pipeline of new investment opportunities in our core defensive growth verticals. Turning to Page 20. Our mix of originations continues to skew meaningfully toward first lien loans accounting for 73% of total new originations this quarter. Our sales and repayments were balanced evenly between first and second lien assets. Overall our Q3 mix showed a continued shift toward first lien assets consistent with our stated plan to avoid increased portfolio level leverage with a more senior-oriented asset mix.

As shown on Page 21 NMFC's asset level portfolio yield has declined by about 10 basis points since the end -- since Q2 from approximately 9.4% to 9.3%. The decline is primarily due to the decrease in LIBOR from the end of Q2. While we are very mindful of the potential continued decrease in the base rate we remain comfortable with our portfolio yield which solidly supports our quarterly dividend. The top of Page 22 shows a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart we break out subsectors to give better insight into the significant diversity within our larger sector. The chart on the bottom left of the page presents our portfolio by asset type where you can see the shift toward first lien oriented assets that we discussed earlier in the call. Currently only 1/3 of our investments are junior in the capital structure. The chart on the lower right shows that the vast majority of our portfolio is performing broadly in line with expectations. Finally as illustrated on Page 23 we have a diversified portfolio with our largest investment at 3.3% of fair value and top 15 investments accounting for 33% of fair value. As you can see on the lower right side of the page we have added more position diversity in each of the last 4 quarters to decrease our risk to any one borrower. We expect this trend to continue going forward.

With that I'll now turn it over to our CFO Shiraz Kajee to discuss financial statements and key financial metrics. Shiraz?

Shiraz Y. Kajee -- Chief Financial Officer

Thank you. For more details on our financial results in today's commentary please refer to the Form 10-Q that was filed last evening with the SEC. Now I'd like to turn your attention to slide 24. Portfolio had approximately $3 billion in investments at fair value at September 30 2019 and total assets of $3.1 billion with total liabilities of $2 billion of which total statutory debt outstanding was $1.6 billion excluding $184 million of drawn SBA-guaranteed debentures. Net asset value of $1.2 billion or $13.35 per share was down $0.06 from the prior year. Our statutory debt-to-equity ratio was 1.2 to 1 pro forma for the equity raise we had in October. In this offering NMFC issued 9.2 million shares raising $125 million in proceeds inclusive of a $6.8 million cash payment to the company by the investment manager. NMFC netted $13.60 per share which was above book value and accretive to all shareholders. Since our IPO we have had 13 follow-on offerings in which the advisor had over $23.7 million in subsidies such that NMFC always netted proceeds above book value. On slide 25 we show our historical leverage ratios. Step-up in leverage over the past 6 quarters is in line with our current target statutory debt-to-equity ratio.

On this slide we also show our historical NAV adjusted for the cumulative impact of special dividends which shows the stability of our book value since our IPO. On slide 26 we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line we continue to generate stable net investment income above the line. Focusing on the quarter ended September 30 2019 we earned total investment income of $72.6 million an increase of $6.1 million from the prior quarter due to higher interest income from the increased asset base and a stronger fee quarter. Total net expenses were approximately $41.4 million a $2.8 million increase from the prior quarter due to higher borrowing cost and fees. As in prior quarters the investment advisor continues to waive certain management fees. The effective annualized management fee this quarter was 1.28%. It is important to note that the investment advisor cannot recoup fees previously waived.

This results in third quarter NII of $31.2 million or $0.36 per weighted average share which is above our guidance and more than covered our Q3 regular dividend of $0.34 per share. As a result of the net unrealized depreciation in the quarter for the quarter ended September 30 2019 with an increase in net assets resulting from operations of $23.4 million. slide 27 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see 95% of total investment income is recurrent and cash income remains strong at 87% this quarter. We believe this consistency shows the stability and predictability of our investment income. Turning to slide 28. As briefly discussed earlier our NII for the third quarter more than covered our Q3 dividend. Given our belief that our Q4 2019 NII will fall within our guidance of $0.33 to $0.35 per share our Board of Directors has declared a Q4 2019 dividend of $0.34 per share which will be paid on December 27 2019 to holders of record on December 13 2019. On slide 29 we highlight our various financing sources.

Taking into account SBA-guaranteed debentures we had over $2 billion of total borrowing capacity at quarter end. During Q3 we successfully upsized both our Wells Fargo and Deutsche Bank credit facilities by $80 million and $60 million respectively. As a reminder both our Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time. Finally on slide 30 we show our leverage maturity schedule. As we've diversified our debt issuance we have been successful at laddering our maturities to better manage liquidity. We currently have no near-term maturities.

With that I would like to turn the call back over to Rob.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Thanks Shiraz. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters so long as NII covers the dividend in line with our current expectations. In closing I would just like to say that we continue to be pleased with our performance to date. Most importantly from a credit perspective our portfolio overall continues to be quite healthy. Once again we'd like to thank you for your support and interest.

And at this point turn things back to the operator to begin Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Ryan Lynch with KBW. Please go ahead, Iran.

Ryan Lynch -- KBW -- Analyst

Hey guys. Good morning. Thanks for taking my questions. First one I wanted to discuss was looking at some of your originations this quarter particularly in the healthcare industry. As I look through some investments PhyNet Dermatology Affinity Dental MyEyeDr. center for sight there are several investments that look to kind of fit the traditional sort of healthcare roll-up strategy. We've seen several of those businesses in other parts of the market have some pretty meaningful issues. So can you maybe just speak to some of your healthcare investments this quarter? Particularly maybe someone that I commented on. Are these kind of the traditional healthcare roll up? And if so how you guys get comfortable particularly in the light of some weakness in some other companies in the broader market?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Yes absolutely. So I mean healthcare is arguably our strongest vertical at the firm overall. We've had incredible success over 20 years in private equity and healthcare and great success on the credit side there as well. Now healthcare is clearly an area where you have winners and losers. And I think having the intellectual capital to distinguish between those two is absolutely critical. And so it is an area where I think leveraging the platform is of particular importance. In terms of some of those specific platform companies you mentioned there are definitely historically winners and losers and will prospectively be winners and losers in that space. I think we are focused on sectors within that whether it's derm or dental or eye care that have what we believe the high level of conviction have the best possible macro trends have the best underlying micro elements around reimbursement around all the other issues that are important. Obviously execution is critical. So it's a management team that we know and believe in. So we're -- but definitely obviously we like them we invest in them but we're very very comfortable. And I think our track record we've done many of these over the years. And to date knock on wood they worked out well. And I think we have every reason to believe these ones prospectively well. And I think we say that with a lot of conviction because it is a space we know incredibly well.

Ryan Lynch -- KBW -- Analyst

Okay that's helpful commentary. Can you maybe talk about the really robust portfolio growth that you had this quarter? You guys have been very efficient in capital deployment particularly after a raise and deploying that capital in a very efficient manner. Can you talk about why there is such a robust growth this quarter? And then also if I look at your slide deck which shows the amount you invested and into the tranche size you guys are typically investing in less than 50% of the tranche size of investments. So is one strategy that when you guys have additional capital to deploy you guys can just increase your hold size in some of these deals that you guys were planning on closing if the capital is there?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

So yes a couple of things on that. So in terms of the pace of deployment I think in any three-month period there's some idiosyncratic element to it. Although as I think I've said in the past it's certainly over a rolling six or 12-month period our deployment pace is expanding. And part of that is due to the overall growth in the platform and we now have within our core verticals incremental sub-verticals to address as New Mountain overall has gotten bigger and frankly better at what we're doing. And part of it is the market is coming to us. And I think I've said before when you look at private equity capital formation and we're fundamentally a sponsor finance provider the amount of capital flowing into funds that focus in our space has grown significantly. And frankly that's where the economy is going right into services away basic manufacturing and particularly into things like enterprise software and certain areas of healthcare and business technology-enabled business services. So I think overall private equity capital formation is getting bigger. That drives deal flow to us. I'd say overall direct lending continues to take share generally and the verticals that we focus on are growing faster than the already growing private equity industry.

So I think all those things continue to lead when coupled again with the overall growth of the New Mountain private equity platform that drives our credit business. All of those things lead to continued growth. And then in any quarter you can have a little bit more or less just depending on that relatively short time period. In terms of the percent of tranche issues and how we think about follow-on investments? I'll make a couple of observations. One is that oftentimes the percent of tranche just at the BDC is a little bit misleading. As you know we have a few other other funds here private funds that co-invest with the BDC. So institutionally we will typically have a larger percent of the tranche than just the piece that shows up on the BDC side. And then secondly you are right in that many of the businesses that we lend to are themselves growing platforms of need for incremental capital over time and we certainly like to put additional capital behind the businesses that we know and like and for a period of time. Does that answer the question Ryan?

Ryan Lynch -- KBW -- Analyst

Yes. Yes. That answers it and that's good commentary. One last question maybe somewhat of a philosophical question. It's interesting you talked about on slide 14 high-quality businesses operate for 15 to 22x EBITDA but there's a larger equity checks written for some of those that kind of bridge the gap. I wanted to get your thoughts on how you guys view risk in a business that maybe has higher leverage the leverage in a business it's higher than where it was three or four years ago. But because there's larger equity checks there's a lower loan-to-value on those businesses. Now these aren't ABL lending businesses. These are businesses that are lent on cash flow. So how do you view the amount of leverage in a business which is higher versus a lower loan-to-value because of a larger equity check? Do you view those businesses as safer or more risky?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

So -- and I think there's a couple of items wrapped up in that question. I think listen by definition a business relative to itself has the same amount of value intrinsic cash flow etc. whether it's levered 4x or 8x whether the loan-to-value is 30% or 70%. But that said in the real world I think one of the reasons and there are a lot of reasons but one of the reasons these multiples have gone up for the businesses is that these are businesses that are actually growing and generating cash at a higher rate I think than businesses we've seen in the past. So I actually think it's not just pure multiple inflation for the same exact types of businesses that were purchased at a lower multiple five years ago. That same business now commands a 5x higher multiple. There is clearly some multiple inflation on a like-for-like basis but the mix has shifted.

So when we talk about businesses that trade at 18x that has sponsors putting in 11.5 turns of equity that is a different business than I think we've seen in the past just from my pure academic financial analysis perspective in terms of the growth profile the margin profile the free cash profile. So we do feel that these are businesses that can support a modestly higher level of debt. And I think we're talking probably about half a turn or so relative to three or four years ago relative to 4 or 5 extra turns of equity capital. So I think a little bit you're comparing apples to oranges there. And then I would say even if it was pure apples to apples there is value in having a sponsor have again 4 or 5 more turns of equity. That will absolutely impact behavior in the event that incremental capital is needed to help out down the road. People do look at money in the ground. And no one in the end is going to throw good money after that. These are at the margin in a significant way is impacted by the magnitude of the equity check. So I do think that is a truly helpful piece even on an apples-to-apples basis. Is that all makes sense?

Ryan Lynch -- KBW -- Analyst

Yes yes. And that makes sense. And yes I was comparing an apples-to-apples the same business that now has more leverage but the multiple has grown even more than that. Is it a more risky business today versus five years ago? So -- but all that commentary makes sense and I appreciate it.

Operator

Thank you. [Operator Instructions] Your next question comes from Owen Lau with Oppenheimer. Please go ahead

Owen Lau -- Oppenheimer -- Analyst

Good morning and thank you for taking my question. So I have a modeling question. Your originations since the end of the quarter was very strong over $120 million. So given your conversation with your clients how should we think about the pace of the originations for the rest of this quarter? Should we expect this will slow down a little bit going into the holiday seasons? Additionally subsequent to the quarter end about 40% of the originations were second lien compared to about 26% of the total portfolio. And I know you have been shifting toward first lien. Is there anything we should look into this?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Yes absolutely. So on the first question for Q4 pace of originations for the balance of the quarter we wouldn't expect Q4 to be as heavily -- origination Q3. I think that was an idiosyncratically very strong quarter. But we do have a robust pipeline as John mentioned and we'd certainly expect to see significant addition to the portfolio through the end of the year. The market remains robust. And I think what we typically see is a push into the second third week of December. And then clearly things shut down for the holiday and into early January. In terms of the second question no I would not read anything into that. It's obviously a very tiny sample size. I think that's 5 deals. And in fact when you look at our forward pipeline we see significant percentage back to first lien. So I think that our mix will continue to be consistent with what we've seen over the course of the last 12 or so months. Does that answer the question?

Owen Lau -- Oppenheimer -- Analyst

Yes that's perfect. And then on slide 15 -- and I think some investors are still concerned about the downside scenario. If interest rates continue to go down could you please elaborate more about what levers you can potentially pull to maintain the dividend coverage?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Yes absolutely. I mean I think obviously one leverage is -- one lever is the leverage which we modulate within a band. I think the second lever is the mix which again we modulate within a band. I think not a lever but certainly something we continue to see is there is an inverse correlation between base rate and spread. So as the base rate goes down we continue to expect to see maybe not a one-to-one offset but a material offset in the spreads environment. So I think all of that continues to give us confidence that irrespective of the base rate environment we have high confidence in our ability to continue to earn the dividend.

Owen Lau -- Oppenheimer -- Analyst

That's great. Thank you very much.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

You're very welcome.

Operator

Thank you. [Operator Instructions] Your next question comes from Fin O'Shea with Wells Fargo Securities. Please go ahead.

Fin O'Shea -- Wells Fargo Securities -- Analyst

Morning. I just want to expand on a couple of Ryan's earlier questions not the philosophical one but the earlier ones. On the healthcare services companies. I want to tie this into your focus on new LBO deals which tend to be higher quality. But I think these days from market observation often entail looser documentation to accommodate a roll-up strategy. So can you give some context on where you're coming in in these stories? And what sort of EBITDA -- or let's say how much higher is the adjusted EBITDA down the road? And what does that entail for a new LBO these days?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Sure. So I guess 2 questions. One in terms of timing we're typically coming in when there's enough scale and critical mass such that we're dealing with enterprise values typically well north of $100 million. I think on average it's probably $300 million to $400 million. So we're not necessarily doing the very early stage financing for a roll-up. We think there's less execution risk once the platform itself has critical mass. In terms of adjustments look we all know that there is a -- oftentimes a chasm between GAAP EBITDA and financing EBITDA. One of our big big elements of our job is to underwrite what we actually think is real-world earnings and cash flow and we're really good at it because we do it all the time on the PE side. And so we are seeing a lot of the things thrown in there and we sort of come up with our own view and definition and that's what we presented in investment committee and that's what we focus on. We're not that interested in a headline number. We're interested in the real number and that's what we factor into our investment decisions. And we obviously strive to have the credit agreement be as constrained around those types of things as is reasonable. And we do walk away from things where either we're unable to get comfortable with an earnings level that makes sense or we have a document that allows for effectively infinite add-backs as we think about go forward draws on facilities to allow for the roll-up to continue.

Fin O'Shea -- Wells Fargo Securities -- Analyst

That is helpful. And then sort of another question on new investment. Obviously you're continuing to grow at a consistent pace and looking at the new originations pretty much consistent in terms of the amount you invest some of the tranche sizes are mid-sized some are larger $400 million $500 million. This quarter there was one looked like European syndicated gems that was a much larger facility. Like -- as we're all seeing now today where the markets pushing toward the private side on a lot of these $600 million $700 million $800 million tranches going private. What are you -- how are you viewing those even in the context of your normal $30 million $40 million $50 million bite size? Do you see those deals your connect wise and so forth as an attractive opportunity compared to the more core $300 million $400 million facility size that you've been sticking to?

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Yes look it's a good question but I think we've always said that first principle is industry and business quality. And that is really what we focus on kind of first second and third. And if there's a great company in a great industry that we know intimately we're less concerned whether the enterprise value is $250 million or $1 billion. So there are pros and cons as you think about different sizes but it is a much further down the list of what we're focusing on. We've never wanted to pigeonhole ourselves as we're upper middle market lower middle market middle-middle market. It's always been from the beginning that great defensive growth businesses that we know intimately through PE and then we can be flexible around that. So we continue to reemphasize that. And yes as we've seen the direct lending sort of take share from the syndicated market increase its scale and ability to provide sponsors -- solutions that sponsors want. We're going to participate in that when that intersects with the great business that we know incredibly well.

Fin O'Shea -- Wells Fargo Securities -- Analyst

Fair enough. That's all for me. Thank you so much.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Great. Thank you.

Operator

Thank you. [Operator Instructions] Your next question is a follow-up question from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch -- KBW -- Analyst

Hey, guys, Just had 1 follow-up question. We have heard and read about some a little bit of early on a little bit of softening in some of the liquid markets. But that seems to be particularly around some -- maybe some perceived riskier credits or some credit that are rated B minus or B3. You guys focus on noncyclical very strong dural businesses that are viewed as some of the highest quality. So it's a little bit of a different market than what seems to be having a little bit of softness. I'm just wondering is that the case? Are you guys seeing any bit of softness or increasing or better terms or structures in your market? Or is it as competitive as it has been over the last year.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Look it's certainly competitive but you touch on an important thing that we absolutely are seeing and I think to our benefit which is the B3 market is -- this is for mostly technical yes it's late cycle etc. but mostly technical CLOs are very worried about their CCC buckets. How do you get to be a CCC? What typically first year would B3. And so the CLO buyers of classic syndicated first liens are definitely shying away from B3 paper and our view there are business that deserve to be B3 in capital structures and there are businesses that probably don't deserve to be B3. And there is some knock-on effect. Our market ultimately benchmarks off of the bigger illiquid market. In occasionally they're actually actionable things for us in the more liquid markets. So yes it is a CLO-driven. It's not really that the numbers are getting worse. There are always areas of the economy or certain industries that are doing worse. But that hasn't fundamentally changed. What's changed is that we're seeing just over time as the cycle lengthens CLOs are piling up things in their CCC buckets and they're starting to get pretty full which means there is a desire at the margin if you're a CLO manager to avoid B3 exposure because that means you're one step away. And that is having a bit of a knock-on effect into the overall market which in general is helpful to us from a spread and turns perspective. And John anything you'd add to that?

Ryan Lynch -- KBW -- Analyst

I mean I -- the only thing I would add is when you look at some of the press around the syndicated market it's clear there have been pockets of weakness in the syndicated market. I think there's an article in Bloomberg that 4.2% of the loan market is trading below 80. And the observation I would make about those loans are typically there in the energy sector retail restaurants industrials. It's fair to say there are a couple of healthcare loans in there in sectors in areas that we have proactively avoided. So when I think about the real stress in the syndicated loan market I think it's just challenged industries that have -- where the underlying companies have struggled and the loans are going to trade down and there will be problems in those pockets of the economy.

Okay, that that is helpful color. That's my only follow up. Thanks.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Thanks, Ron.

Operator

Thank you [Operator Instructions] We are showing no further questions at this time. And this does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Hamwee for any closing remarks.

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Yes. As always just want to thank everybody for their time and attention. And obviously we're here for any follow-up. But otherwise look forward to speaking to people on our next call. So thanks very much. Bye-bye now.

Operator

[Operator Closing Remarks].

Duration: 49 minutes

Call participants:

Robert A. Hamwee -- Chief Executive Officer and Member of Board of Director

Shiraz Y. Kajee -- Chief Financial Officer

Steven B. Klinsky -- Chief Executive Officer and Chairman

John R. Kline -- President and Chief Operating Officer

Ryan Lynch -- KBW -- Analyst

Owen Lau -- Oppenheimer -- Analyst

Fin O'Shea -- Wells Fargo Securities -- Analyst

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