PNNT - NYSE

Good afternoon, and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2025 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone. I'd like to welcome you to PennantPark Investment Corporation's First Fiscal Quarter 2025 Earnings Conference Call. I'm joined today by Rick Allorto, our CFO; and Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. 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 may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. We're going to spend a few minutes and comment on the current market environment for private middle market credit, how we fared in the quarter ended December 31 and how the portfolio is positioned for upcoming quarters, our dividend coverage and spillover income balance, a detailed review of the financials, then open it up for Q&A. . For the quarter ended December 31, our GAAP and core net investment income was $0.20 per share, which is $0.04 below our quarterly dividend. PNNT has $65 million or $0.99 per share of undistributed spillover income. In order to continue to comply with the tax rules, we are required to distribute the spillover income over time. We believe PNNT can generate core NII of $0.21 to $0.22 per share. However, if core NII remained at the current level of $0.20 per share, it would take over 24 quarters or 6 years to fully distribute the spillover income. GAAP and adjusted NAV increased to 0.1% to $7.57 per share from $7.56. As of December 31, our portfolio totaled $1.3 billion. And during the quarter, we continue to originate attractive investment opportunities and invested $296 million in 12 new and 61 existing portfolio companies at a weighted average yield of 10.6%. We continue to see an attractive vintage in the core middle market. For investments in new portfolio companies, the weighted average debt-to-EBITDA was 4x, the weighted average interest coverage was 2.2x and the weighted average loan to value was 62%. As of December 31, the portfolio's weighted average leverage ratio through our debt security was 4.9x, and the portfolio's weighted average interest coverage was 1.9x. These attractive credit statistics are a testament to our selectivity, conservative orientation and our focus on the core middle market. In the core middle market, the market yield on first lien term loans appears to have stabilized in the SOFR plus 500 to 550 range. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market loans is excellent, and the core middle market leverage is lower, spreads are higher and covenants are tighter than the upper middle market. And we are still getting meaningful covenant protections. Our JV portfolio continues to grow and be a significant contributor to our NII. At December 31, the JV portfolio grew to $1.3 billion. And during the quarter, the JV invested to $354 million, including $286 million of purchases from PNNT. Over the last 12 months, PNNT earned an 18.4% return on invested capital in the JV. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with the continued growth in this portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters. The credit quality of our investment portfolio remains strong. We had 2 nonaccruals as of December 31, which represented 4.3% of the portfolio cost and 1.5% of market value. Now let me turn to the current market environment. We are well positioned as a lender, focused on capital preservation in the United States. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing middle market companies in 5 key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask and have an excellent track record. They are business services, consumer, government services and defense, health care and software technology. These sectors have been recession resilient and tend to generate strong free cash flow. And the core middle market companies [ with $10 million to $50 million ] of EBITDA is below the threshold and does not compete with a broadly syndicated loan or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit stats, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity coinvestments. Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans had meaningful covenants, which help protect our capital. This is a significant reason why we believe we are well positioned in this environment. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That is a perception and may make some intuitive sense, but the reality is different. According to S&P loans with companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of the core middle market where there's more careful diligence and tighter monitoring have been an important part of this differentiated performance. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity coinvestments have been excellent over time. Overall, for our platform from inception through December 31, we've invested over $563 million in equity co-investments and have generated an IRR of 26% at a multiple on invested capital of 2 times. Since inception, nearly 18 years ago, PNNT has invested $8.6 billion at an average yield of 11.3% and has experienced a loss ratio on invested capital of approximately 20 basis points annually. This strong track record includes the investments of primarily subordinated debt that we made prior to the global financial crisis, legacy energy investments and recently the pandemic. With regard to the outlook, new loans in our target market are attractive. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors. We want to reiterate our goal to generate attractive risk-adjusted returns through income, coupled with long-term preservation of capital. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt instruments, and we pay out those cash flows in the form of dividends to our shareholders. Let me now turn the call over to Rick, our CFO, to take us through the financial results.

Thank you, Art. For the quarter ended December 31, GAAP and core net investment income was $0.20 per share. For the quarter, NII was negatively impacted by $0.012 per share as a result of placing our investment in Pragmatic Institute on full nonaccrual. Operating expenses for the quarter were as follows: interest and credit facility expenses were $11.7 million; base management and incentive fees were $7 million. General and administrative expenses were $1.75 million and provision for excise taxes was $0.7 million. . For the quarter ended December 31, net realized and unrealized change on investments and debt, including provision for taxes was a gain of $3.1 million. As of December 31, our GAAP and adjusted NAV was $7.57 per share, which is up 0.1% from $7.56 per share in the prior quarter. As of December 31, our debt-to-equity ratio was [ [indiscernible]is diversified across multiple funding sources, including both secured and unsecured debt. As of December 31, our key portfolio statistics were as follows: Our portfolio remains highly diversified with 158 companies across 35 different industries. The weighted average yield on our debt investments was 12%. We had 2 nonaccruals, which represent 4.3% of the portfolio at cost and 1.5% at market value. The portfolio is comprised of 50% first lien secured debt, 4% second lien secured debt, 11% subordinated notes to PSLF, 6% other subordinated debt, 6% equity in PSLF and 23% other preferred and common equity. 94% of the debt portfolio is floating rate. Debt to EBITDA on the portfolio is 4.9x, and interest coverage is 1.9x. Now let me turn the call back to Art.

Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT and its shareholders. Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks at this time. I would like to open up the call to questions. .

[Operator Instructions] We'll now take our first question from Mark Hughes with Truist.

Art, I'm just sort of curious, any commentary about the level of capacity or competition in the core middle market, I think you described spreads is relatively stable. So that's one meaningful indicator. I'm just curious whether you've seen more folks in the market pursuing these type of loans?

It's a good question, Mark. We have not seen new players, the larger players have not chosen to come down into this kind of space. We've seen them exit and go upmarket. So there's really just a handful of players that we view as kind of peers in this market. And frankly, there's not many of those peers who kind of have our game plan of being willing and able to finance a $10 million EBITDA company, for instance, and then have a game plan to finance the growth of that company up to $30 million, $40 million, $50 million of EBITDA. So we're one of the only couple of players, I think, that can kind of are willing able and would like to do that. kind of growth financing. In many cases, we'll make an initial loan to the platform, and we will structure a delay draw term loan to fuel the growth of that company. So no new competitors of meaning spreads have kind of stabilized at [ 500, 550 ] in general, and it's a pretty good environment to be a lender.

How about your appetite or the companies or private equity appetite for the equity coinvestments. Is that something you're pursuing more or less, is that going to be a stable part of the investment portfolio.

I don't think we do it more or less there each individual investment decisions. We first try to figure out if we can make a good and safe loan. And then separately, as a separate investment, we evaluate the equity co-invest in those prototypical deals where we're fueling the growth, and we're helping these companies and private equity sponsors grow. We think it makes a lot of sense to be participating in that upside to some extent that we're helping to create with our loans. So in many of those cases, we will ask for and receive some form of upside equity co-invest instruments to capture some of that growth. And we think it makes a lot of sense as a portfolio matter because even though we're highly diversified and we're very selective and we try to keep leverage low, we like having something in our portfolio that's got a little bit of lift. And on those co-invest over time, as we've said, we've had a 26% IRR and 2x MOIC, so that's helped to solidify NAV over time.

Yes. And then when we think about net investment activity for PNNT, obviously, the JV took down a lot of the investments. How do you think that will trend in the kind of the first half of the year? Would we expect PNNT to be net investor net positive investment activity?

At this point, PNNT is optimized. I still think we believe PNNT, long term, should be leveraged in the 1.25x, 1.3x debt-to-equity range. So is a little bit higher than that right now, really just as a holding holding PNNT for assets that are going to end up in that growing joint venture. So long term, we're still anticipating PNNT's leverage back down to that 1.25x, 1.3x zone. But a little bit more leverage than that for now temporarily as it holds assets that will ultimately end up in that joint venture. .

We'll now take our next question from Robert Dodd with Raymond James.

On the spillover income question, I mean you've got -- to your point in the prepared remarks [indiscernible], I mean, $0.99, I mean that's basically your dividend run rate, which means functionally, you can't cut the dividend until that's worked down, not without paying corporate tax at least. So where would you like to work that spillover income down to in terms of like how many quarters of dividend or a dollar number I mean, because that's -- it's -- to your point, it's going to take a long time at the rate it's getting eaten into. But just give us any color on what your target kind of level would be for that?

It's a great question. And part of it is what's the market opportunity? Where is the yield in the market? What's our equity rotation looking like. At this point, we're kind of steady as she goes, we think we should be earning more than [ 20 ] on a core basis. As we said, '21-'22, we should be. We're hoping that 2025 will give us an opportunity to rotate equity. And you see some of the names that have been marked up. We would hope we can turn some of those into cash. So I don't necessarily know that we have a target. We know that our shareholders like a steady, stable dividend stream. We think we've got plenty of runway to do that under the current construct. But we'll kind of grind through 2025, see where we end up and continuously speak to our Board about it and trying to understand where the market is and how the overall platform is doing in terms of kind of getting rotation on the equity. And I don't really have an exact answer for you. It's kind of like we take it as it goes. This year, the game plan is clear for 2025, steady she goes, grind our way through it, try to rotate some equity, come up [ for air ] in a year, and we are committed to keeping the dividend where it is.

Got it. Got it. Moving on to the -- on Pragmatic obviously, full nonaccrual now. What are the prospects for a restructuring there like and maybe some of that equitization of some of the debt or something like that where the remainder of the debt comes back on to accrual. I mean is that a likely or potential outcome in the near medium term for that asset?

Yes. It's a good question, and we're figuring out as we speak. Our current assumption is that during this quarter, the quarter ended March, there will be some form of restructuring there, some debt will be converted and there'll be a yield instrument coming out of that.

Got it. Got it. And then just kind of following on from Mark's question. In terms of the environment, I mean, you are very active. What areas do you, and you've talked about some really attractive vintage. But I mean are there areas in particular that you'd like to ramp up exposure more in the portfolio? Obviously, there's -- within the JV as well, I mean there's industry concentrations you're trying to manage and things like that. So I mean, are you seeing the right kind of industries that in terms of being attractive also to manage your concentrations in that vehicle and directly on balance sheet as well.

Yes. So as you know, we kind of respond to what's being shown us in the marketplace and where the middle market private equity community finds value. So certainly, we can deemphasize certain areas and we can emphasize others. Health care is the -- it's the biggest portion of our portfolio, and we try to in health care, particularly with reimbursement risk, try to find areas that are on the right side of cost containment, try to find providers, service providers and other types of companies that can provide health care at a lower cost and still maintain high quality. So that's something that -- it's probably just a big part of the portfolio. We -- I think our Performance in Health care is probably better than some of our peers. I think some of our peers have gone caught in it, whether it's just not picking the right credits that are on the right side of cost containment, or just having higher leverage. As you've heard, our incoming debt-to-EBITDA for new loans is under 4x. So when you are 4x exactly here in this vehicle. So when you structure deals with more reasonable leverage, you can deal with the [ curve bar ] too. So health care will remain. Government Services, again, that's topical given what's going on with the government. We believe we're on the right side of financing companies that are driving cost containment for the government and are aligned with government payment, again, we're responding to what our sponsors are showing us. And there's a whole proliferation of other types of industries, business services, consumer and others that that were shown. But we do not -- we can kind of dial things up or dial things down for us, it always begins with is it a steady stable cash flow stream that is protected. Is anyone really going to care if this company goes away or not and trying to keep leverage as low as we possibly can. And then, of course, alignment with the sponsors putting in a lot of equity beneath us.

We'll now take our next question from Brian McKenna with Citizens JMP.

Great. So just on the portfolio rotation opportunity, is there any way to think about the timing and magnitude of monetizing some of your equity investments? And then redeploying this capital into loans? And I guess, ultimately, where does the percent of equity investments within the portfolio settling at longer term?

Yes. So I'll try to deal with the last question first, which is what are we targeting? We're certainly targeting less equity Certainly, you can look at the equity book and see where there's been markups and the goal would be that's kind of a leading indicator for where there might be some monetization opportunities. . But in terms of the equity book, I mean, let's exclude the JV equity, which is about 6% of the portfolio, and that's just part of this JV that's generating a very healthy 18% return in cash and is over 20% in other equity. Some of it's co-invest. I think about half of it is kind of from co-invest where we've co-invested and the other half is restructured equity where we converted debt to equity. Some of that -- some of both of those has been marked up. So we hope that '25 is the year where we're going to see more M&A activity in this core middle market, where we can monetize some of those names and convert that equity to cash and ultimately yield. Look, we'd like to get that 20-ish percent number down in half if we can. That's our goal. Try to cut that in half over time. We have not met that goal. It's taken us too long, to be honest with you. And some of it we kind of control, some of it we don't, but that's got to be our target, and that's what we're going to try to do.

Okay. Great. That's helpful. And then, Art, I've asked this in the past, but assuming you are successful kind of rotating out of the equity and into loans and that kind of ratio looks similar and the percent looks similar to PFLT, I mean, do you ultimately, maybe potentially look to merge the 2, so you have 1 publicly traded BDC? I'd just love to get your updated thoughts there.

Yes. Look, there's nothing more update than what we've talked, which is we've got a little bit of a cleanup scenario here. We've got a -- we've got to focus on it. Then we'll lift our head up and kind of look at the options. There are certainly arguments to do something, there are certainly arguments not to do something. All options are always on the table. There has been historically a differentiated portfolio, difference in yields, difference in underlying portfolio. We got a little bit of a job to do first, and then we'll come up and try to assess what's best for shareholders.

We'll now move to Paul Johnson with KBW.

On some of those investments that were marked higher. I noticed [ Bilight ] was marked higher again this quarter that the market has been moving up over the past few quarters. Is -- I mean should we take that as an indication of interest that you might think the company has been receiving? Or has that just been more of a result of just performance?

Yes. Look, it's hard for me to -- I can't comment on M&A and all that. I can comment that the company has performed well, and you've seen that in the markups. Most of these companies are owned by private equity firms who ultimately try to sell. I can't comment on a specific name, but the company has been performing well.

Art, and then last question was, I noticed that PNNT participated in the marketplace events loan that PennantPark reinvested with the company following the sale of the business. Just given that I don't believe PNNT participated in the previous investment and it's just a slightly lower yield. I was just curious as to as to why PNNT participated this time?

I'm going to defer to Rick. I don't think that PNNT was involved in the marketplace. Rick, any color.

You're correct in terms of the realization. But PNNT did participate in the new loan and the thought there all is, again, that, that loan will ultimately leave at the joint venture.

Yes, the new loan. Yes.

it's the new loan.

1 So there was a new buyer that came in and bought marketplace events. PFLT and a group of other lenders or the shareholders and PFLT was the lead equity investor, a new private equity sponsor came in, bought the company at an attractive price. And as part of that, there was an attractive loan to be made in a company that we obviously knew very well. So we did buy that loan across the platform, PFLT, PNNT and ultimately, the joint ventures will own a piece of that marketplace events alone.

Got it. And when you made that loan, was that alone that you chose to reinvest in the company or was that a loan that was essentially carried over to [ the enacted ] deal?

Yes, it was a separate transaction. So the funds that were in the old marketplace events got cash, and then we evaluated where the new loan and a new equity co-invest would make sense. And then across the platform, PennantPark platform bought new senior debt and new equity co-invest in the new marketplace events where another sponsor came in and bought the company, and that's been allocated across the platform.

we'll now move to Mickey Schleien with Ladenburg. .

Art, just a couple of questions from me. What did you assume in terms of the fund's balance sheet leverage and equity rotation in your core NII guidance?

Core NII was actual NII. There's no -- this kind of actual for the quarter ended December 31. In terms of the guidance going forward, your question is about the guidance going forward. We just said that's kind of just assuming continued growth in the joint venture.

Okay. And the balance sheet leverage remaining where it is.

Yes, yes. And over time, kind of getting back down to 1.3 after we fill up that joint venture, we could grow that joint venture, we could do another joint venture. We hope to be able to get some equity realizations here in the next number of quarters, which will certainly be helpful.

For sure. And just a housekeeping question, maybe for Rick. What were the main drivers of the realized loss and the unrealized gains.

Let's see. So the main drivers for the unrealized, there was a write-up in JF Intermediate and a write-up in Federal Advisory Partners. Those are the 2 larger write-ups. On the write-down that netted that down, the equity investment in Cascade Environmental and additional write-down on Pragmatic where the 2 main large drivers on the right downside. In terms of realized gain -- or sorry, realized loss for PNNT that was a restructuring for [ STG ] also goes by a Reception Purchaser. That was the main driver for the realized loss during the quarter.

We'll now move to Melissa Wedel with JPMorgan.

Most of mine have been asked, but I thought I would follow up and clarify a couple of things. Firstly, on the growth of the JV, when we look at the dividend income to the BDC from that JV, it looks like that was pretty flat quarter-over-quarter, except that the portfolio assets that the JV had grown pretty decently even since September 30. How should we think about the growth in the dividend to the BDC from PSLF and like the cadence of that going forward.

Yes. It's a great question and the growth in the underlying JV portfolio should match what comes over to PNNT. But we don't book income unless it's actually distributed. So there's a bit of a reserve that we create at the joint venture. And there's no particular reason we're creating reserve there. There's -- other than just have excess cash so that we have a bit of a reserve. But you would imagine, and it would certainly normalize over time where growth in the joint venture and growth in the investment in that joint venture will yield the dividends. Rick, I don't know if you have any particular explanation for why the phenomenon Melissa is talking about in this particular quarter.

Yes. Sure. Melissa, last quarter, the JV did distribute some of that reserve Art just mentioned. And I believe we detailed that out last quarter as kind of a core NII adjustment because that portion was, I'll say, less recurring. Additionally, we see through both debt and equity. So as we fund additional capital to fuel the growth of that JV portfolio, the economics back to us, a portion is in that debt instrument, so you just don't see it in that dividend line item on the income statement.

One way to look at it is comprehensively between the debt instrument and the equity instrument side.

Yes. And then just to clarify, I wasn't quite sure I fully followed your comments on the exposure to government services and defense companies. It's -- do you -- how much exposure is there in the portfolio to any potential sort of reimbursement risk, whether that's in the government segment and Defense segment or even in the health care segment of the portfolio. Have you taken a more critical look at that?

Yes. No, we're looking at...

Sorry, [indiscernible] any tariff exposure as well.

Tariffs, yes. Yes. We have limited tariff exposure. Most of the companies that would be impacted by tariffs, we're not really involved in and the ones that we are kind of had a dry run of tariff exposure during the last Trump administration. So the tariff exposure is very, very limited. Biggest part of the U.S. economy and biggest part of our portfolio is health care. So for sure, there is government reimbursement risk in health care, the way we comport ourselves in that is we try to focus on health care companies that are driving lower costs with reasonable quality. So if we're on the right side of that, which is lower cost, reasonable quality in any environment, we're likely to be okay. And then we layer on the fact that we keep leverage lower. The average new loan is 4x debt to EBITDA in this portfolio with at least 50% equity beneath us. So where some of our peers may have stumbled occasionally in health care, to date, we're relatively clean because of those 2 facts. So same applies on the government services and defense side, when you look at that portfolio, we're not doing tanks, we're not doing missiles. We are focused typically on service companies where you have individuals, people walking into offices and sitting behind computers, doing things like cybersecurity, intelligence, maneuvering satellites, doing technology updates. Those, again, typically are what we would call on the right side of cost, on the right side of being very efficient with taxpayer dollars going into government contracting and defense. And then when you drill down one layer deeper, in those companies, they typically get paid in 2 ways. One is cost plus where they provide the cost and they create a margin above that. And on those companies, those companies by and large are making single-digit EBITDA margins. They're not making excess margins on cost plus. If they were making excess margins and cost plus, they would be more at risk. And then the other way companies get paid is through fixed price where they take risk, they can essentially go along providing a service for fixed price, in which case the government is dishing the risk off to the provider, the providers taking risk. In those cases, those companies could earn higher margins and they could also earn lower margins depending on how they priced their service relative to their cost. Again, if you look at that piece of that portfolio, we've seen that a very good operators who are generating fair margins not exorbitant, but fair margins, and they're taking risk off the government and they're going long service. So we think we're relatively well insulated. But every day is a new day, as you know, we don't know, but kind of we've comported ourselves in those 2 industries, which have government exposure to be focused on the right side of cost containment and then add on the layer of keeping debt-to-EBITDA 4x or below, so that if there are curve balls, they could be -- they can be dealt with appropriately.

I appreciate all the detail there. Actually, one final question for you. I take your point on looking -- hoping for some equity rotation in the coming quarters, as you said. It occurs me though that you also have a pretty elevated balance in treasuries. Is that something that could be a source of funds to deploy into something higher yielding until you get that equity rotation?

Yes. Good question. The treasuries are balance sheet management that we do at quarter end, typically, that's temporary to optimize our 30% bucket. We want to optimize our 30% bucket for the JV and for other 30% type assets. So that is a technique we use to optimize that bucket.

We'll now move to Casey Alexander with Compass Point.

Art, I've got a few questions for you. First of all, we know that base rates have gone down 100 basis points, but there's a delay in the way in which they flow through your balance sheet. What percentage of that 100 basis points would you suggest has already flowed through?

That's a really good question. Rick, any -- I'll defer to Rick, I don't know if you have an estimate, Rick or off the cuff or we can certainly get back to you, Casey later on, but any sense?

It isn't off the cuff. I would say the majority of the borrowers are electing 3-month LIBOR contracts. So they are flowing through on kind of a 3-month basis. The quarter ends are -- there's a higher volume, a higher number of borrowers that kind of roll their contracts towards the quarter end, but they do roll all throughout the period. Off the cuff, I would say, it's in that 50% to 75% is already in the numbers.

So you're halfway through flowing through to maybe 3/4 of the way flowing through. That would be your guess?

And we also have liabilities, obviously, that are floating as well. So we have some fixed and we have some floating liabilities. So there's some matching going on .

Yes, I'm aware. Based upon the amount that you shipped down to the JV this quarter, another quarter like that, and you're basically going to be at capacity. Do you think that you'll be at or near that capacity by the end of the first calendar quarter?

I'd say the next -- I'd say probably takes us 2 to 3 quarters to get that JV more fully ramped and optimized gives us time to evaluate financing options, gives us time to evaluate equity rotation options. And then once we're optimized, we're optimized, and we'll do everything we can to add value thereafter. But kind of we're expecting and hoping some for some or some kind of equity rotation between now and then.

So we should be thinking about a little bit slower pace going down to the JV over the next couple of quarters if we compare it relative to this last quarter?

Yes, yes. And part of it is just the activity levels. We're seeing a, what I'll call, a normal quarterly flow, the December quarter was very busy, as you saw the March quarter that we're in today is a little bit slower. That's a normal seasonal activity. We still think '25 can be a very active year, but this quarter that we're in right now is a little bit slower.

Right. Okay. So let's have a conversation about the dividend distribution. I'm just curious, have you guys considered switching off to a year-end special distribution to clear up some of the spillover and rightsizing the dividend because it's pretty common knowledge that when you appear as though you're chronically under-earning your dividend, the market tends to impact your valuation in a negative way because you're doing that. And if you switch to a year-end special distribution, you could rightsize the dividend relative to your current earnings power, and perhaps the market would treat your valuation better? Have you considered that as an option?

And we have. And Casey, we're happy to consider it and happy to talk to you any time you like about dividend policy and trying to figure out the optimal way to get our stock trading even better. So we can talk about that and talk about different things and what our shareholders would prefer. Is there -- I don't know, like you have institutional shareholders, you have retail shareholders. what's the preference? What do people want? What's the reaction going to be? So we can -- we have to have the call here, have that discussion in front of the community, but we're always happy to talk about it and talk about it with our Board as to what's going to help our stock trade better. And if there's other methodologies or other ways to do it, we are all ears.

I would be more than happy to have that conversation with you. You mentioned that the JV when it reaches its capacity that you might enact another JV. I'm just -- is there any technical limitations given that when this JV has completed its capacity, it's going to be larger than the on-balance sheet BDC itself. And so I'm just wondering if there's any practical limitations to how much you can take off balance sheet relative to the size of the on-balance sheet BDC itself?

It's a great question. And certainly, there's a couple of limitations, a, it's part of the 30% bucket, right? So no more than 30% of our overall balance sheet at PNNT can be in one of these vehicles. And you're correct that the BDC -- that the JV itself can get quite large, but PNNT's ownership of it can be a different number, right? We're -- PNNT is a little bit more than 50% owners of it. The JV can continue to grow and PNNT can own less than 50%. I mean there are some of our peers who have the BDC owning 10% or 12% or 15% or 20% of a JV that can be very large with third-party investor capital. So the relevant thing is what's the 30% bucket and how much of that is in a JV-type structure. The JVs are -- have been very accretive. For us here, it's been generating 18%, which is accretive to PNNT. And when you think about it, kind of our [ management ] managing all these assets, and we're not charging our shareholders an incremental management fee for it is just showing up in the form of incremental ROE. So We think it has some benefits. It's been a good thing for PNNT, and seem to be a good thing for other BDCs. So we'll continue to look at it, and we'll continue to look at our 30% bucket. And continue to figure out if we can add value through using the JV mechanism to do so.

Lastly, have there been any notable credit events that have taken place in the portfolio since the end of the quarter?

There's a company called

That includes the amount of

Yes, JV and on balance sheet.

We'll now take a follow-up from Robert Dodd with Raymond James.

Just a quick follow-up from Melissa's question actually. I mean there is a visible gap to your point in terms of stopping the reserve, so to speak. And there was an extra couple of million of that paid out in June. So I mean, is there going to be a true-up distribution from the JV kind of -- is it going to be once a year? Or is it going to be once in a while? I mean should we expect an annual distribution from that vehicle that kind of captures that? Or is it just a true-up whenever you and the partner decide is appropriate.

More of the latter, kind of we try really to distribute the vast majority of NII out on a quarterly basis every so often because the credit performance has been good there. We just have a little bit of excess and we'll distribute it when appropriate.

And we'll now take a follow-up from Melissa Wedel with JPMorgan.

One more follow-up, actually, to Brian's question about whether Penn and PFLT would ever make more more sense in a combined vehicle. You mentioned that there's a little bit of cleanup work to do. And I just wanted to better understand what that means to you. Is that a function of nonaccruals, equity exposure, something else? And I asked that because in the past, I know you've probably gotten that question a number of times over the years. In the past, you had referenced the multiple and the disparity between multiples on the 2 vehicles, and that seems to be less of an issue now. So appreciate any clarifying thoughts you have on that.

Yes. And that could be -- it's all kind of maybe the same thing, Melissa, which is, I believe, if we can get some reasonable equity rotation, which will derisk the portfolio, derisk the NII that will be clean up, right? That will be the cleanup I'm referring to. And then we can take a look and evaluate different options.

That does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Penn for any additional or closing comments.

Just really want to thank everybody for their participation. I want to thank the research community for your excellent questions. It's good that there's engagement and some interest. And we look forward to speaking with you all again next in early May as we discuss the March numbers. Thank you very much. Have a good rest of the winter.