MFIC - NASDAQ

Good morning, and welcome to the Earnings Conference Call for the period ended June 30, 2024 for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen-only mode. The call will be opened for a question-and-answer session following the speakers' prepared remarks. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman, as well as additional members of the management team are on the call and available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we posted a supplemental information package on our website, which contains information about the portfolio as well as the company's financial performance. Throughout today's call, we will refer to the MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I would like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Thank you, Elizabeth, and thank you to everyone who has joined today's call, especially those of you who may be newer to MFIC. I will begin today's call with an update on the successful completion of our mergers with our previously affiliated funds, Apollo Senior Floating Rate Fund Inc. and Apollo Tactical Income Fund Inc., which we will refer to as AFT and AIF or the CEFs throughout today's call. I will then provide an overview of MFIC's second quarter results and will also provide our perspective on the current environment. Ted will then discuss our investment activity and provide an update on the investment portfolio. He will also review the assets that we acquired in connection with the mergers. Greg will then review our financial results in greater detail and will also review some of the accounting aspects of the mergers. Beginning with the mergers, we are pleased to announce that on July 22, MFIC successfully closed its mergers with AFT and AIF, two listed closed-end funds managed by Apollo. We believe these mergers mark an important step in MFIC's evolution to becoming a leading pure-play middle-market BDC. We remain enthusiastic about realizing the potential benefits that we highlighted when we announced the mergers last November. Let me remind you of some of these key benefits. First, we expect these mergers will be both ROE and NII per share accretive for all shareholders as we rotate the CEF's lower-yielding investments in the ordinary course into higher-yielding directly originated loans that align with MFIC's investment strategy. Second, the mergers are expected to enhance MFIC's portfolio diversification and improve certain portfolio metrics. Third, we expect to be able to realize operational synergies from the elimination of certain duplicative expenses from the mergers. And lastly, we believe that the larger market capitalization for the combined company may broaden the universe of potential investors, which could result in greater stock liquidity. As Ted will discuss, we are currently focused on deploying the capital and rotating certain assets acquired in the mergers and have already made good progress in that regard. As a reminder, Apollo provided significant financial support for these mergers by reimbursing all merger-related expenses for all three funds and by making a one-time special cash payment to the CEF shareholders. As a result of the mergers, MFIC's net assets have increased by approximately 44%. With $1.45 billion in net assets, MFIC has significant investment capacity. As a result of this deleveraging, MFIC is well positioned to deploy capital into true first lien senior secured loans sourced by MidCap Financial, a leading middle-market lender managed by Apollo. Moving to our results for the June quarter, as previously announced when the mergers closed, MFIC's net investment income per share for the June quarter was $0.45, which corresponds to an annualized return on equity, or ROE, of 11.8%. Results for the quarter reflect solid recurring interest income from our predominantly floating rate portfolio and strong fee and prepayment income. GAAP EPS for the June quarter was $0.35. NAV per share was $15.38 at the end of June, down $0.04 from the end of March. Beginning with the macro environment regarding rates, Apollo's Chief Economist believes that the Fed will cut rates by 25 basis points in September, but still expects a soft landing. He notes a continuing strength in a broad set of number of weekly indicators such as TSA data for air travel, restaurant bookings, retail sales and hotel occupancy rates that suggest the economy will be able to avoid recession. With regard to markets, the credit market continued to be very strong and well bid throughout Q2 and into the start of Q3 2024. M&A and LBO activity increased in Q2 from very low levels, though has lagged expectations, and thus, issuers and sponsors have taken advantage of limited new supply, tapping the market for dividends and repricings. Auction activity has seen a meaningful pickup in the latter part of Q2 and into Q3, and we expect to see an increase in new deployment opportunities for direct lenders in the back half of the year. As you know, MFIC is squarely focused on investing in first lien loans to middle-market companies sourced by MidCap Financials. A leading middle-market lender with one of the largest direct lending teams in the US with close to 200 investment professionals, MidCap Financial was founded in 2009, has a long track record, which includes closing on over $118 billion of lending commitments since 2013. This origination track record provides us with a very large data set of middle-market company financial information across all industries and we believe it makes MidCap Financial one of the most informed and experienced middle-market lenders in the market. Apollo Global's affiliation with MidCap Financial provides MFIC and the broader Apollo platform with significant deal flow. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high-yield market. Despite the heightened level of competition, we are pleased to report that MidCap Financial was active during the June quarter, closing approximately $4.4 billion in new commitments or $9.6 billion in the first half of 2024. Next, let's turn to dividends. First, as previously announced, in connection with the mergers on July 21, our Board of Directors declared a one-time special cash distribution of $0.20 per share to shareholders of record as of August 5, 2024, payable on August 15, 2024. As a reminder, this special $0.20 dividend is being paid to all shareholders as of the record date, including former AFT and AIF shareholders. In addition, on August 6, 2024, our Board declared a quarterly dividend of $0.38 per share consistent with our prior quarterly dividend to shareholders of record as of September 10, 2024, payable on September 26, 2024. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I will spend a few minutes reviewing our second quarter investment activity and our investment portfolio. I will then review the investments we acquired via the mergers with the closed-end funds. During the June quarter, MFIC's new investment commitments totaled $285 million across 28 different borrowers for an average new commitment of $10.2 million, as we continue to focus on diversification by borrower. 23% of new commitments were made to existing portfolio companies. Despite spread compression, we believe the risk return profile on these new commitments remains compelling. The weighted average spread on our new commitments in the June quarter was 559 basis points. Net leverage on new commitments was 3.3 times, down from 3.9 times last quarter. The weighted average OID for new commitments was approximately 157 basis points. This spread in OID translates into very attractive unlevered asset yield of over 11%, assuming a 5% base rate. In terms of funded investment activity for the quarter, gross fundings for the corporate lending portfolio, excluding revolvers, totaled $214 million. Sales and repayments totaled $131 million. Net corporate lending revolver fundings were positive $10 million, and we received a $3 million paydown from Merx. In aggregate, net fundings for the quarter totaled $90 million. Turning to our investment portfolio. We've built what we believe is a well-diversified senior corporate lending book. At the end of June, prior to the close of the mergers with the closed-end funds, our portfolio had a fair value of $2.4 billion, and was invested in 165 companies across 23 different industries. Corporate lending and other represented over 92% of the total portfolio and Merx accounted for less than 8% of total portfolio on a fair value basis. 97% of corporate lending portfolio was first lien and over 99% of our corporate lending debt portfolio had one or more financial covenants and 88% of our corporate lending portfolio is backed by financial sponsors who we know well and with whom MidCap has longstanding financial relationships. The average funded corporate lending position was $14.1 million or approximately 0.6% of the total corporate and other lending portfolio. The weighted average yield at cost of our corporate lending portfolio was 12% on average for the June quarter, down slightly from 12.1% in the March quarter. At the end of June, the weighted average spread on the corporate lending portfolio was 601 basis points, down 20 basis points compared to the end of March. Turning to credit quality, our focus on true first lien top of the capital structure middle market loans has resulted in what we consider to be stable credit quality. Overall, we feel good about the health and quality of our corporate lending portfolio, as our underlying borrowers have largely been able to handle higher borrowing costs. We have not seen a significant increase in the amendment request and the request we have seen are generally accompanied with good sponsor support. Our portfolio companies are generally maintaining performance, continuing the trend of solid fundamentals demonstrated in 2023 and into early 2024. On a median basis for the March quarter, portfolio company revenue and EBITDA both increased by mid-single digits year-over-year. This has been achieved despite a downturn in acquisition activity, indicating that much of the growth demonstrated has been organic. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.38 times, up very slightly from 5.36 times last quarter. At the end of June, the weighted average interest coverage ratio remained 1.9 times, unchanged quarter-over-quarter, with four companies below 1 times. We are closely monitoring these situations and believe they are manageable as the companies have strong current liquidity, good underlying business performance or have strong financial sponsor support. The median EBITDA of MFIC's corporate lending portfolio companies was approximately $46 million. Our underwriting on MidCap-sourced loans has proven to be sound. Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, our annualized net realized and unrealized loss is around 3 basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy has performed. As of the closing of the mergers, investments on non-accrual were 1.8% of the total portfolio at fair value, or 2.3% at amortized cost across 11 names, including six companies acquired from the closed-end fund portfolio, two of which we have exited near cost in the secondary market. We wanted to take a few minutes to highlight some metrics that we think can provide insight into how we assess the risk of the portfolios of BDCs. Lenders have a number of ways they can mask liquidity challenges with their underlying borrowers. First, lenders increase the use of PIK interest. Whether at origination or as part of the restructuring, PIK income is a proxy for borrowers who cannot currently service their debt. In this regard, MFIC's PIK income remains very low compared to the BDC industry average. Second, lenders allow revolving loan senior to their cash flow term debt while still categorizing their cash flow loan as first lien. We focus on what we often refer to as true first lien or top of the capital structure, meaning there's no debt senior to our position as evidenced by our attachment point of 0.04 times. Third, some lenders provide covenant-lite loans or even draws on the revolvers do not spring a covenant, effectively making the whole revolver available for payment of interest, regardless of the state of the company. As a reminder, over 99% of MFIC's corporate lending portfolio has at least one financial covenant, and any covenant-lite loans we may hold would have a spring covenant when the revolver is drawn above certain levels. And fourth, some lenders have added structures where they increase their debt to pay their own interest, sometimes referred to as synthetic PIK. Although hard to account for the myriad structures of lenders -- of structures lenders can use to achieve these results, we generally do not advance credit to borrowers to cover interest. Importantly, MFIC benefits from MidCap Financial's large, dedicated portfolio management team, which helps identify and address issues early. It's also important to note that MidCap Financial leads and serves as administrative agent on the vast majority of our deals, which provides meaningful downside protection. As agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving problem credits. Moving on to Merx. As we've discussed in the past, we're focused on reducing our investment in our aircraft leasing and servicing business. While we don't expect paydowns to occur evenly, we believe aircraft sales and servicing income should allow for the paydown of third-party debt and MFIC's investment in Merx over time. The blended yield across our total investment in Merx is less than 4%, and the continued rotation of capital from Merx has the potential to have a meaningful beneficial impact on income. As of June 30, 2024, our investment in Merx totaled $187 million, representing 7.7% of the total portfolio at fair value. During the June quarter, Merx paid MFIC $4.7 million, including $1.7 million of interest and a $3 million return of capital. Since the end of June, MFIC's investment in Merx has decreased to approximately 5.8% of the total portfolio due to a combination of the growth in the portfolio from the mergers, as well as an additional $7.5 million paydown from Merx, which occurred in July. Turning to the mergers with AFT and AIF, to echo Tanner's comments, we're excited about the long-term benefits that we believe this transaction will create. I'd like to take a few minutes to discuss the assets we acquired as part of our mergers with AFT and AIF. We onboarded approximately $596 million of investments from the closed-end funds, increasing the size of MFIC's portfolio to approximately $3.1 billion as of the closing date. Of the $596 million of onboarded assets, approximately $207 million, or 35% of these assets were directly originated loans across 37 obligors with a weighted average spread of 564 basis points. The remaining $389 million of these assets consists of broadly syndicated loans, high-yield bonds, and structured credit positions. As Tanner mentioned, we are currently in the process of selling the non-directly originated assets and redeploying those assets --- redeploying those proceeds into assets that are more consistent with MFIC's investment strategy. The good news is that these non-directly originated assets are held throughout the Apollo platform, which facilitates risk monitoring while on our books, as well as the selling process. Since the closing of the mergers on June 22, and through yesterday, we have sold approximately $125 million of these assets near our cost basis. We are very much on track with our plan to sell these assets, which we expect to complete over the next few quarters. In addition, the mergers were a significant deleveraging event for MFIC and created investment capacity of approximately $386 million, assuming a net leverage ratio of 1.4 times. Taking into account the $389 million of non-directly originated assets that we intend to sell, plus the $386 million of additional investment capacity, we have approximately $775 million of capital to deploy. Given the significant deal flow generated by MidCap, we are confident that we can deploy this capital in attractive opportunities. As Tanner mentioned earlier, MidCap closed on $9.6 billion of commitments in the first half of 2024. We expect to reach our target leverage in the next two to three quarters and see no impediment to doing so. We want to emphasize that we will remain committed to our disciplined approach to portfolio construction as we deploy this capital. With that, I will now turn the call over to Greg to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the June quarter was $0.45, which reflects solid recurring interest income as well as strong fee and prepayment income. For the quarter, prepayment income was $3.2 million and fee income was approximately $900,000. PIK income remains low, representing approximately 3.6% of total investment income for the quarter. GAAP net income per share for the quarter was $0.35. Results for the quarter correspond to an annualized return on equity, or ROE, based on net investment income of 11.8%, and an annualized ROE based on net income of 9%. Results for the latest 12-month period correspond to an annualized ROE based on net investment income of 11.6% and an annualized ROE based on net income of 11.1%. MFIC NAV per share at the end of June was $15.38, down $0.04 quarter-over-quarter, which reflected net investment income of $0.45, which is $0.07 above the $0.38 distribution and an $0.11 per share net loss in the portfolio. As Ted mentioned, the vast majority of our corporate lending portfolio continues to have strong fundamental performance. MFIC's net assets increased by $450 million from the mergers. Both the NAV per share of $15.38 and the $450 million increase in net assets exclude the impact of the one-time special distribution of $0.20 or $18.8 million made in connection with the mergers. Net expenses for the quarter were $39.6 million, down slightly compared to the prior quarter, primarily due to lower incentive fees and lower administrative expenses, offset by higher interest expense given the increase in the size of the portfolio. The weighted average interest rate on our debt for the quarter was approximately 7%. We intend to continue to evaluate and monitor capital raising transactions going forward. Management fees totaled $4.4 million for the June quarter, essentially flat compared to the prior quarter. As a reminder, MFIC's base management fee was reduced to 1.75% on equity and is one of the only listed BDCs to charge management fees on equity, which we believe provides greater shareholder alignment and focus on net asset value. Incentive fees totaled $5.6 million for the June quarter. As a reminder, our incentive fee on income is 17.5%, and includes a total return hurdle with a rolling 12-quarter look back, the effective incentive fee rate for the June quarter was 15.9%, impacted by the net loss recorded during the quarter and the impact of the lookback feature. Moving to our balance sheet. MFIC's net leverage was 1.45 times at the end of June compared to 1.35 times at the end of March, reflecting the $90 million of net fundings during the quarter. MFIC's net leverage as of closing of the mergers was 1.13 times. I'd like to take a few minutes to cover some of the accounting aspects of the mergers. Mergers are being accounted for in accordance with the asset acquisition method of accounting under ASC 805-50. As a reminder, AFT and AIF merged into MFIC in stock-for-stock transactions, with shares being exchanged on a NAV-for-NAV basis. The exchange ratios for the mergers were based on the fund's NAV per share as of July 19, 2024. Accordingly, MFIC issued 0.9547 shares of its common stock for each AFT share and 0.9441 shares of its common stock for each AIF share. In total, MFIC issued approximately 28.5 million shares of MFIC to the closed-end fund shareholders, resulting in 93.8 million MFIC outstanding shares following the merger. At the time of the merger, MFIC was trading at a slight discount to its current NAV. In connections with the merger, an affiliate of Apollo, made a $0.25 per share special cash payment to each AFT and AIF shareholder for a total payment of $7.5 million. In accordance with the accounting guidance, a portion of this cash payment was deemed to be merger consideration, which resulted in the fair value of the consideration paid to both, AFT and AIF shareholders being equal to the fair value of the assets acquired, resulting in no purchase discount or premium. As a result, there will be no impact on the cost basis of the acquired assets, and therefore, no impact on our financial statements. Fair value of the closed-end fund assets at close became MFIC's cost basis in these assets without any adjustment. This concludes our prepared remarks. Operator, please open the call to questions.

[Operator Instructions] We'll take our first question from Kenneth Lee of RBC Capital Markets.

Hey, good morning. Thanks for taking my question. Just in terms of the portfolio rotation over the next few quarters, the non-directly originated assets being sold, I assume you're talking about the BSLs, the structured credit and the high-yield bonds from the closed-end funds. Granted that the BSL market is fairly liquid, but just want to get a better understanding of any kind of key constraints around the pace of sales, for example, like the structured credit, the high-yield bonds? Thanks.

Yeah, thanks, Ken, And thanks for the question. I think -- so, first of all, as we mentioned in the prepared remarks, we've already, even since closing the mergers on July 22, made some good progress and sold or raised roughly $125 million of proceeds. So, some really good progress out of the gate. And I think your question is alluding to a very important piece of how we are going to proceed from here. And that being, if you look across the roughly $400 million that's in those three respective buckets of type of investment, there's going to be a number of securities or loans that are not as liquid. And so, we would look at this program and this rotation strategy as not contingent on selling every last broadly syndicated loan or high-yield bond. And obviously, certain of those securities or loans don't have the same liquidity, would require us to take a discount to fair market value, which we would not want to take. And as a result, you should see us continue to make progress in reducing that, but by no means should expect us to sell out of all $400 million, and importantly, consider reinvestment yield and the type of discount one might have to take in order to transact on those bonds and loans.

Great. Very helpful there. And just one follow up, if I may. Any updated outlook on potential ROE or ROE accretion just going forward? Thanks.

No, we are not going to update that guidance. Obviously, we're looking at the potential for lower base rates, but as we outlined in our prepared remarks, as well as which referenced our November materials, we see significant synergies to improve both ROI -- ROE and NII.

Got you. Very helpful. Thanks again.

We'll take our next question from Melissa Wedel of JPMorgan.

Good morning. Thanks for taking my questions. I'm trying to sort of reconcile the math around the rotation strategy that you described and also growing leverage -- or building leverage in the portfolio back up to target levels. It seems like there's a lot of rotation and just sort of organic churn that we should be expecting in the portfolio, but also, it seems like a pretty short timeframe within two quarters or so to get back to the target. Hoping you can, like, help walk us through that a little bit, but also just confirm the target range that you're thinking about in this environment. Thank you.

Yeah, sure. Thanks, Melissa. So, if we start with the lower end of our guided leverage range of 1.4 times and the pro forma leverage that we reported or we disclosed in the prepared remarks of 1.13 times, if you just took up leverage, if you just got to that 1.4 times, that would be investment capacity of nearly $400 million, $386 million to be more exact. And obviously, that's growth, net of any sell-offs you have there. And then, this will reference the --- my answer to Ken's question is, if you look at the broadly syndicated, I did allow for the fact that the goal is not necessarily to sell every last bond and loan and to be discriminating in how we sell and ensure that we're not sacrificing FMV to move that risk. But just for argument's sake, if you were to rotate out of all that $389 million of non-directly originated assets that came over with the mergers, it brings us to total investment capacity of roughly $775 million. And so that's -- so if you think about this from two perspectives, Melissa, on one hand, we have the $389 million to sell, of which we've sold $125 million, and caveat that the goal is not necessarily to sell all $389 million. That's one piece of it, and that will be market-dependent over the next couple quarters. Importantly, and I think this has been a really important piece of our strategy -- of our story for quite some time, and thus it's worth emphasizing, on the other side, in terms of deployment, we're extremely lucky to be now just over $3 billion of assets, which itself is roughly only one-tenth of the assets within the MidCap Financial ecosystem. That's in excess of a $30 billion business. And so, from a deployment standpoint, we have never had an issue with deployment or access to assets. And with this incremental capital, whether it's playing an increased number of deals or increased -- a roughly higher average size of deal, that piece of the equation, i.e., the redeployment itself is very much provided for by the breadth of the MidCap Financial origination platform that we're very lucky to have access to.

Thank you.

We'll take our next question from Finian O'Shea of Wells Fargo Securities.

Hey, everyone. Good morning. Higher-level question. With Howard moving over to Apollo and taking on what seems to be building out the direct origination effort and marrying that with MidCap's, can you outline the sort of firm-wide direct lending setup such as how do you collaborate and maybe compete? Do you split up sponsors? Do you go by deal size on who leads? Anything that you think would be important for the MidCap investor? Thank you.

Yeah, I can take that, Fin. It's Howard. So, again, like, to the market, we have one offering, which is the combined Apollo-MidCap menu of direct lending options. So, we -- there is a calling effort to sponsors which combines resources at Apollo and MidCap, which I'm responsible for, which basically goes to market and says, we're available for your capital needs. Those capital needs are these direct lending loans, which you see go into sort of the large market Apollo effort and the MidCap effort. There's also other things we provide, sponsors, which could be NAV loans or GP capital generally or rediscount loans when they have finance capacity, equipment loans, whatever the case may be. So, we are going to the market and we are saying, here is our catalog of capabilities. And then, when a deal comes in, there are sort of two strategies which overlap, which I think is the most relevant part of the question. So, one is, if there is a core middle-market deal, say, $50 million -- $40 million, $50 million of EBITDA being done at 5 times, that is being executed by MidCap. And, often, portions of the Apollo ecosystem will take some of that loan, especially because in the 40 Act, you want to be part of transactions as they grow. So, they may take a little bit. On the other side of the spectrum, $300 million EBITDA company that's doing whatever, $1.5 billion private credit deal, three parties $500 million. Let's say, Apollo's taking down, that will be by and large -- or that will be done by sort of the [AGS, CDC] (ph), and other satellite entities. And we have the option, meaning MFIC has the option to take part of the -- in those, but generally won't. Might occasionally and generally won't. And in fact, the closed-end funds were part of that AGS ecosystem, and more recently had some pieces of some of those loans. So, some of the loans that came over as part of the CEFs who are in sort of -- are in those loans and are now classified in our corporate portfolio. So, things that we're not going to rotate out of. With regard to, like, how that risk, in particular, and how MFIC is making choices, because we're all integrated and because I'm responsible for the sponsor origination, we see and have access to everything, and we know which deals not only that we bought with CEF loans, but which we have options to. So, it actually goes back to what Melissa said, how do we know that we can generate flow? It's not only all of this MidCap assets, but it's also from time to time picking off certain of the larger assets that we decide that they fit whatever criteria we may have. So, I think for the shareholders of MidCap, they should view our strategy, core middle market, we say, $20 million to $100 million of EBITDA, but tied into a sort of a global platform that provides a lot of sponsors, so we have a lot of relevance to them with lots of flow that's available on the periphery of that. And then, sort of most importantly, I think our strategy being sort of one of the centerpieces that Apollo is taking to market as part of their whole value proposition. As indicated, most relevantly in that -- me and Clare Bailhe, who's responsible for the MidCap sponsor lead, are sort of leading that effort across Apollo.

Awesome. A lot of color and really appreciate that. I guess just another high-level follow-up. With the mergers complete, and congratulations on that, what's your -- I assume you probably want to be one of these $5 billion BDCs, maybe, maybe not. What would the sort of path forward be? Some of your peers do large private to publics. There's a lot of those going on. Some are going in publics secondary-style growth. Like, how do you look at all that? And I guess, what is the -- anything in the immediate future?

Well, just I'm going to channel [indiscernible] for a second, which is he sort of says, like, the size of the BDC is not the goal, it's the reward for doing the business the right way. So, we are focused on, and our expectation is we will continue to sort of generate appealing risk-adjusted returns. So, our -- there will be an ability to grow in the normal course, meaning, hopefully trading well in sort of -- trading well on an absolute basis in order sort of people to want to invest more. So, that's like the core focus. Continue to execute, and we will be rewarded, and we will be able to grow. With regard to sort of other sort of less tactical growth opportunities, I think what -- generally, our view has been everything we -- and this almost goes to the other thing. Everything we do, we want to be accretive to our shareholders. So, in other words, like, we don't want to grow at the expense of that. And so, we'll look at everything. That could be, like, which -- as you know, we haven't seen in our industry. Like, everybody would love to merge in another BDC and take in another contract and grow if you think you could deploy the capital well. That stuff hasn't really happened, so it's hard to predict that. But, like, any of the -- any ways to sort of access capital that are accretive to our current shareholder base, we'll consider. I'll stop there. I don't know if Greg or Tanner have anything to add.

No. And I think that's well stated.

All right. Thanks so much, everybody.

[Operator Instructions] We'll take our next question from Mark Hughes of Truist.

Yeah, thank you. Good morning. I wonder if you could talk a little bit about the commitment activity in the quarter. Your average borrower exposure continues to move down a little bit. The leverage of 3.3 times versus 3.9 times is down sequentially and this quarter's activity well below the overall portfolio net leverage. What are you seeing in the market? What are you kind of focusing on? Just sort of curious with those movements.

Yeah, sure, Mark. Hi, it's Ted. In the first half of the year, broadly speaking, M&A was down. But as we kind of moved through the second quarter, in the marketplace, we saw the pipeline building as private equity firms were starting to line up more LBO activity. That may not have shown itself in all of the stats that are more backward looking, but I think certainly and you probably heard this from others, as we look at our pipeline going forward, it's building very nicely. And in terms of deployment in the second quarter, we did some of which were based on incumbency, but then part of that was, as we look to accelerate ahead of the merger, we knew where that was coming out. So, we did accelerate our deployment. So, we finished at 1.45 times, still in the low end of the range, but certainly was in anticipation of the merger closing and then deleveraging down post that closing. So, in terms of activity, like, again, what are we focusing on, we focus on the same thing quarter after quarter, which is middle market loans, top of the capital structure, cash pay, floating rate and continue to try to build and stay diverse across sectors and sponsors.

I'd add one thing, your specific question around commitment amount and I'll actually allude to a comment that Howard made is that given the limitations from a 40 Act standpoint, it behooves us to participate at the time the deal is originally originated, Mark, such that we'll have the opportunity to do follow-ons to the extent that we don't participate where you're -- we're necessarily crowded out. So, you'll see that. And then, also with regard to commitment size and Ted alluded to this, but just maybe dig in another level deeper is ultimately, a lot comes from incumbency as he said, and ultimately that will have a lot to do with how big of an acquisition that particular company is doing and that would influence our commitment size. And so, I think, I wouldn't read too much into it, it's going to ebb and flow based on that. But for emphasis, one of the real -- I'll go back to this point about our access to the MidCap origination. If you look at MidCap, there is roughly 500 borrowers, pro forma for the merger, we obviously have a significantly number of obligors. And over time, we hope to be able to -- though roughly $1.4 billion in net assets, be able to run a really, really diversified portfolio and show obligors well in excess of 200 to stress the benefit our platform has of access to very, very diverse deal flow and be reflected in the diversification of our portfolio.

Yeah, thank you for that. And then, the expense synergies associated with the merger, have you talked about timing on that and potential impact on returns or NII?

Yeah, well, the expense are -- when you kind of looked at the consolidated group, right, with the closed-end funds and MFIC, so the expenses essentially are eliminated at this closed-end funds, and very little increase in expenses at MFIC, you'll have some valuation increases. So, it's already happened, okay? So, it was really looking at that consolidated expense level, it was about $3 million -- a little bit over $3 million of expenses taken out of the closed-end funds, but -- and so the MFIC will stay relatively the same from an SG&A basis.

Thank you.

And there are no further questions at this time. I'd be happy to return the call to our host for any concluding remarks.

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us if you have any other questions. Have a good day.