Q3 2021 Barings BDC Inc Earnings Call
[music].
Reading at this time I would like to welcome everyone to the Barings BDC, Inc Conference call for the quarter ended September 30th 'twenty 'twenty. One all participants are in a listen only mode. A question and answer session will follow the company's final remarks, if anyone should require operator assistance during the conference.
Please press star zero on your telephone keypad.
Today's call is being recorded and a replay will be available approximately two hours. After the conclusion of the call on the company's website at Www Dot Barings BDC Dot com under the Investor Relations section.
Please note that this call may contain forward looking statements that include statements regarding the company's goals beliefs strategies future operating results and cash flows. Although the company believes these statements are reasonable actual results could differ materially from those projected in forward looking statements.
Statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled risk factors and forward looking statements in the company's annual report on Form 10-K for the fiscal year ended December 31st 2020, and quarterly report on Form 10-Q for the quarter ended September 32021.
You just filed with the Securities and Exchange Commission.
Barings BDC undertakes no obligation to update or revise any forward looking statements unless required by law.
At this time I will turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
Thank you Lori and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our third quarter 2021 earnings presentation. That's posted on the Investor Relations section of our website.
On the call today, I'm joined by Barings, Bdc's, President and Barings co head of global private Finance Ian Fowler.
Brian Hi, Barings head of U S special situations and co portfolio manager and the Bdc's Chief Financial Officer, Jonathan Bock.
Before Ian and John.
The details of our portfolio in third quarter results I'll begin with some high level comments about the quarter.
The things we highlighted in the second quarter continued into the third most notably robust market activity in the U S and globally with elevated deal volumes and increased competition and this increased activity associated with portfolio velocity helped drive the stable earnings profile and dividend increase we will outline today.
Let's begin with the market backdrop shown on slide five of the presentation.
The backdrop remained largely the same in the third quarter with elevated broadly syndicated loan prices and strengthening BDC equity prices.
Any bdcs trade at or above their pre COVID-19 highs and the competitive market for private credit assets drove associated BDC net asset values and valuation premiums higher.
D C steady stable return performance continued with the highlights summarized on summarized on slide six of the presentation.
Net asset value per share was up one penny in the quarter to $11 40, our net investment income increased to 23 cents per share aided by accelerated OID from repayments as well as increased interest income associated with that portfolio growth.
The underlying stability of our net investment income is further enhanced by our incentive fee structure as our earnings continue to exceed our 8% hurdle rate and remain in the investment catch up.
As a result of these trends our board elected to increase our fourth quarter dividend 22 cents per share equating to a 7.7% yield on our net asset value of $11 40.
Regarding new investments, we had originations of $276 million in the third quarter. This was offset by $232 million.
Sales and prepayments 89 million of which were sold to the JV.
Our investment portfolio continues to perform well in the third quarter and remains valued at above original cost. We had one new non accrual investment from the acquired M. D. C portfolio. According to 70 basis points of total.
Portfolio of fair value.
Slide seven outlines summary financial highlights for the quarter and the third quarter increased investment activity and associated portfolio velocity continues to drive total investment income and net investment income higher both on an absolute and on a per share basis.
Net unrealized depreciation was $3 3 million and this was offset by $3 8 million of net realized losses, but the majority of those moves due to a foreign currency hedging.
Net leverage which is leveraged net of cash short term investments an unsettled transactions was 1.19 times and remained within our target range of four nine to 1.25 times.
Additionally, many of you might recall, our recent announcement related to the acquisition of Sierra income Corporation on September 21st.
Well not outlined details of that transaction on this call and would direct any interested investors to our proxy statement that was filed on October 29.
That said I do believe the transaction crystallizes, the strong return and growth opportunities. We have at bearings globally, we remain a leader in our core markets with an extremely wide investment frame of reference, but it allows us to be selective when competitive market forces increase our commitment to industrial alignment exhibited by our incentive fee structure provides an earnings cushion against unforeseen events.
When our net investment income exceeds eight the 8% hurdle rate recall a decline in earnings caused by non accrual loans or having to refinance assets at lower yields, but first result in a lower incentive fee insulating investors from those negative items.
Now I'll turn the call over to Ian to provide an update on the market and our investment portfolio.
Thanks, Eric and good morning, everyone. If you turn to slide nine you can see additional details on the investment activity that Eric mentioned, our middle market portfolio declined by $46 million on a net basis in the quarter with gross fundings of 165 million offset by sales and repayments of 211 million.
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New middle market investments included 16, new platform investments totaling $107 million and $58 million of follow on investments in delayed draw term loan fundings.
We also had $106 million of net new cross platform investments in the quarter with the majority of that attributed to our closing of eclipse business capital.
We continue to believe portfolio repayments will remain elevated across the market and in the third quarter Barings BDC experienced increase in repayments along with the associated fee income acceleration.
Of our $211 million in middle market sales and repayments prepayments $88 million was associated with full repayments. This quarter $4 million was from partial pay downs and the remaining $117 million or sales predominantly to our joint venture.
Recall joint venture sales enable us to increase portfolio diversification, while maintaining a prudent leverage profile at barings BDC.
Slide 10 updates of data we show you each quarter on middle market spreads across the capital structure as capital seeking private credit return enters the market at a rapid pace market conditions become extremely competitive as evidenced by spread compression loosening terms and higher leverage levels turn.
Slide 11, as we outlined last quarter unit tranche executions were expected to provide a level of pricing premium when compared to first lien second lien structure as a one stop financing solution provides private equity sponsors with ease of execution.
Today, the spread differential between a unit tranche transaction and a first lien second lien execution is approaching all time tights. Additionally, investors can see that covenant light issuance in unit tranche transactions is at an all time record.
Bridge of our investment portfolio from June 30 to September 30th as shown on Slide 12 on Slide 13, you will see a breakdown of the key components of our investment portfolio on September 30th.
As we have discussed in the past the goal of this slide is to provide details on the three key categories of our portfolio, which are in our middle market portfolio.
The legacy MVC capital portfolio.
And our cross platform investments the.
The middle market portfolio remains our core focus and makes up 70% of our portfolio in terms of total investments in commitments and 67% of our portfolio in terms of revenue contribution.
This portfolio is comprised of 133 portfolio companies with geographic diversification across the U S Europe and Australia regions.
Underlying yields on our middle market investment portfolio of six 7% remain reflective of our boring is beautiful approach to credit.
For our middle market portfolio weighted average first lien leverage was five times consistent with our borrowing is beautiful investment approach. In addition to our middle market exposure, we continue to draw upon barings' wide investment frame of reference and complement our core portfolio with 13 investments and the legacy MVC capital portfolio.
And 24 cross platform investments, which have yields had fair value of 13, 8% and eight 4% respectively.
We had one non accrual at quarter and accounting for 70 basis points of the fair value of the portfolio, which was associated with the acquired M. D C portfolio.
Importantly, no bearings directly originated loans are on nonaccrual and the total portfolio had no material modifications to the cash payment terms of our debt investments during the quarter.
Our total investment portfolio, excluding short term investments is now made up of 73% first lien assets.
Slide 14 provides a further breakdown of the portfolio from a synergy perspective.
The core borings originated bearings originated portfolio, which makes up 90% of our funded investments is 80% first lien.
This is down from 87% last quarter, driven largely by our investment in eclipse business capital.
The MVC portfolio is comprised primarily of equity second lien and mezzanine debt investments, which brings the first lien component of the total portfolio down to 73%.
With regard to the MVC assets, we saw an uptick in the repayment activity with three investments paying off in the quarter.
Our top 10 investments are shown on slide 15, our largest investment at five 9% total portfolio in the top 10 investments represented 22, 4% of the total portfolio.
Recall, our largest investment eclipse business capital is backed by a large portfolio of asset backed loans conservatively structured inside of the collateral net liquidation value.
Additionally, two investments acquired from MVC capital are in our top 10 holdings remember these are covered by the credit supported in place.
From Barings, LLC, that's reducing potential downside risk.
The overall portfolio remains diverse from an industry perspective, as well with 170 investments spread across 29 industries.
I'll summarize my market comments by saying bearings broad investment scope across geography, and private asset classes allows barings BDC to create an optimal and differentiated asset mix that is not reliant on any single investment product or channel. Furthermore, we.
Choose to look at alignment differently and.
And our focus on an aligned fee structure and hurdle rate gives us the latitude to ensure our investment teams to make the right investment at the right price for the risk.
Being unique is endemic to our culture and our platform and I believe it's a key ingredient to achieving long term success.
Now I'll turn the call over to John to provide additional color on our financial results.
Thanks, Ian and turning to slide 17, Here's a full bridge of NAV per share movement in the third quarter.
Our net investment income outpaced our dividend by <unk> <unk> per share net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of six cents per share while our unrealized depreciation on our investment portfolio and foreign currency transactions, primarily associated with our foreign exchange hedging globin increase.
<unk> per share additional details on this net unrealized depreciation are shown on slide 18, and on the middle market portfolio price appreciation and credit performance, both increased unrealized depreciation depreciation by $1 6 million and $700000, respectively. However, there was a slight offset by <unk>.
The $6 1 million of unrealized depreciation associated with the foreign currency investments due to the weaker euro. This depreciation is offset by our foreign currency hedges on the portfolio.
Our cross platform investments, our total depreciation of approximately $700000, while the legacy MVC portfolio saw total net unrealized depreciation of $1 6 million near the bottom of slide 18, you can see that that credit support agreement with Barings was unchanged from last quarter.
Slide 19, and 20 show our income statement and balance sheet for the last five quarters and as we've discussed our net investment income per share increased to 23 cents for the quarter.
Driven by a $1 8 million increase in total investment income.
Higher dividend income associated with our investment in eclipse business capital and several of our joint venture investments as well as an increase in accelerated OID on repayments drove this increase the increase in total investment income was partially offset by higher interest and financing fees, which rose as a result of increased.
Borrowing levels. The third quarter also saw the payment of an incentive fee to the manager at.
As pre incentive fee net investment income exceeded our 8% hurdle rate.
From a balance sheet perspective on slide 20 total debt to equity was $1 three nine times as of September 30th. Although this level was artificially high given the timing of certain asset sales and was $1. One not 1.19 times after adjusting for cash cash equivalents and then.
Settled transactions turning to slide 21, you can see how our funding mix tied to our asset mix, both in terms of seniority and asset class.
To the end of 2020, our reliance on senior debt has decreased as we have continued to diversify our balance sheet to match our diverse portfolio of assets details on each of our borrowings are shown on slide 22, which shows the evolution of our debt profile for over four over the last three quarters, we continue to.
Have an additional commitment to raise up to $25 million of unsecured debt.
Plus we have the available borrowing capacity under our $800 million senior secured credit facility.
Furthermore, on November 1st Barings, BDC received an investment grade rating of Triple B minus from Fitch, Our second investment grade rating following our <unk> rating from Moody's received in 2020.
Jumping to slide 23, you can see the impact to our net leverage using our available liquidity to fund our unused capital commitments there.
<unk> currently has $99 million of delayed draw term loan commitments to our portfolio of companies as well as 36 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of these commitments if called upon while maintaining Cushing cushion against our regulatory law.
Average limit.
Slide 24 updates, our paid and announced dividends since barings took over as the advisor to the BDC and as Eric mentioned, we announced yesterday that our fourth quarter 2021 dividend will be 22 cents per share an increase of a penny per share compared to the second quarter and a seven seven.
Sent distribution on current net asset value.
With me now to slide 26. This shows a graphical depiction of relative value across the triple B double b and single B asset classes and with spreads across the liquid credit spectrum at or near their three year tights investors rightly outlined the excess spread per unit of risk is increasingly hard to find.
And so investors seeking alternatives, where they can in effect manufacture excess spread per unit of risk in the form of directly originated transactions seizing on both illiquidity and complexity spread premium and we speak often of these pricing premiums relative to liquid credit and this.
Translates into the actual results shown on slide 27, which outlined the premium spread of our new investments relative to liquid credit benchmarks Barings BDC deployed approximately $180 million at an all in spread of 757 basis points, which represents a 327 basis.
Point spread premium to the comparable liquid market indices at the same risk profile now diving deeper into our core middle market segments across Europe, and North America, we averaged 308 basis point spread relative to the liquid market in disease and for cross platform investments the spread relative to liquid market indices with ease.
Even greater at 574 basis points, and we continue to believe our ability to invest across platforms and generate excess shareholder returns via illiquidity and complexity premium will be a key differentiator for barings BDC in the current market cycle.
I'll wrap our prepared remarks with slide 28, and this summarizes our new investment activity. So far during the fourth quarter of 2021, and our investment pipeline.
The pace of new investments remained steady compared to the last two quarters with $239 million of new commitments of which 164 million have closed and funded.
These new commitments, 76% are first lien senior secured loans, 14% are in cross platform investments and 21% are in European or Asia Pacific Australia investments the weighted average origination margin or D. M. Three was seven 8% and we've also funded.
Simply $4 million of previously committed delayed draw term loans the current barings global.
But finance investment pipeline is approximately $3 1 billion on a probability weighted basis and is predominantly first lien senior secured investments as a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline.
And with that operator, we'd be happy to open the line for questions.
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Yeah.
My first question is from Kyle Joseph of Jefferies. Please proceed with your question.
Hey, good morning, everyone.
Congrats on another good quarter.
Obviously, you guys had strong originations, but she's just going through the last couple of quarters of originations I wanted to kind of pick your brain and see how we should.
This impacted the P&L, obviously tiki was highlighted by Eclipse <unk> Cross platform was very strong, but can you walk us through.
Hey, how you're sourcing those opportunities and B, how you anticipate that impacting the P&L.
Sure Kyle So the question was centered in on cross platform investments and how they are sourced and then kind of the forward kind of rates that we're seeing on those types of investments on a go forward basis.
Yeah, and then also talk about incorporate eclipse and the impact on the P&L and whether we should split where the mix between dividend income and interest income forward.
So Kyle you're rightly pointing out rate dividend income increase materially this quarter with the eclipse investment effectively paying 8% a distribution on the equity which is our largest position inside of a BDC that was effectively $1 $7 million of the of the two.
Plus that you see in the financials.
And Additionally, you can see our JV investments in particular on Thompson Livers also paid another $1 million or so these are expected to be ongoing right in terms of distributions. The business models are very stable and most importantly, very differentiated in terms of how they focus on asset based lending and specific as well as our level of unique mortgage.
Origination that come from our strong partnerships I think it would be best to lateral to Brian Hi, when he thinks about the head of our special situations practice in the U S.
Outlined the return opportunities he seeing in these cross platform investments like eclipse and in the forward prospects. So if that's all right a lateral tam.
Sure. Thanks, John and good morning, kind of I guess I would say.
Our.
Our pipeline has shifted over the last couple of quarters, the opportunistic liquid bucket.
As relatively dry theres not a lot of opportunity out there in the secondary markets. We've been primarily focused on special situations, one off investments, where we can provide financing solutions to storied credits and we're sourcing goes through both our sponsor networks as well as.
<unk> agencies that we have relationships with and the space that are representing some of these potential issuers and borrowers so.
That's what our pipeline looks like today.
Think about types of income.
A lot of this is.
<unk>.
What I would call primary issuance of opportunistic financings.
It would it would be primarily generated through interest income as opposed to <unk>.
Something at a steep discount with.
A lot of OID.
And in terms of the Eclipse I think.
Partnering with them it has been.
Very fruitful for.
Both.
[laughter] originating new opportunities on the asset based lending side as well as us.
Looking at potential term loans and in markets that we otherwise weren't werent covering.
Historically.
Got it very helpful. And then my follow up probably more for Eric and in just wanted to pick your brain on kind of your macro perspective.
And how and the potential implications for credit.
Obviously, we've kind.
Lap the easiest COVID-19 comps.
Some uncertainty out there, whether it's supply chain inflation wage pressure etsy.
Et cetera, but just walk us through you know how you how your company and maybe focus on the middle market are doing in terms of Rev and EBITDA growth versus expectations and how you would expect that as a trend.
Let's call. It intermediate term just given your comments about the market remaining competitive.
Eric do you want to.
Macro and then I can talk about the portfolio.
Sure.
No listen I think you just you hit on it right which is.
All we know when we underwrite you'll look at credits is theres going to be something during the life of that credit maybe multiple things that are frankly, unforeseen or and which is why we really stress those downside cases, when we're underwriting deals.
Right now I'd say the biggest thing that we see kind of occurring is what's kind of now playing through and kind of what you saw yesterday's news on the PPI Index and then.
And then this morning, there is always more news on consumer and I think it really is that combination of wage pressure commodity input increases that are that are creating basically margin compression.
Depending on the company.
Some companies can pass through that those increases better than some other companies.
But I'd say in general companies are still performing well.
They're more cautious based off of the.
The inputs there youre seeing that are occurring through inflation basically and to your point some of the supply chain stuff.
But any alternative use talking about anything more specific.
Yeah, and kind of like just following along Eric's comments I mean, when we look at our.
Portfolio I mean, we're definitely seeing.
Decent top line growth across the portfolio.
But on the other hand, we are seeing some wage inflation and other cost input inflation I think a lot of it is driven by the supply chain disruption, which I think has created a fair amount of inefficiencies.
And so like one of the analysis that we've done for example, as you look at natural gas as an example in natural gases I think almost doubled in price and so we've looked at our portfolio and what companies are.
It could be impacted heavily.
By increases in natural gas and for example, we don't have a lot of paper chemical or plastic businesses that would fall in that category, but that's kind of the work that we're doing from a portfolio perspective, but we feel like as.
As Erik said when you underwrite. These deals do you expect certain things to happen and so we do that in our underwriting and we also make sure we pick the right partners on the equity side.
Work through any issues that occur.
Great really helpful. Thanks for answering my questions.
Our next question is from Ryan Lynch of K B W.
And with your question.
Good morning, Thanks for taking my questions first off Eric Congratulations on the promotion to president of bearings.
And then my first question was.
Guys have done a great job.
Overall, I think really investing in some unique areas.
Particularly.
The cross platform investments.
Quits and structured products opportunistic special situations JP as such but as I looked at your portfolio. Currently a lot of those investments are non qualifying investments and that's about 26% of your portfolio.
Today now Sierra also has kind of a similar exposure sounds like that's really going to ease.
The nonqualified bucket, either so as that bucket starts to increase closer to that 30% level does that restrict your ability to continue to kind of source those really attractive unique investments in this environment.
Great question, Ryan the way I would try to look at it too is still included in that 26%.
As a level of exposure to European European direct lending.
So depending on the market environment and in terms of joint ventures, right, where you know.
Things are establishing I think things are running well you.
You can have a relative risk return trade off right and with the ability to sell down and manage our nonqualified asset exposures for diversity occasion purposes down with.
The joint ventures, like our partners in Jakarta, with plenty of capacity to make the investments when we find the right investments to make.
So plenty of capacity and then beyond that many cross platform investments.
When you think about Brian on the special situations and the cross platform side can be qualified I think of some of the stress or distress, either ABL or corporate style lending it kind of fits that bucket. So it still has a pretty wide.
Wide berth.
But at the same time, if we were to find something that was nonqualified, we'd have plenty of levers to move around.
To ensure that that's the.
The best possible use of our capital.
That makes sense.
And then just my follow up and maybe this is not not the way you guys are looking at it but I wanted to ask a question regarding sort of the earnings profile.
PBGC because it looks like this quarter you guys might've gotten above.
The upper end of your pre incentive fee hurdle rate.
And so now at this point.
Do you guys. Because you guys always talked about kind of generating kind of a stable sort of we've always thought about it as an 8% operating ROE. It looks like now you guys are really in a spot where that can actually increase higher than of course.
Hurdle rate's going to change when Sierra closes. So maybe this is kind of a moot point, but.
Are you guys looking to continue to execute the way you are and actually grow.
The operating ROE higher or now that you guys could kind of hit that at 8% Roe.
Is it more of a function of let's turn down risk and generate that stable operating Roe.
<unk> continued to have the safest portfolio, we can generate in that return.
I'd, probably start with kind of how we is the operating or the operating levers of the business.
Likely to puts you above the high hurdle steady state and the answers is yes right there.
A great origination premium coming from our private credit businesses as well as our cost platform investments.
One item that we we've always found from our study of BDC research would be that having both a steady and stable dividend, but at the same time, increasing your net asset value.
That's a very very rare combination and the space and so you'll probably see us continue to operate the way the way, we will where you'll see dividend distributions from our.
Select investments and cross platform strategies.
To associate the yield profile, but then at the same time the underlying earnings of those ventures are probably exceeding those dividend distributions, giving you a level of increase to the book.
So the goal will be to try to shoot right down the middle and ensure that we're paying exactly what were paying at a very very attractive risk profile, but.
But at the same time, recognizing that there is still a level of earnings contribution that's inside these businesses, creating to your net asset value that would be the proposition that we'd be looking to offer in this environment because trying to stress over distribution can come at the sake of sacrificing long term return on EV and you want both.
Stable and growing in a V and it's steady and stable and boring dividend distributions.
No that's helpful and I think makes a ton of sense I appreciate the time today.
Thanks Ryan.
Thanks, Brian.
Our next question is from Lee Cooperman of Omega family Office.
With your question.
I'm relatively new shareholder as a result of your acquisition MVC and I'm very pleased with your performance I congratulate you I'm curious if you could lay out your acquisition criteria, which I assume there'll be more growth coming via acquisition.
<unk>.
We look at it we look at it this way to where we.
We like opportunities that are both good for <unk> shareholders.
Target's shareholders as well as our manager complex right and you have to have the checks and all three were that normally comes out is in situations, where the shareholders of an underlying target are actually being able to be awarded for the benefit of the transfer the management contract so in it and the history.
Of of Bdcs right <unk> seen a couple of transactions.
Think of it.
American capital and a manager that purchased them as well as MVC capital and then now recently Sierra whether it's effectively cash offer to shareholders. As a result of the merger for the contract. So that's a very important combination is that if we are able to use our manager resources to purchase an underlying.
The portfolio at a discount for our shareholders, but the target shareholders are receiving that distribution as opposed to an individual manager that's something that we get excited about and it's rare in this environment, we are but it can and does happen.
So we think about that and then also our view is this is lee as its scale and growth by acquisition strategy is important and there is always a benefit to being big our philosophy is one of big enough and so when we have the opportunity to be accretive to your underlying dividends and net asset value.
We make those decisions and allocate capital and mobilize our manager resources to bear and in situations, where we feel that prices too high we want overtime, we think corporate governance may create more opportunities in the BDC space, but we'll look at them Episodically and always keep in mind that we wanted to make sure it wins for those shareholders as well as well as ours.
Thank you. Thank you very much and good luck.
Thank you Lee and I would just add to what John said too I think that when we have seller boards that see that alignment and seed.
This support agreement, we put in place in the MVC deal. The one that we announced as part of the Euro deal I think those boards look at this in a way that we are we have the manager in this case barings LLC or insulating shareholders from potential downside risk in the portfolio and then remember to extend that portfolio you purchased it at a.
It would be refinanced get back par on those assets all that benefit accrues to the shareholder so that alignment.
Putting our own money behind it.
The cash payment as John referenced as well as the credit support agreement I think when selling board see that they see.
Also as an acquirer that will stay consistent with the shareholder alignment that we've talked about from day one.
Our next question is from Robert Dodd Raymond James. Please proceed with your question.
Hi, guys and congrats on the quarter.
That's right.
Right.
On the.
When I look at slide 13, I'm kind of stick to slide 13, and slide 27.
The total portfolio average spread.
80 bps higher than the middle market, obviously, it's considerably.
The spread of the liquid market seeking hot in that but even a little bit just in.
The middle market sponsor backed business, you're generating 80 bps more.
Related to obviously equity allocation of capital to cross platform and acquired businesses.
Do you think.
The market is conducive to you maintaining or even expanding.
That 80 basis point kind of excess spread in excess value creation beyond whats available in the call.
Private credit middle market today.
I'll start with a comment on on cross platform and then also kind of a discussion of the uniqueness of how we create risk return, which will go to Ian inside of middle market rent, because we stick to our knitting and finding attractive risk return on the on the cross platform side, just given the level of a complexity of premium.
That will access that's basically unique are bespoke.
To the bearings management complex answer is you'll still see a level of yield maintenance.
That spread that you see there Robert and it likely to increase because even in periods, where there's a flush capital right. The the level of human capital or intellectual just our intellectual work that goes into making some of these investments they are very very difficult and when theyre very very difficult you can.
<unk> attractive pricing premium when we see opportunities where that can continue to increase and Brian outlined that in some of our proprietary transactions on that side, but at the same time I just our focus on growth on the middle market side, you know, it's a very it's a very large and wide market, where we're attracting.
Strong sponsors, but I'll turn it over to Ian on spread maintenance inside the middle market.
Hey, Robert.
A couple of things just to throw out there I guess the first thing is again as we look at the middle market, we see different components within the market market segments and there is definitely a differentiation between those market segments in terms of risk return and so on.
Relative value basis, I think you know as we as we look at opportunities, where we're always focus and we are bottoms up in credit fundamental investors and we're always looking for good platforms, but we're also very much focused on the relative Val the value of the illiquidity premium.
That we can we can generate in the market in and pretty much every transaction that we do we're looking at that sort of two to 300 basis point Illiquidity premium and then we really factor in this.
We look at the illiquidity premium on a per ton of leverage basis and so when you. When you look at for example, refinish did our analysis and in the large market your spread for churn of Leverages around 74 basis points in the middle market, It's about 124 basis point.
So on a relative value, we see attractiveness, there, but even within the middle market itself. We focus on segments that are more attractive than others and then the other thing I would point out which is.
Beyond just the the spread when you look at the.
Private equity market and this is another reason why we find this market. So attractive is the most of the transactions that we're doing are financing. The original platform and then supporting that platform as it consolidates and industry and through delayed draw term loans and so every time.
Hugh you finance the growth of that platform, you're generating additional fees.
Youre, putting more dollars to work in.
And we've looked at transactions, where the original platform of call it $15 million in EBITDA with an origination yield of seven 5% generated a IRR of 13, 14%. After everything was said and done as the sponsor grew that business sold it to another sponsor we find.
<unk>.
That acquisition and then continue to finance the growth of that platform until it was ultimately sold to a strategic.
I appreciate that color.
Thank you. Thank you.
And just a follow up if I can.
To the point might be Bdcs out just spread coupon investments that we investments so.
The three tools.
The spread the management fee and the cost of capital and essentially the management fee shifting that and shareholders paper when when Sierra closes on the cost of capital more specifically the cost of debt.
Do you think you can subject to how the treasury market.
Thank you can you can.
Your blended cost of debt, obviously now with two investment grade ratings, you could increase unsecured, but you've always pretty cheap.
How how are you viewing the calculus on maybe shifting the mix acuity secured versus.
Yeah.
Maybe being willing to take the blended cost up a little bit given you have.
Flexibility on it.
And Youll lap is above kind of the hurdle.
So Robert our view would be that.
The unsecured marketplace, particularly public AG both.
Maximizes your ability to deploy capital efficiently across a wide spectrum investments right as opposed to well argue more restrictive bank line style financing and you are seeing the pricing of those underlying on a spread basis of those underlying unsecured inside or certainly at where folks are borrowing on a secured basis.
So you can expect that level of mix shift to continue you're right in pointing out the second investment grade rating also offers a very important point to access the public markets and you could expect to see US do so as we outlined post the Sierra acquisition announcement.
I'd expect more unsecured they may.
Arguably put a slight degree of pressure right now as it relates to the fact that where treasuries are gone.
That being said.
The pickup that you get in the enhanced flexibility to make the right investment and the right structure at the right time.
Probably gives you more enhancement on the topline which makes the unsecured.
Yes.
Well worth the effort.
Yeah.
Yeah.
And that was have reached an <unk> chip. We have reached the end of a question and answer session. I will now turn the call over to Eric long for closing remarks.
Thanks, Hillary and again, thank you for everybody for your questions.
Taking the time to listen into our conversation today in our earnings call and for shareholders. Thank you for your continued support we hope we have.
Pull through with what we committed to you over three years ago. When we started this journey.
<unk> alignment transparency and communication.
And so thanks for everybody's time today, everybody stay positive and stay healthy out there.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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Okay.
[music].
Yeah.
Yes.
Okay.
Yes.