PennantPark Investment Corporation (PNNT), a business development company, has reported a strong financial performance in the recent quarter, with both GAAP and core net investment income reaching $0.22 per share. The company's portfolio value stands at $1.3 billion, with new investments totaling $192 million across 56 portfolio companies. A slight increase of 0.5% in Net Asset Value (NAV) to $7.56 per share was noted, attributed to positive valuation adjustments.
Key Takeaways
- PennantPark Investment Corporation's GAAP and core net investment income stood at $0.22 per share.
- The company's portfolio reached $1.3 billion with a weighted average yield of 11.4%.
- NAV per share increased to $7.56, marking a 0.5% rise.
- Portfolio includes 152 companies across 33 industries, with 55% in first lien secured debt.
- The joint venture (PSLF) reported a 19.2% return on invested capital over the past year.
- PennantPark focuses on middle market lending, targeting companies with strong free cash flow and meaningful covenant protections.
Company Outlook
- Optimism about investment opportunities in the core middle market.
- Focus on capital preservation and strong credit performance.
- Anticipation of equity realizations due to increased mergers and acquisitions (M&A) activity.
Bearish Highlights
- Two non-accrual investments, representing 4.1% of the portfolio at cost.
Bullish Highlights
- Substantial return on invested capital from the joint venture.
- Increased commitments and credit facility for the joint venture indicate strong performance and trust from partners.
Misses
- No significant misses reported in the earnings call.
Q&A Highlights
- CEO Art Penn emphasized the company's strategic focus on the core middle market for attractive investment opportunities.
- Penn reiterated the goal of generating attractive risk-adjusted returns through income and long-term capital preservation.
- The company's approach includes maintaining lower leverage and securing strong covenant protections.
PennantPark's strategic focus remains on middle market lending, particularly in sectors such as business services, consumer, government services and defense, healthcare, and software/technology. The company's disciplined approach includes maintaining lower leverage for new investments and focusing on companies with strong free cash flow. The CEO highlighted the importance of providing strategic capital to borrowers and the ongoing commitment to capital preservation and patient investing.
The company's joint venture, PSLF, has shown remarkable performance with a 19.2% return on invested capital over the last 12 months, indicating a successful strategy in this area of the business. Additional capital commitments and an increase in the senior secured credit facility for the JV further underscore this success.
Overall, PennantPark Investment Corporation's recent earnings call paints a picture of a company with a strong and disciplined investment approach, optimistic about its future in the middle market lending space.
Full transcript - PennantPark Investment Corporation (PNNT) Q4 2024:
Conference Operator: Good afternoon, and welcome to the PennantPark Investment Corporation's 4th Fiscal Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen only mode. The call will be open for a question and answer session following the speakers' remarks. 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.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Good afternoon, everyone. I'd like to welcome you to PennantPark Investment Corporation's 4th fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward looking statements.
Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: 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 call turn the call back to our Chairman and Chief Executive Officer, Art Penn.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: 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 September 30, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, then open it up for Q and A. For the quarter ended September 30, our GAAP and core net investment income was $0.22 per share. GAAP and adjusted NAV increased to 0.5% to $7.56 per share from $7.52 The increase in NAV for the quarter was due primarily to net positive valuation adjustments in the investment portfolio. As of September 30, our portfolio totaled $1,300,000,000 and during the quarter we continue to originate attractive investment opportunities and invested $192,000,000 in 12 new and 44 existing portfolio companies at a weighted average yield of 11.4%.
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 3.6 times, the weighted average interest coverage was 2.4 times and the weighted average loan to value was 36%. As of September 30, the portfolio's weighted average leverage ratio through our debt security was 4.5 times and the portfolio's weighted average interest coverage ratio was 2.0 times. These attractive credit statistics are testament to our selectivity, conservative orientation and our focus on the core middle market. During 2024, the market yield on 1st lien term loans has tightened 50 to 75 basis points.
As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent and the core middle market leverage is lower, spreads are higher and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market, in the core middle market, we are still getting meaningful covenant protections. During the quarter, PNNT's joint venture PSLF accepted $127,000,000 of additional capital commitments from PNNT and its JV partner. PNNT committed 52 point $5,000,000 and the JV partner committed $75,000,000 In addition, the JV increased its senior secured credit facility from $325,000,000 to $400,000,000 This additional capital will allow the JV to scale its investment portfolio to over $1,500,000,000 representing a nearly $500,000,000 increase in the JV's investment capacity. At September 30, the JV portfolio equaled $1,000,000,000 during the quarter the JV invested $146,000,000 including $105,000,000 of purchases from PNNT.
Over the last 12 months, PNNT earned a 19.2% return on invested capital in the JV. We expect that with continued growth in the JV portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters. The credit quality of PNNT's investment portfolio remains strong. We had only 2 non accruals as of September 30. Non accruals represented 4.1% of the portfolio at cost and 2.3% at 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, healthcare and software and technology. These sectors have also been recession resilient and tend to generate strong free cash flow. The core middle market companies with $10,000,000 to $50,000,000 of EBITDA is below the threshold and does not compete with a broadly syndicated loan market or the 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 statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co investment. Additionally, from a monitoring perspective, we receive 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 1st lien loans have 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 and P, loans to companies with less than $50,000,000 of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of the core middle market, more careful diligence and tighter monitoring have been an important part of this differentiated performance. As a provider of strategic capital who fuels 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 co investments have been excellent over time.
Overall for our platform from inception through September 30, we invested over $540,000,000 in equity co investments and have generated an IRR of 26% and a multiple on invested capital of 2x. Since inception nearly 17 years ago, PNNT has invested $8,300,000,000 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 investments of primarily subordinated debt investments made prior to the global financial crisis, legacy energy investments and more 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 are producing attractive 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 contractual 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.
Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: Thank you, Art. For the quarter ended September 30, GAAP and core net investment income was $0.22 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $12,300,000 base management and incentive fees were $7,400,000 general and administrative expenses were $1,750,000 and provision for excise taxes were $700,000 For the quarter ended September 30, net realized and unrealized change on investments and debt, including provision for taxes, was a gain of 4,000,000 dollars As of September 30, our GAAP and adjusted NAV was $7.56 per share, which is up 0.5% from $7.52 per share in the prior quarter. As of September 30, our debt to equity ratio was 1.57x and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of September 30, our key portfolio statistics were as follows.
The portfolio remains highly diversified with 152 companies across 33 different industries. The weighted average yield on our debt investments was 12.3%. We had 2 non accruals, which represent 4.1% of the portfolio at cost and 2.3% at market value. The portfolio is comprised of 55% 1st lien secured debt, 5% 2nd lien secured debt, 9% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF and 20% in other preferred and common equity. 94% of the debt portfolio is floating rate and the debt to EBITDA on the portfolio is 4.5x and interest coverage is 2x.
Now let me turn the call back to Art.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: 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.
Conference Operator: Thank And the first question will come from Mark Hughes with Truist.
Mark Hughes, Analyst, Truist: Yes. Thank you. Good afternoon. The investment activity so far in the Q4, I'm not sure if you gave any specifics on that, but what have you seen so far?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. Thanks, Mark. We've been active kind of with PNNT's current situation. PNNT is kind of pretty fully levered here at about 1.5x. Our long term target leverage is targeting about 1.25x to 1.3x.
So what PNNT does is it basically buys deals and seasons them. And then at some point, the JV will then purchase those deals. So the growth of the portfolio in PNNT is really going to come through the JV at this point. So it's kind of been more of a steady state at PNNT, and the new deals and new opportunities, given the leverage, are going to be shifted over to the JV when appropriate. So kind of ins and outs are monitored very closely, and we've been active, but we're also getting repayments.
Mark Hughes, Analyst, Truist: Yes. Okay. And then you described kind of high teens returns on the JV. Anything structurally that should influence that? Is that kind of sustainable?
Is there decent visibility for those sort of returns? Are there any market factors that maybe influence that?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Sure. It's a lot of the 1st lien deals that we originate across our platform, lower levered, lower risk type deals. And then, as they go into the JV, they get levered up a little bit more than they went on a BDC balance sheet, kind of 2 to 1 kind of debt to equity ratio range. And we use credit facilities, we use CLO technology to finance those loans. So certainly, same thing as a BDC balance sheet.
If interest rates come down, the returns on that JV will come down. These are mostly virtually all floating rate loans, granted the cost of liabilities will come down as well. And then credit performance. We've had excellent credit performance in the JV. Hopefully, we continue to have excellent credit performance.
But a combination of interest rates and credit performance would be the key areas that you'd watch for that 19% return coming down.
Mark Hughes, Analyst, Truist: Very good. And then thinking about the credit stats this quarter, the, I think, 3.6 percent or 3.6x debt to EBITDA and then it seems like the loan to value also pretty attractive. At the same time, you're getting a little bit of spread compression. What are you seeing just in terms of those leverage numbers? They seem pretty good.
Is that sustainable or you might see those move up a bit?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. Look, they're really good from an overall standpoint. We end up being in the mid-4s over a long run basis. And as we say, typically, we'll start out with a company that's a platform for growth or acquisition. So we'll finance a $10,000,000 or $15,000,000 or $20,000,000 EBITDA company.
Once a little smaller, we might keep leverage a little tighter as the company grows to 20, 30, 40 of EBITDA, gets a little bit bigger, maybe the leverage will go up a little bit as it does add on acquisitions and draws down the delayed draw facilities. So that's the typical life cycle of one of our deals. We'll start out smaller EBITDA, keep leverage tight, give them a DDTL to grow, co invest the equity to participate in that growth. Company gets bigger, ends up before 4.5x leverage and then as it gets to 40 or 50 of EBITDA or greater, it moves off to the upper middle market. Appreciate that.
Thank you.
Conference Operator: And the next question will come from Robert Dodd with Raymond (NS:RYMD) James.
Robert Dodd, Analyst, Raymond James: Morning. Hi, guys. On the outlook in terms of sectors, I mean, you mentioned obviously 5 key sectors. I mean, when I look at the ads this quarter, I think 3 or 4 of them were healthcare mostly and then business services, only one governmentdefense. What are the ones that look appealing to you going forward into 2025 maybe with taking into account obviously change in administration coming etcetera.
I mean which areas do you expect to remain attractive?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes, look, I think our 2 biggest sectors and some of those business services might as you look under the cover a little bit more government services or defense. Look, healthcare has been a good sector for us. Some of our peers have stumbled a little bit in that space. I think we generally tend to keep leverage lower than some of our peers. Maybe we're financing smaller companies at lower leverage with tighter covenants, don't know.
But we've selected areas in healthcare where the tailwinds are behind us, the reimbursement risk may be a little lower and importantly we keep leverage lower. And demographically, healthcare is just going to continue to be a big portion of our economy. We almost can't avoid it, the aging of our population. So, we're going to continue to do a bunch in healthcare, be very selective about which pieces of the industry and then keep leverage low. Government services and defense continue to be an important part of the economy.
The geopolitical outlook remains uncertain. Certainly, with Doge coming in and taking a look at all government expenses, that's we'll see how that plays out. As taxpayers, we, of course, want our tax dollars to be spent efficiently. But typically, in defense government services, we're financing service businesses where human beings walk into an office building and sit behind computers, whether that be cybersecurity, intelligence, other kind of non heavy asset areas that we think will continue to be really important given the geopolitical risk that's in the market. But it's really hard to handicap what the Doge efforts going to mean.
And kind of again, we just try to keep leverage low. I don't know how many of our peers have a portfolio that has a debt to EBITDA kind of in the mid-4s and has new loans in the mid-3s debt to EBITDA. I don't think there's very many. So, for us, that's been our tactic or strategy. And we're okay keeping lower leverage and accepting a lower yield.
And with the advent of being able to efficiently finance those loans either on the balance sheet of the BDC or in a JV where leverage can be optimized a little bit more and we can manage more assets on behalf of the shareholder and not charge a management fee for managing those assets and be able to punch out a mid to upper teens return. We think that's a very good model for PNNT.
Robert Dodd, Analyst, Raymond James: Got it. Thank you. On that, the spread question, I mean, they have come down, you mentioned in your prepared remarks. I mean, where do you do you think it's at a bottom, the spread compression is kind of leveled out given or do you think this the returns on 1st lien is still a really, really attractive. I mean, double digit yields on 1st lien even with spreads where they are right now.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: So I
Robert Dodd, Analyst, Raymond James: mean, do you think there's room for them to come down further? Or is this the bottom? Or thoughts there?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. Great question. We think they've plateaued here. Our deals are typically, right now, on the senior side, 5 to 5.50 spread over the risk free rate. It seems to have plateaued.
If deal supply gets even heavier, perhaps we have a chance as an industry or in the core middle market to be able to increase spread a little bit. If there's heavy supply, that won't be so bad. Again, credit, credit, credit, that's got to be most important. If we can reduce mistakes, the rest of it will take care of itself. So we're not modeling an increase in spread.
And right now, we don't think there'll be any tightening. And on a relative value, if you look at the BSL market, BSL market is kind of 3.50 spread. So if we're 5.50, BSL is 3.50. From a relative value standpoint, we still think it's attractive.
Robert Dodd, Analyst, Raymond James: Got it. Thank you.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thank you.
Conference Operator: And moving on to Paul Johnson with KBW.
Paul Johnson, Analyst, KBW: Good morning. Good afternoon. Thanks for taking my questions. So on the JV, very strong return once again this quarter. It's been a great asset for the BDC, a 19% annualized distribution rate from the JV this quarter, portfolio yield close to 11% inside of the JV.
Can you kind of give your thoughts around sustainability that current distribution rate? I mean, some sort of any sort of sensitivity around interest rates and what happened with net interest income in the JV?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. It's a great question. And certainly, our track record in the JV to date is really good. We've had very minimal non accruals. Look, you have to kind of say, let's build in some cushion in that.
If you were to kind of say, okay, long run, we're 4 or maybe 5 years into that JV, can we sustain that? I certainly hope so. But certainly, over time, we have non accruals, and we should model those in. For PNNT, over many years, it's been a 20 basis point annualized, diminution of return due to non accruals. The PFLT and the JV portfolio is a little bit closer to the PFLT 1st lien portfolio.
It's been 10 basis points annualized. Certainly, as interest rates come down, it's going to be sensitive to that. So those are the 2 things you model in. Is 19% going to come to 17% or 15% at some point? It's quite possible.
It's hard to guarantee 19% forever. I mean, I certainly hope we can achieve that, but it's really hard to say. It's absolutely sustainable and pound the table in that. But certainly, the way we've been investing in senior debt and then how we've been using leverage at the JV level, including securitization, CLO leverage, we should still be able to get an opportunity to return on that capital.
Paul Johnson, Analyst, KBW: And what is the idea around leverage? I think last quarter was around 2.1 times or so in the JV. Is the idea to continue to increase that as rates decline? Is that kind of near its sort of max target leverage? What's the idea?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. I think 2 to 1, 2.25 to 1 is probably the relevant zone at this point. Again, these are the same exact assets that we use across our platform PFLT and its JV gets these 1st lien assets. It's important to note that we have a CLO business, a third party CLO business, and these same assets are in middle market CLOs where the equity gets levered 3 or 4 to 1. And those are very strong good structures.
We are going to price our CLO-ten shortly in the coming days. And if you look at 3rd party research on middle market CLOs, thankfully PennantPark is one of the top 3 quarter after quarter in terms of performance in the middle market CLOs. It's because the performance of the underlying assets so far has been very good and it's the same assets that are in our JVs and in PFLT. So these assets could be safely levered 3 or 4 to 1. And the JV right now, we're focused on 2, 2 in the quarter over 1.
Paul Johnson, Analyst, KBW: Thanks for that. And then can I just ask about the amendment this quarter in the JV? It looks like you made an amendment that allows parties to potentially redeem their interest. What's the idea with that? Is that to potentially create some sort of opportunity to maybe bring new partners in the future somehow or to sell stakes?
Or what was the purpose of that amendment?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes, that was just kind of in line with the updated agreement we have with our JV partner. They were bringing more capital in. As part of that, they just wanted to clarify entry and exit mechanics. So there's a potential that this really could just be an evergreen vehicle and their limited partners can come in and exit on an orderly basis if they want to continue to be in this vehicle.
Paul Johnson, Analyst, KBW: Thanks for that. And then on the non accruals, in the filing, it says there's 2 companies on non accrual. However, if I pull up the number of companies on partial non accruals, there's a few more. Can I just ask why would a company be placed on partial non accrual versus just full nonaccrual? Was there any specific situations this quarter or the reason for that?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Rick, do you want to handle that one?
Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: Thanks, Paul. There is one company, it's called Pragmatic, that's on partial nonaccrual. Based upon the valuation, which is in the low 60s, it is currently paying PIK interest. So we're accruing to that mark of 60 because the enterprise value of the company is not it's basically at 100% loan to value. So we're reserving for that portion that exceeds the enterprise value and then therefore collectability.
Paul Johnson, Analyst, KBW: Appreciate that. And then just a few more if you may. Within the portfolio, what would you say I guess is the refinancing opportunity that's still left in the portfolio at this point? I mean, how what would you see as kind of like the balance between activity that can be derived from the existing book versus new activity kind of given that leverage is obviously kind of getting close to being maxed out within the BDC?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. We're getting repayments. Middle market M and A is getting active again. I think we're on the PFLT call earlier, it's an active environment for middle market M and A. We hope to be getting some realizations on our equity co invest portfolio as part of that.
Certainly, we're going to get repayments on loans as part of that. And the idea is to optimize that portfolio, optimize the JV portfolio and manage it sensibly and tightly. But the wheels of commerce in the middle of M and A are picking up again. And hopefully, that will provide us an ability to get some equity realizations and make the equity piece of the book a smaller piece of the book.
Paul Johnson, Analyst, KBW: Thanks for that. I mean, would you say that any of your larger equity co investments are getting any closer to that point of exit if we do see a material pickup in M and A activity next year?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Sure. I mean, you can it's a simple review of the equity co investment, look at fair market value relative to cost. And if there's the fair market value is a lot higher than cost, typically, we're a co investor with a private equity sponsor. Typically, it's just a matter of time, right? So, we're hoping to get some nice realizations in the not too distant future.
Conference Operator: And our next question will come from Melissa Wedel with JPMorgan. Most
Melissa Wedel, Analyst, JPMorgan: of mine has already been asked. But I thought I'd follow-up on the JV in particular. As you talk, you mentioned that the growth in the portfolio is likely to come through that JV, certainly makes sense with the recent upside. When you think about the investment in the JV, both in the sub debt, but also the equity investment, How do you think about position sizing of that JV investment within the total portfolio context? Do you think of is there some constraint in terms of position size that you would be targeting or not be comfortable exceeding in the portfolio?
Thank you.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. That's a great question. So the JV itself was about $1,500,000,000 of availability for that particular bucket, let's just say average position should be 2%. So that's up to $30,000,000 And I think reality, the average position there will be about $25,000,000 dollars if we were to do a new loan that JV would take $25,000,000 in and of itself. So very diversified portfolio in the JV.
And then the question is, what's too big for PNNT in terms of its position in that JV. Look, we're getting pretty full. Just to be quite honest, we're getting pretty full. It is part of our 30% bucket, which is getting pretty full. So we're getting there, not to say we're there, but it's going to be a pretty full position.
And you saw that we prior to this investment, we PNNT on 60% of the JV, our partner on 40%. We did not take 60% of this upside. We took less. They took more. So I think we're probably about 55%, 45% now.
So something we evaluate. That said, when you look at the underlying portfolio, the underlying portfolio obviously is very, very diversified.
Melissa Wedel, Analyst, JPMorgan: Understood. Thanks, Art.
Conference Operator: And the next question will come from Casey Alexander with Compass Point.
Casey Alexander, Analyst, Compass Point: Yes. I've got a few. 1 in particular, J and F equity position that was marked up $9,000,000 this quarter, that was a pretty extreme mark to market quarter over quarter on an equity position. It's one of the few equity positions that really is large enough that if it got monetized, it could really help your income producing, your income generating in terms of switching it to stuff that does generate income, does that one in particular appear to have some sort of a path towards monetization because all of a sudden because usually when we see a large quarter over quarter markup like that, it may mean that something is more current?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. We just said that, hey, when there's a big markup of the equity, it's just a hopefully, it's just a matter of time. Although we never want to overpromise and underdeliver. And occasionally, we've underdelivered on that score, Casey. So do not want to overpromise and underdeliver, but that deal has been marked up and company is performing well.
Casey Alexander, Analyst, Compass Point: All right. But secondly, and as you say, you're the 45% in the JV, right?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: In this last iteration, but overall no, overall, today, we're about 55%.
Casey Alexander, Analyst, Compass Point: PNNT is 55%. Okay. Yes. Because it could be the 1st JV I've ever seen where the balance sheet is going to be larger than the on company balance sheet. But let me ask, the balance sheet on Pennant's balance sheet as well as the debt that it has also has $100,000,000 payable for investment purchased.
And so that would make the effective leverage around 1.7 times. So obviously, you're warehousing a little bit for the JV. And when you bring that down, when you move those over to the JV, the appropriate investments to get it to where you want to be and bring your leverage ratio back down to your target leverage ratio, I'm struggling a little to figure out how that is going to be accretive to earnings if 100% of the income is on balance sheet shifting to 50% of the income going off balance sheet. Is it just because you have so much additional leverage in the JV that you're able to squeeze out some accretion to earnings from that?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yes. So it's a great question. Every dollar we invest in the JV, whether it's earning a 19%, which is terrific or something a little bit less, is obviously accretive to NII. So that's very helpful. And we're earning some income along the way.
But the question is like, hey, when the dust settles, once the JV is fully optimized, it's $1,500,000,000 And this incremental capital we're putting in, what do those economics look like? And we can work through that model with you, Casey, on the incremental capital, putting in the JV and how that works its way back to PNNT. And then yes, we are looking forward to some equity rotation in this M and A world that seems to finally have revived after a couple of years of being sleepy. And I think those are the 2 drivers for optimizing NII is the JV and the equity rotation.
Casey Alexander, Analyst, Compass Point: Okay. My next question is, you have 152 companies in the portfolio, 12 of which were new this quarter, which means that 140 are legacy companies. And you did add on investments to 44 companies, which is over 30% of the portfolio. It's hard to imagine that over 30% of your portfolio was getting bolt on growth capital. It feels like there may be some maintenance capital that's helping these companies pay the coupon on their debt.
And PIK income is already 13% of the total portfolio. Can you talk to those 44 and how many of them are kind of maintenance capital versus ones that are really requiring additional bolt on growth capital?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: It's fair. I'll kick it over to Rick in a minute because some of this might just be revolver draws. So I don't know, Rick, how much of that's revolver. We do have a very active portfolio. Again, most of the deals we're doing, we're taking a $10,000,000 or $15,000,000 or $20,000,000 EBITDA company and you're there's a real game plan to grow it to 40, 50 and greater.
So the DDTLs are an important piece of the add on loans we're making. Rick, does the revolver are revolvers included in some of those numbers Casey was referring to?
Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: Yes, Art. The 44 add on does include revolver draws, and I would guesstimate that that's probably about 85%
Conference Operator: is related to revolver draws as opposed to add on acquisitions and DDT. And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Art Penn.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Just want to thank everybody for being on the call today and this season of Thanksgiving. I want to express gratefulness and thankfulness to everybody who's on the call and your interest in PNNT. Wishing everybody a terrific holiday season and we'll talk to you in February.
Conference Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
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