May 28, 2020

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Edited Transcript of CRN.TO earnings conference call or presentation 5-May-20 12:30pm GMT

TORONTO May 20, 2020 (Thomson StreetEvents) — Edited Transcript of Crown Capital Partners Inc earnings conference call or presentation Tuesday, May 5, 2020 at 12:30:00pm GMT

Crown Capital Partners Inc. – CEO, President & Director

Crown Capital Partners Inc. – Senior VP of Finance & CFO

AltaCorp Capital Inc., Research Division – MD of Institutional Equity Research for Diversified Industries & Senior Analyst

Acumen Capital Finance Partners Limited, Research Division – VP of Research & Equity Research Analyst

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital’s Q1 2020 Results Conference Call.

Please note that today’s call contains forward-looking statements within the meaning of the applicable Canadian Securities legislation. Forward-looking statements involve known and unknown risks and uncertainties as well as other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by forward-looking statements. For a description of these risks associated with Crown’s business, please refer to the company’s filings for Q1 2020 as well as its AIF at sedar.com.

Chris Johnson, Chief Executive Officer, you may begin your conference.

Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [2]

Well, thank you, operator, and good morning, and welcome to today’s call. I’m joined as usual by Michael Overvelde, our Chief Financial Officer. To begin, I hope everybody is doing well and managing through this difficult period. It’s amazing how different the market backdrop is versus 6 weeks ago when we reported our Q4 results. Like most companies, the Crown team has had to quickly adapt our operations to the pandemic, and our business continuity plan enabled us to seamlessly operate from remote locations. Having said that, I certainly look forward to the days when we can all be back in the office and work with my colleagues.

Q1 was a good quarter for the company. We deployed a significant amount of new capital and 3 new special situation investments, and we continue to move along projects in our Power Fund, and we generated strong adjusted funds from operations. In fact, it was the best quarter we’ve had in 2 years on this venture. However, the pandemic has materially changed things for many, and we face new challenges today.

So the agenda for today’s call will be different than typical calls. As you’ll see from our press release, which I acknowledge, most of you’ve only had 1.5 hours to review, we have several important strategic updates we want to share. Given how quickly the economic condition is changing, we will also do our best to give you our latest perspective on how this crisis has impacted our investments and the conditions in our markets.

While quite a number of you have followed Crown since the initial public offering in 2015, and in some cases, even knew us as a private lending platform, one thing we do well is analyze the value of businesses and understand their path to value creation. Although we continue to have success in raising capital for our funds, what’s clear is that public markets are not providing a reasonable valuation or ready access to capital. Over a 4-year period, Crown has traded at an average price-to-book multiple of 0.85x, and currently, that multiple is below 0.5x. By comparison, our objective upon our public offering was a trade at a multiple of 1.5x or greater.

Our management team and Board believe that status quo is not acceptable. While this is not a new realization, we discussed this challenge in the past as it’s constrained our growth. In response to Crown’s trade and persistent discount to underlying net asset value, we have been working towards evolving our strategy and diversify our business. We’ve 2 main priorities: number one, to develop new revenue streams that are both highly profitable and scalable where Crown can act as both the direct investor and asset manager of capital pools, such as distributed power; and two, improve the efficiency of our capital by shifting to a capital-light business model. Our alternative corporate finance investments, while they generate healthy interest income, are not being properly valued by the public markets. Capital is valuable and requires to repurpose, such as seeding new funds or lines of business, and the vast majority of our funds required to grow can come and should come from parties with a much lower cost of capital than Crown. I’ll walk through these changes we’re making and the impacts in the context of review of our 2 main businesses.

I’ll start with Alternative Corporate Finance. At quarter end, we had investments of $275 million, including Special Situation investments of $240 million and Long-Term investments of $35 million. Our special situation investments are currently through Crown Capital Partners Fund, of which we own 39%. As I mentioned, Q1 was a good quarter for the company in the Partners fund, with 3 transactions representing $42 million of commitments. The highlight was a $30 million facility for Centric Health to enable a transformational acquisition for them. Understandably, we’ve had more questions lately about the health of our investments and the potential for increased losses. Crown’s investment strategy is to find successful companies that are fully expected to survive recessions.

Intensive due diligence is central to our investment process, and we stress test and plan for different scenarios with each company. Over our 20-year history, we’ve managed through multiple economic downturns including the 2008 global financial crisis. Although it’s difficult to know the extent of the economic damage caused by COVID-19, compared to 2008, we have better quality borrowers, a greater proportion of first lien positions and much greater fund level liquidity. While it’s early days in the recession, we are proud of the results our team accomplished in the previous crisis that ultimately delivered a 12% gross IRR from that portfolio.

There’s an all-weather aspect to our investment strategy that we believe will insulate our investors through this downturn.

That said, all lenders experienced difficulties with work-codes with individual loans from time to time, even in good markets. We expect all of our portfolios will be affected by this economic shock, with some being forced to take aggressive measures to adapt. Nevertheless, we currently believe the impacts will likely only have minimal effects on their ability to meet their obligations to Crown over time. Interest payments are coming in as expected, and we have not seen any new signs of impairment.

It’s been a particularly difficult macro environment for our energy clients. Fortunately, our clients have substantial natural gas exposure, which we expect to provide stability through this downturn. Our operating assumption is Canada is facing a significant and prolonged economic recession. Experience suggests this is a good time to be an alternative lender. Quality businesses need capital and traditional providers often retreat in times of disruption and uncertainty. We were already seeing a moderation of the credit cycle in late 2019, and we saw us come to a grinding halt in March 2020. And when the corporate activity levels return to normal levels, we expect a large window for Crown to continue its Special Situation investing.

In our distributed power business, we remained focused on building assets in the Crown Power Fund. At this point, we do not see any material financial impacts of the pandemic on the financial performance of our power generation assets or the opportunities. Instead, we see 2020 as a year of accelerated growth. The number of pipeline transactions, including prospective projects already implanted is vibrant and growing. We currently have 10 power projects in development in one operation. We expect these projects will increase revenue and operating cash flow as Crown has become operational in 2020. We also continue to build our base of operating partners. In March, the fund established relationship with — and a partial ownership in another operating partner with a focus on distributed power solutions to the midstream energy sector in Alberta. Crown Power Fund now has 6 operating partners.

Another objective for 2020 is securing additional third-party funding commitments for both of our active funds. Given the volatility in public markets, we anticipate accelerated growth in investor appetite for private credit and asset classes historically provided lower volatility and strong risk-adjusted returns.

In terms of the second priority I outlined earlier, repositioning of the balance sheet, we’re moving ahead on 2 fronts: one, we plan to reduce our ownership position in Crown Partners Fund towards a target of 20% or less from 39% currently; and two, we’re in the process of realization, at least in part of our existing long-term investments. Combined, the unwinding and divestment of these investments will result in repatriating a significant amount of capital, and the proceeds will be used to pursue strategic opportunities and rationalize our capital structure. In the near term, however, it will create some earnings volatility, and we view this as a necessary consequence to affect the shift towards more capital-efficient business model.

As we undergo this transition, we’ve made the decision to spend our quarterly dividend. In 2019, we paid out a total of $7.5 million to shareholders comprising of $5.7 million of dividends and $1.8 million of share buyback. While we expect to continue to deliver positive adjusted funds from operations and generate proceeds from realized investments, our overriding objective is to achieve increased shareholder value. We believe that directing available funds to achieve strategic opportunities and share buybacks included in our recently renewed normal course issuer bid will allow higher shareholder returns and distribution of dividends — correction, than distribution of dividends. We recognize this has caused angst for certain shareholders, as our Board and management are significant shareholders too. We strongly believe that upon completion of the revisioning of the balance sheet, our business will deliver significantly greater earnings per share, and we will resume dividends.

With that, I’ll turn the call over to Mike, who’ll review the financial results.

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Michael John Overvelde, Crown Capital Partners Inc. – Senior VP of Finance & CFO [3]

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Thanks, Chris, and good morning to everyone on the line. Just kind of quickly go over the financial highlights for the first quarter. For Q1, we did report a net loss of $1.2 million. That was the result of 2 primary factors: one, we did record a net loss on investments of $3.2 million, that relates mainly to investments in Crown Power — Partners Funds, including a realized gain of $0.3 million and an unrealized loss of $3.6 million; and two, our results include a $1.6 million net loss attributable to WireIE, which includes depreciation expense of $1.9 million with WireIE contributing EBITDA of positive $0.3 million in Q1.

Taking a closer look at the revenues. Interest revenue decreased year-over-year from $8 million to $7.3 million, but was up modestly from Q4 levels of $7 million. The year-over-year decrease is mostly because last year’s Q1 number included $1.7 million contribution of additional interest that resulted from 2 loan prepayments in that quarter, with no such bonus interest earned in Q1 of this year.

Fees and other income in Q1 were $0.3 million, and that’s comprised almost exclusively of our royalty revenues. We did earn, I think it’s important to note, $1.2 million of transaction fees in the quarter, but since all of these fees this quarter relate to loan investments that we carry at amortized costs, the full $1.2 million was deferred and will be amortized into interest income over time. As mentioned, we recognized a net loss on investments of $3.2 million in Q1, down from $13.5 million investment loss we recorded last year when we recognized a loss in relation to the Solo investment. $0.3 million realized gain we recognized this quarter represents a partial recovery in respect to the Solo investment that we achieved through the receivership process, and the unrealized loss on investments of $3.6 million is attributable mainly to reductions in the fair values in the Partners Fund of the Ferus awards and the investment in source.

The $2 million network services revenue from WireIE is comparable to Q4.

Looking at the expense categories, just taking a quick rundown here. G&A was $0.6 million, that was up a bit from $0.5 million last year, and that includes $0.2 million from WireIE versus 0 from that division a year ago. Salaries and benefits were up by $0.8 million to $1.5 million. That includes amounts in relation to WireIE that obviously weren’t there a year ago, and we’ve made a normal accrual in respect to annual staff bonuses, whereas in Q1 of last year, we accrued 0 for bonuses. Finance costs of $1.6 million are up versus $0.7 million last year, simply reflecting a higher average level of outstanding debt, as you’ll see from the balance sheet. And depreciation expense was up from $35,000 a year ago to $1.9 million this quarter. That’s entirely attributable to the addition of WireIE.

We did recognize a $0.3 million provision for loan losses compared with $0.1 million a year ago, just recognizing, I guess, the risk environment. We note that relative to year-end, there’s been no change in the number of loans classified in stage 2.

As highlighted earlier, the adjusted funds from operations showed a nice increase this quarter to $4.2 million or $0.44 per basic share. That compares with $0.7 million or $0.07 per share in Q1 of last year. Total assets increased from about $300 million at year-end up to $338 million. That’s due mainly to the 3 net new loan advances in Crown Partners Fund that Chris referred to and also contributing to that was the addition of amounts in relation to Crown Power Fund that you’ll find spread amongst 3 different balance sheet categories.

We exited Q1 with cash and equivalents of $14.9 million on a consolidated basis. That compares with $8.4 million at the end of 2019, with the increase mainly reflecting capital contributions made by noncontrolling interests into Crown Power Fund that have yet to be invested. Total equity is now $94.8 million or $10.05 per basic share, compares with $10.38 per share at the end of 2019. That decrease attributable to a combination of the Q1 net loss of $1.2 million, and dividends that we did pay in Q1 of $1.4 million. Note that while we didn’t repurchase any shares in Q1, partly due to an extended quiet period surrounding our Q4 results release and also because we were being cautious with the capital, we did renew our NCIB for an additional 12-month period, under which we can purchase up to 550,000 shares.

Exiting Q1, in addition to our working capital, we had access to an additional $64 million of committed capital available from third parties to our 2 funds to fund incremental investment. We also had about $19 million in undrawn amounts available under our 2 credit facilities. We’ll note that after drawing an additional $27 million from our credit facilities in Q1 to fund incremental investment, we’re getting high in the range on certain financial covenants and our access to additional debt funding in the near-term could be somewhat limited. As Chris highlighted, we will be focused on looking for new limited partner capital in each of our special situations in distributed power funds in the near term to support continued growth in each of those areas.

Finally, I think it’s just important to reiterate our commentary from the MD&A as you’re going through our financial results, that commentary dealing with the ongoing COVID-19 situation, just simply denote that the duration of full financial effect of the pandemic on the business, the operations, the financial condition of both Crown and our borrowers, it’s clearly unknown at this time, and the impact has the potential to be material. I want to highlight in determining our loan valuations, our loan loss provisions and risk ratings as at March 31, 2020, while considering the situation, we have not assumed a long-term impact of the pandemic, and we’ll continue to monitor all of our positions and reassess our related estimates and assumptions on an ongoing basis.

With that, I’m going to turn it back to Chris to make some closing remarks.

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [4]

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Okay. Well, thanks, Mike. Clearly, that’s a lot of material in today’s remarks. I just also want to take this opportunity to thank 2 outgoing Directors, and welcome new one incoming Director at this afternoon’s Annual General Meeting of shareholders, Glen Roane and Larry Pollock, who are stepping down from our Board. Glen has been on our Board since the IPO in 2015, and Larry joined in 2018. I have a tremendous respect for both these gentlemen, and we will miss their contributions. I also look forward to welcoming John Brussa to our Board upon his election this afternoon. John is a very well-regarded Calgary-based businessman, and I’m confident he will be a strong addition to our team.

In summary, I want to thank our shareholders and analysts for their support and interest in Crown. Our team strongly believes that through the execution of the strategy, we’ll emerge as a more diversified finance platform with a larger market opportunity. In our view, earnings per share more than any other financial measure is the most powerful way to drive shareholder returns. We believe these changes will better position us to deliver consistent growth in earnings per share. We look forward to updating you in the coming months on the execution of our priorities we outlined today.

So with that, we’ll turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Nik Priebe with BMO Capital Markets.

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Nikolaus Priebe, BMO Capital Markets Equity Research – Former Associate [2]

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Okay. I just wanted to start with a few questions around portfolio health. As one of your larger investments, I was wondering if I could ask for an update on PenEquity? I noticed that the risk rating moved up sequentially. I do recall that loan was in arrears for the past few quarters, but if I understood it correctly, I think that status related more to project timing issues than ability to pay. So I’m just wondering if you could give us an update on how that business is performing through all of this.

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [3]

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Sure. Again, I’ll try to be a little bit guarded with my remarks, it is a private company. But generally, it has been in arrears. They were going through a series of transactions that were going to dispose of certain assets that would be used to both catch up on arrears and pay down debt. The — it is public information that one of their key assets, a very commercial development, has run into financial difficulties. And the lenders have called a loan and put a receiver in. The — that instance in itself doesn’t have tremendous amount of impact on our loan. We had not a lot of value in our schedules attributed to that property. But it does set other things in motion that we’re currently working on. We see the underlying collateral being very strong properties. And at this moment, we feel that we’re very well covered in our security. But given the destabilizing effects of what’s happened in the varied commercial property, we’re going to be looking to restructure that loan in some way. That is an ongoing conversation.

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Nikolaus Priebe, BMO Capital Markets Equity Research – Former Associate [4]

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Okay. Got it. And then just for your investments with exposure to oil and gas, and some of them that come to mind like Touchstone, Persta and Triple Five. I was wondering if you could just give us a bit of a general update on how those businesses are adapting. And whether you consider payments as sustainable at current energy prices?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [5]

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They’re all — they’re very 3 unique situations. So you really can’t broad brush them like Persta and Triple Five are somewhat similar in the sense they’re both Western Canadian heavily — like Persta is entirely gas, whereas Triple Five is maybe 80% gas. And as you may know that gas prices have actually strengthened in the last — yes, probably the last 6 months, consistently continue to strengthen. The — our operators have been able to lock in hedges through a good chunk of next year even at very good prices. So we’re not actually seeing any signs of — in fact, it’s quite the opposite. There are signs of a lot of improvement. They’ve been through their own recession as gas prices were quite low previous to the last 6 months.

Touchstone is very oil-based. But if you read through, it is a public company, their disclosures, they’ve had some really significant discoveries on the new exploration side, and those are all gas. So those are — that’s where a lot of value that’s being created. And they’ve raised a lot of equity value too. They closed $11.5 million U.S.-round, I think it was early March or late February. So they’re extremely well capitalized. And we’re first lien positioned on all 3 of those companies. And so we don’t actually feel that there is a lot of stress in those companies.

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Nikolaus Priebe, BMO Capital Markets Equity Research – Former Associate [6]

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Okay. That’s great color. And then one last one for me before I pass the line. For those portfolio companies that are compelled to make significant changes to adapt to this new environment, have you considered offering payment deferrals or any other source of relief on a case-by-case basis for any of your portfolio companies that do encounter a period of kind of acute financial stress?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [7]

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Absolutely. No, I think you need to — it is on, absolutely, you say, a case-by-case basis. Like these are like any company that they’re worth more operating than dead. And this is an environment where there really is a no bid environment. So any lender thinks they can call loans in order to get money out of it is just delusional. So like what you need to do is do what you can to — do your part to keep the company solvent, and as I made in my remarks, compared to 2008, we’ve got some really strong companies in the portfolio that some are going to get — someone like a Source is directly in the crosshairs of what’s happened here.

But if you look at a company like Source, this is an infrastructure company that’s going to be required on the other side of this recession. So what we need is the lending groups to work together to achieve that. And so — and others, we have, as I said, are almost unaffected by this. Like we have a very much a — we’ve been anticipating recession now for years, like I would say, for 3 or 4 years, it’s been part of our underwriting thesis. And we’ve asked ourselves, how does this company survive in a recession? And so far, everything is performing as we would expect it to.

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Operator [8]

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Your next question comes from Chris Murray with AltaCorp.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division – MD of Institutional Equity Research for Diversified Industries & Senior Analyst [9]

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Just — Chris, maybe just thinking about the strategic update. I mean, when I read this, in a lot of ways, it’s very similar to what we talked about back at the Investor Day, maybe a year and a bit ago. And thinking about wanting to get into more diversified stuff. And at the time, you talked about maybe coming back off your ownership in some of the funds. I guess what I’m trying to square is, how is this — how has this kind of disclosure changed versus what you were talking about? Is it may be moving more from theoretical to, we’ve kind of agreed, this is what we’re going to do? Just trying to get a better explanation for essentially what you think Crown is going to be in the next 5 years.

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [10]

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Okay. Well, it seems like that Investor Day was a long time ago, the — and that was earlier in our Power Fund, very early in the Power Fund developments, we’re making the case, we were diversifying out of just being a pure lending platform. And that we would be really not pursuing on balance sheet long-term loans, but looking at these other asset classes. As you would be aware, we had some start-up bumps as we’ve worked through the development of Power Fund. I believe there’s probably other bumps coming, but nothing like the real start-up ones. And so we lost a little bit of time in terms of creating it, but I believe today, we’re firmly on the right path. And we can see the pipeline develop. We can see that projects come to fruition.

So we feel — like I just — so take that — I mean, maybe take 9, even possibly 12 months out of that, and we’re right on track. I think the difference is one of magnitude and one of speed. So we were contemplating maybe modest reallocation of capital before, and really keeping our loans. Like our allocation loans, we aren’t just really adding to the balance sheet to make other ones. I think now, we’re talking about is actually divesting of certain assets in order to get that money free. And as I mentioned earlier, we’re going to use that for new opportunities as well as sort of capital buybacks and whatnot. So that — just the magnitude is different, and the speed is different.

In terms of the long-term strategy, if you use the — I’ll just use the Power Fund as one of the examples, and we can apply that to the others as well. The goal is that, we’ve launched a fund, we’ve seeded it with our own money, we believe very much in the quality of the assets and the ability to raise funds around that strategy. So we don’t need to continuously put Crown’s money at that. Like, there’s — these are very financeable — fundable assets by third parties, and — to which Crown has a management fee stream as well as a direct share of the operating profits. And as those things go without really any capital increases to that, we’ll make a good return. We will make the same return as our institutional clients make for our investments. We’ll have this whole new line of revenue that doesn’t exist today. And given the scale of that business, we just believe that can be probably as great as the portfolio in its entirety produced today in earning income. So that’s the model, and then you start applying that to the other business lines we’re working on as well, and say that would be, I think, a very valuable company.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division – MD of Institutional Equity Research for Diversified Industries & Senior Analyst [11]

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Okay. And then just moving through, thinking about the transition. So you’ve talked about winding down the long-term financing transactions. You talked a little bit already about I guess, either restructuring or calling the PenEquity loan in some way. And I note in the MD&A, you’ve issued a demand note to Mill Street. So I guess the assumption is that you’ll just receive that capital back and then move forward. And then the other question I have for you is, in terms of the — your intention to reduce your ownership in the Crown Partners Fund from 39% to 20%, do you have third-party LP interest today? And is that from existing participants? Or is that something that you’re going to have to go out and source?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [12]

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So I think, yes, maybe just to ground those numbers a bit. Like if you look at the long-term deals together, there’s $35 million, and we have a $75 million investment today in the debt fund. So you’re talking about something in the magnitude of $70 million, $80 million, that we have sort of positioned in our minds to bring back. That’s obviously a significant amount of money relative to our debt position today and our market cap. So the question comes as to how quickly, how aggressively you need to push on that? And your third question is, how much interest is there? Given that, that partners fund is our “core business” today, there may be opportunities for certain people to go and just see liquidity at discount. But we very much don’t feel that, that fund needs to be at a discount. We think that’s a very good quality fund in today’s world. It will likely emerge as one of the top quartile funds like our fund in 2008 did as well. And we need to find the right investors for it. And so we have some institutional appetite. I think our current group of LPs is a great group, and what is relatively full in their allocation. I wouldn’t — some of — we have really 3 anchors in addition to Crown, all of them are in that sort of 15% to 17.5% range. Like I don’t really want anybody taking a much bigger interest in that if you’re going to ideally manage it. So we’re really looking to get some fresh blood into that. And I actually, as I made — mention, like, the goal is to bring that fund up to $500 million. So we definitely need some fresh blood in that fund.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division – MD of Institutional Equity Research for Diversified Industries & Senior Analyst [13]

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Okay. And then just the — in terms of long-term financing transactions, thoughts around timing on being able to recoup that $35 million?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [14]

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I think given the exact moment we’re sitting right now, that’s a tough thing to call. I think that we’ve 2 different situations, and I don’t really want to get into details just given they are active negotiations, but they range from, some of them, we can probably get back relatively quickly, or some that may have to take some time to think through, and some that might be more opportunistic for us to work through over time. And we have — again, we — this is almost a daily exercise as we work through these things. So we’ll have more to update in the quarter. Yes.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division – MD of Institutional Equity Research for Diversified Industries & Senior Analyst [15]

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Okay. And then I guess the last question, and it goes back to your, I guess, initial comments around the fact that the rationale for doing the IPO really, I think, at least from your commentary, sounds like maybe hasn’t worked the way you had expected. In terms of strategic options, I mean, is there any thought around the rationale for staying as a public company? And is it — does it make it easier if you maybe return to being private?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [16]

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Yes. I have definitely thoughts. I wouldn’t say that — I’d be lying if I didn’t say there was thoughts. The question is that we get lots of thoughts, like what is the right next step to take? And the decision of the Board and management, we think the right next step is to do is reallocation of the portfolio, and then make some reassessments then. There’ll be a whole lot more information as quarters go by, as we see the evolution of our Power Fund and even our burgeoning telecom business. We’ll dictate what the right course for the company is. I will flatly outstate this that if things continue as they are, it doesn’t make any sense to remain as a public company. So like — but we do believe that there are some very significant opportunities for this business, and that the market we have and the shareholder base will probably want to own those.

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Operator [17]

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(Operator Instructions) Your next question comes from Trevor Reynolds with Acumen Capital.

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division – VP of Research & Equity Research Analyst [18]

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I just wanted to — just wondering about the new partner that you talked about in the release there on the Power Fund side in Alberta, maybe just touch on that a little bit. And also just kind of where deployment, where you see that going in the current environment on the power side?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [19]

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Sure. Well, the partner is a company called Lionstooth Energy. The principal is a fellow named Geoff Lester. Geoff’s an expert in the Alberta power markets and has a significant history of advising energy companies on their electrical requirements. He’s been, as we have — as many have been seeing the evolution of the Alberta power system. And if you look at who some of the larger consistent power consumers are, it’s these natural gas midstream assets that — and so he and we have a view that, as the Alberta grid changes from one of coal-based load to essentially to be natural gas-based load in the next 10 years, a lot of that should happen on these natural gas plants, where you have just one of the cheapest sources of fuel that’s available. So we are actively negotiating numerous facilities through Lionstooth. I’m sorry, Trevor, what was the second part of your question?

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division – VP of Research & Equity Research Analyst [20]

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Sorry. Just curious on the deployment level, I guess, and how the power side has been functioning through the downturn here.

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [21]

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Deployment, with the almost rare exception of a few larger — like on some of the incumbent utilities where they have deemed some of our interconnection to be nonessential service, construction progresses. So it’s — we really haven’t seen any disruption on the kind of operational side. Like on the ones — we have one plant operating right now and a couple more coming on in the next 30 days. Like, the need for the power hasn’t changed. These are businesses that continue to operate. The — I would say that the situation has probably heightened people’s consciousness of reducing expenses, that we’re — as I said, we’re — it’s guaranteed — we’re technically in a recession. I expect it to be a fairly severe one that is prolonged, I think I’m not alone in that view. And people are going to be looking to ways to save money. And so this power solution does save companies meaningful amount of money. So we actually see no change in the pipeline. And in fact, we continue to see additions to the pipeline.

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division – VP of Research & Equity Research Analyst [22]

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Okay. That’s great. And are you able to quantify what you expect kind of in deployment over the next 12 months on that front?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [23]

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We’re going to be coming up on that in the next quarter or so, like we’re going to try and formalize that for everybody. Like the one thing that COVID has done is it’s made getting stuff done more difficult, including our own businesses. And we had intended to have a Investor Day or an update, together with our AGM this year, and of course, that’s — now we’re doing a virtual AGM. So sometime in the coming few months as COVID starts to let off and we get back to some normal operations, we’re going to — we’ll give a more fulsome update in terms of where it goes. Like maybe the broad stroke numbers are — and I got to be careful, because I look at numbers 2 ways. We look at what’s committed, because sometimes we had to commit to projects before we even necessarily contract them. And then we have contract, and then you have what’s operational and what’s in development. The numbers move all around, but it’s a pretty safe assumption what’s in the near line of sight is $150 million of projects. That one we have almost locked down. Over the next few years, we expect that to be in the several hundred million, half-billion range. So the exact timing of things is where things move a bit, project delays and — but it’s a very significant amount of capital relative to where we are today.

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division – VP of Research & Equity Research Analyst [24]

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Perfect. And then maybe I did miss this, but just in terms of the timing of going from that 39% in the Crown Partners Fund to 20%, do you have any guidance on that front?

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [25]

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Yes, like I said earlier, with Chris’ comments — or questions, it’s — there are range of investors out there. What we want is the right ones. This is a good fund. It’s got some great LPs in it. And we want to add the right LPs to it. There are — obviously, there’s secondary funds out there, too, and their business is purely just to buy interest in funds and work them out. And their business operates traditionally with a discount. Credit fund discounts are going to be less, in my opinion, than the equity fund discounts in today’s world. But — and that — in a purely financial trade, that would make sense for Crown to take some level of discount on its assets in order to repurchase other assets or liabilities of ours at even greater discounts and just capture that spread. I think we have both a highly discounted share price and a highly discounted convertible bench out there. But you need to do these things prudently. And it is — you have to look through how not to disrupt what is basically the core business today.

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Operator [26]

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Mr. Johnson, there are no further questions at this time. Please proceed.

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Christopher Allen Johnson, Crown Capital Partners Inc. – CEO, President & Director [27]

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Okay. Well, I realize this is a doozy, so I appreciate everybody joining today. And of course, as these things sort of digest and you think about them, feel free to reach out to Mike and I. And stay safe, stay well.

That’s it. Thank you.

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Operator [28]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.