Morgan Stanley Direct Lending Fund (MSDL) Q4 2023 Earnings Call Transcript

Morgan Stanley Direct Lending Fund (NYSE:MSDL) Q4 2023 Earnings Conference Call February 29, 2024 10:00 AM ET

Company Participants

Michael Occi – Head of Investor Relations and Chief Administrators Officer

Jeffery Levin – President and Chief Executive Officer

David Pessah – Chief Finance Officer

Orit Mizrachi – Chief Operating Officer

Rebecca Shaul – Head of portfolio Management

Conference Call Participants

Finian O’Shea – Wells Fargo Securities

Robert Dodd – Raymond James

Melissa Whittle – JP Morgan

Kenneth Lee – RBC Capital Markets

Vilas Abraham – UBS

Operator

Welcome to Morgan Stanley Direct Lending Fund, Fourth Quarter and Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, this conference call is being recorded.

At this time, I’d like to turn the call over to Michael Occi, Head of Investor Relations and Chief Administrators Officer, please go ahead.

Michael Occi

Good morning and welcome to Morgan Stanley Direct Lending fund’s fourth quarter and fiscal year 2023 earnings call. Joining me this morning are Jeff Levin, President and Chief Executive Officer; David Pessah, Chief Finance Officer are Orit Mizrachi, Chief Operating Officer and Rebecca Shaul, Head of Portfolio Management. From time to time, we will refer to Morgan Stanley direct Lending Fund as the company. The financial results were released earlier today and can be accessed on the investor relations section of our website@www.msdl.com. We have arranged for a replay of today’s event that will be accessible from the website.

During this call, I want to remind you that we may make forward-looking statements based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward looking statements, including and without limitation, market conditions, uncertainty surrounding rising interest rates, changing economic conditions, and other factors we have identified in our filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained on this call are made as of the date hereof, and we assume no obligation to update the forward-looking statements or subsequent events. To obtain copies of SEC related filings, please visit our website.

With that, I will turn the call over to Jeff Levin.

Jeffery Levin

Thank you, Michael. I want to welcome and thank everyone for joining Morgan Stanley Direct Lending’s fourth quarter and full year 2020 through conference call. Our inaugural call is a listed company. I’m pleased to report our operating results highlighted by growth in that asset value, strong credit performance, and a well covered dividend for the full year. The company delivered a total return of 16.4%, including growth in NAV and $2.27 per share of dividends. Net investment income per share was $0.67 for the fourth quarter of 2023, and we ended the quarter with a net asset value per share of $20.67.

We are pleased with our results, which continue to deliver strong returns for our investors. This morning, I’m going to provide a brief introduction to the platform and discuss the foundation of our direct lending investment strategy. First, let’s discuss our initial public offering that the company successfully executed in January. On January 23, we priced a base offering of five million shares at the offering price of $20.67 per share, equivalent to net asset value per share.

As of December 31, net proceeds from the IPO totaled approximately $97 million and shares of common stock commence trading on the New York Stock Exchange on January 24. The company is a business development company with the objective to achieve attractive risk adjust returns through our guiding principles, which include long-term credit, performance, preservation of capital, and risk mitigation.

We purposely constructed this company from day one to be a successful publicly traded company focused on driving shareholder value. Our primary investment strategy is to make privately negotiated predominantly first lien senior secured credit investments in US middle market companies that have leading market positions, high barriers to entry, generate strong and stable free cash flow, and are led by proven management teams with strong private equity sponsored backing.

I’m very excited to speak to our compelling investment opportunity, and I appreciate all participants who have joined today’s conference call. I want to start by highlighting what we believe to be our key differentiators to begin. Morgan Stanley direct lending fund’s sourcing platform is comprised of our captive dedicated investment team, Morgan Stanley’s investment bank and the private market solutions team within our investment management platform that makes LP commitments to middle market buyout funds.

This approach allows us to consistently evaluate significant deal flow, and in turn be more selective with investments. Morgan Stanley investment management has approximately $1.5 trillion of assets under management with a deep history in alternatives. As of January 1, 2024, the Morgan Stanley private credit platform in the US managed committed capital of approximately $18.5 billion, $15.6 billion of which is for the direct lending platform where this company resides. There are countless benefits to our team being part of the broader platform, most notably from an origination and due diligence standpoint, which we will delve into in a bit more detail.

We believe that our dedicated origination team is comparable in size and depth to other large alternative asset managers in the direct lending space, and we have deep coverage across the US with offices in New York, Chicago, and Los Angeles covering approximately 400 private equity firms. Our team has extensive experience and longstanding relationships with these firms, having worked with them for many years.

Our direct sourcing team also benefits from the investment banking division, which includes industry bankers, a sponsor coverage team, and other parts of Morgan Stanley that engage with the private equity community every day. These multiple touch points drive deeper relationships, provide idea generation for private equity firms and help sponsors create equity value. Furthermore, we leverage domain expertise across the firm as we conduct due diligence such as our private equity business economists, industry bankers, and government relations team to help select only the deals that best match our rigorous credit standards.

While our platform sourcing and underwriting capabilities benefit from the broader sell side network At Morgan Stanley, all investment decisions are made independently within our business and through our investment committee comprised of senior Morgan Stanley investment management professionals.

Turning to the portfolio, we’ve built a diversified defensive portfolio of directly originated first lien loans to middle market companies that are owned by private equity firms. We look to avoid cyclical sectors, so we do not typically seek to lend to restaurants, retailers, and energy businesses. We’re focused on lending the businesses that generate strong, stable, free cash flow. We do not chase yield or excess credit risk in this portfolio to achieve our investment objectives.

Lastly, on shareholder alignment, we are extremely focused on delivering value for our shareholders. We believe the combination of relatively low expenses of thoughtful fee structure in our defensive investment strategy will help drive shareholder value.

Now I’d like to turn to the market outlook. Looking at the operating environment, we believe that this market presents the opportunity to achieve attractive risk adjusted returns. Private credit was a well covered asset class in 2023, catching the attention of both financial markets and the investment community. We believe interest in the asset class will only continue to grow across both the LP community and borrowers. We believe the middle market direct lending environment continues to be attractive following a slower than typical 2023 as it relates to LBO volumes.

That said, we believe that deal flow in 2024 may increase versus 2023 due to a variety of factors including significant loan maturities and dry powder held by private equity firms, as well as potentially improved visibility in the trajectory for interest rates. US middle market companies represent a large and growing opportunity set, and we believe they will likely require additional amounts of private debt financing for various purposes.

In fact, estimates indicate there are more than $600 billion worth of middle market loans with maturities through the end of 2029 that could require a refinancing event. In addition, data from pre shows that as of December 31, 2023, there was more than $1 trillion of capital raised, but not yet invested by global private equity managers, which could represent a sizable pool of support for both new and existing investments.

We believe these are important dynamics that will provide significant financing opportunities for lenders like us. We remain confident that our origination ecosystem within Morgan Stanley positions us well to capitalize on these opportunities.

With that, I would now like to hand the call over to David, who will cover Morgan Stanley direct lending funds portfolio and investment activity along with financial results.

David Pessah

Thank you, Jeff. Starting with our portfolio, we ended the fourth quarter with a total portfolio at fair value of $3.2 billion, which was comprised of 94% first lien debt, 4% second lien debt, and then remaining 2% in equity. As of December 31, 2023, we had investments in 172 portfolio companies across 30 industries with nearly a hundred percent of our investments in floated rate debt.

We believe that our portfolio diversification, including both loan size and industry, is an important risk mitigation tool, and we look to maintain diversity by selectively targeting non-cyclical industries while preserving low borrower concentration. At the end of the fourth quarter, our portfolio’s weighted average LTV was 43% and our median LTM EBITDA was $80 million.

We believe there’s significant equity cushion beneath our loans in the capital structure and that the portfolio remains well insulated from downside principal risk. As of December 31, 2023, our weighted average yield on debt and income producing investments at fair value was 12.1% and 12% at cost.

As of December 31, 2023. Our two largest industry exposures were insurance services and software, which accounted for 15% and 14% of the portfolio at fair value respectively. These are industries of focus not only because of the investment committee’s expertise, but also the asset like non-cyclical nature of these businesses, which we believe result in strong revenues and stable free cash flow profiles.

In terms of borrow diversification, the average position size of our investments was approximately $18.6 million or 0.6% of our total portfolio on a fair value basis. Further, our top 10 portfolio companies represented approximately 20% at fair value of the total portfolio. Larger borrowers tend to be high quality businesses that we know well and often have grown with over time as their businesses have scaled. As it relates to our internal risk ratings, we maintain a four tier risk rating system. As of December 31, 2023, approximately 98% of our total portfolio had an internal risk rating of two or better.

Additionally, we had only three investments on non-accrual status representing approximately $19 million or 60 basis points of the portfolio at cost for the fourth quarter. New investment commitments totaled approximately $243 million in 12 new portfolio companies and 14 existing portfolio companies. Investment fundings totaled $254 million with $192 million in sales and repayments, which included full repayments from five portfolio companies for net funded investment activity of $62 million.

For the full fiscal year.2023 investment fundings was $632 million offset by approximately $363 million in realizations and repayments turn to our fourth quarter and year end results. Total investment income for the fourth quarter was a hundred 0.8 million compared to $94.5 million for the third quarter. The increase was primarily driven by the deployment of capital and rise in sofa rates on floating rate debt investments.

Total operating expenses for the fourth quarter was $45.3 million compared to $43.9 million for the third quarter. The increase was primarily driven by interest in other finance and expenses. Net investment income for the fourth quarter was $55.5 million or $0.67 per share compared to $50.6 million or $0.70 per share for the third quarter. For the fourth quarter, net change in unrealized appreciation on investments was $1.9 million.

Moving to our balance sheet at the end of 2023, total assets was $3.3 billion, and total net assets was $1.7 billion. Our end in NAB for the fourth quarter was $20.67 per share up from $20.57 per share at the end of the third quarter at the end of 2023. Our debt to equity ratio was 0.87 times compared to 1.16 times at the end of the third quarter. Our target debt to equity range is between one and 1.25 times.

We plan to deploy capital and achieve our leverage target gradually over the coming quarters. Since inception, we have gradually and strategically diversified our sources of leverage. As of year-end, approximately 47% of our funded debt is in a form of unsecured nodes with well led maturities ranging from 2025 to 2028.

Overall, our liquidity position is strong and we remain pleased with our debt. Capital stack distributions under a quarter included a regular distribution of $0.50 per share and a special distribution of $0.10 per share. Our spillover taxable income is approximately $42 million or $0.50 on a per share basis, which we believe provides continuous stability for consistent regular dividends.

In conjunction with our IPO on January 11, our board of directors declared two $0.10 per share special dividends to be paid 195 and 285 days post IPO. These will occur in the third and fourth quarters of this year. Additionally, on February 29, our board of directors declared a regular distribution for the first quarter of $0.50 per share to shareholders of record on March 29, 2024.

Strong alignment with shareholders is a critical dimension behind the structure of our business. I want to take a moment to speak to the features that we believe will help optimize the experience of our shareholders following the IPO. First, we strongly believe that we have a shareholder friendly fee structure. We have a baseline management fee of a hundred basis points on assets and 17.5% on an incentive fee for the upcoming year.

Following the IPO, these have been brought down through waivers to 75 basis points and 15% respectively. Additionally, we proactively instituted an incentive fee cap living in the amount of income-based incentive fees paid in the event of net realized losses.

Also, in conjunction with the IPO, we entered into a share repurchase program to acquire up to $100 million in aggregate of common stock at prices below NAB per share adjusted for dividends. This program will commend 60 days after the closing I of the IPO or on March 26, 2024. We believe this serves as a meaningful demonstration of our commitment to driving long-term shareholder value.

With that operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you,[Operator instructions] we’ll take our first question from Finian O’Shea with Wells Fargo Securities.

Finian O’Shea

Hey everyone. Good morning. Jeff, appreciate your opening remarks on the platform. First on, on the other parts of Morgan Stanley and we’re more interested in the investment bank, but you can include the others. If, if that’s the answer, what, what’s the most meaningful hook you have that attracts sponsors to want to want you as a lender and and how much of an advantage has that been to your origination footprint?

Jeffery Levin

Yeah, sure, Finn, thanks for the question and good to hear from you. Look, I think when you when you look at our business, but 60 people dedicated to private credit here in the US offices, New York, Chicago, and la, the top layer of professionals called the top 15 or 20 or so have been investing in direct lending for the vast majority of of our careers and interfacing in covering and working with sponsors over that period of time.

So the group here that we’ve assembled invest the capital and originates the deals generally independently has the ability to do it independently. And this team could invest really well without all the benefits of being part of the Morgan Stanley ecosystem. Some of the most senior members of the team here have been dealing with sponsors for 25 years, and so understanding which sponsors we lean into and focus on which partners within each firm, which sectors they’re better at investing in than others, so that all that knowledge is here and incumbent within our senior team.

A lot of the deals in the portfolio we’ve seen come through multiple times over the course of our careers as the, as these businesses have traded from one sponsor to another. So there’s a lot of knowledge here, and so this team could invest really well, frankly, outside of Morgan Stanley. But as I mentioned, the team is made better by being inside the firm. And so tangible examples would be when we’re talking to sponsors.

So we cover about 400 names across our business. As I mentioned, there’s a fair amount of overlap with the sales side of the firm as well. And so when we’re, when we’re speaking to sponsors about why to use Morgan Stanley direct lending to lead their financing or come into a club, that’s going to be a pretty narrow group. Oftentimes we’ll leverage the broader relationships that we have across the institution.

So most notably, that’s the financial sponsor, sponsor coverage group, which is interfacing with all these sponsors on a daily basis, advising them for m and a transactions industry sector coverage debt financings on the syndicated market m and a ideas. And so when we’re speaking to the sponsors that we transact with, Morgan Stanley is obviously a household name. They’ve typically known the person from our team within private credit for 10 or 20 years in many cases, but they also know countless people here internally.

And so we’ll, we’ll roll out those and leverage those resources as appropriate. And that could be someone in the sponsor group, it could be someone within an industry sector. So for example, software and insurance are the two sectors were the longest, as you’ve probably noted in our materials, so we’ll leverage the industry bankers within those sectors. It could be someone from m and a, some could be someone from capital markets.

And so the private equity partners that are debating which BDC or direct Lending Manager to use to lead their financing, they’re going to quickly realize that we’re, what they’re going to get from us is not just a, a product on the financing side that provides scale and certainty and so and so forth, but also access to the Morgan Stanley ecosystem in terms of idea sharing and idea generation to help them create equity value, which we think, it doesn’t mean Finn, that we can be off market in terms of our leverage or our pricing or terms, but we think it really does serve as a tiebreaker that results in our being chosen to lead certain deals. So there’s all of that benefit from being inside the firm. The brand value is quantifiably helpful to us. We also have within investment management a fund to funds business, which makes LP commitments to middle market gps called the Private Market Solutions business.

And they have investments in about 150 middle market buyout funds. So again, leveraging those relationships as well is important to our success. So I think when you take a step back and look what we’ve, what we’ve built here, you have a team of about 60 people dedicated to the strategy that in our opinion is as stronger, stronger than any other manager in the space, but adjacent to that team have these other legs of the stool that are critically important that really do differentiate us.

So that’s on the sourcing side and then on the diligence side as well, leveraging the institution, whether that be research analysts, bankers that cover certain sectors, there are clients that are c-suite executives and so and so forth. So long-winded answer Fin but hopefully helpful in terms of how we leverage the firm.

Finian O’Shea

Very much. And you touched on a little of this, but as, as a follow- up looking at the portfolio, you’re, you’re pretty concentrated in the large market club deals, and we’re interested if this is how it will always look. So I, I guess what, what percent of your portfolio now is lead originated and is that a number that you want to grow and ultimately take over over time? Thanks.

Jeffery Levin

Yes, that’s, that’s a great question. So, so the taking a step back. So we started investing this this portfolio in the direct lending business more broadly in the beginning of 2020. And so this was the first pool of capital, actually this direct lending fund at the time it was privately held, it was it wasn’t listed yet.

Obviously we, we conducted the IPO back in January. And so what we started, we had a senior team that had known the sponsor community, as I mentioned for a long time. So this was not a group of repositioned bankers that were new to direct lending, but rather a very seasoned team of direct lending investment professionals both incumbent within our private credit business here that had been here for a while. And then we attracted really strong talent from, from other market leading private credit managers.

And so we had a, we had a senior team that had the pipes in place and the relationships to source really well, but the capital base at the time was modest. And so the strategy back in 2020 was to leverage the relationships that we had and utilize the capital base that we had to invest in the deals that provided the best risk return, obviously. And what’s happened since then is the capital base has grown dramatically.

So as I mentioned, about $15.5 billion of available capital in our US direct lending business, relative to about a billion dollars in early 2020. So the cap, the capital base has been growing frankly to match the origination capability and investment capability of the team that we have here. And so what you’ll find over time is that we’ve increasingly led more and more deals.

About 60% of the deals in our portfolio we’ve led are co-led and that’s been growing quarterly. So for example, in the fourth quarter of ’23 of the new deals that we did, there were 12 deals. We letter co-led nine of them. So we increasingly are going to look to, to lead more deals. That being said we’re invested. We’re, we’re most interested in investing the deals that offer the best risk return.

And part of our strategy is really investing up and down in terms of the size spectrum. So you noted the larger club deals, the weighted average EBIT does is about $150 million. The median is around $80 million. So there, this business really does have a middle market focus as well.

One of the things that I like about our strategy is that our origination pipes are very wide and very deep, and so we can go down market when we think risk return there is really attractive. We can play up market as well in terms of some of the largest deals should we deem appropriate based on the relationships that we have within our team and also more broadly across the institution.

So I think we can be more opportunistic in terms of where we deploy capital and how we deploy capital. And as I mentioned, we have, we have a very senior team here that’s been doing this for a long time and I don’t expect any change in strategy fan to answer your question directly.

Operator

Well now take our next question from Robert Dodd with Raymond James.

Robert Dodd

Hi guys. Going back to, to your opening remarks, if I can, talking about 2024 versus 2023, I mean, obviously we’ve been hearing this from, from a lot 2024 as expected to be a, a real active year, maybe not 2021, but much more active. What are the, what’s, what are the, the puts and takes? I mean, where’s, where’s the risk in that? Obviously, if, if rates come down much slower, is that going to slow activity if they come down faster, is it, is it going to accelerate? It is, it’s an election year and then, but then there’s tax changes next year. So can you give us a, walk through your thoughts on, on what you think the, the, the drivers are that we should look for to, to indicate whether that’s really going to ramp up as much as, as, as, as many participants in this space expect?

Jeffery Levin

Yeah it’s a great question Robert, and, and thanks for it. I think starting more macro as you, and as the, the number one driver of private credit volume is undoubtedly private equity capital deployment. And as I noted earlier about a trillion dollars of, of dry powder there. And so the, the backdrop there provides a real tailwind, I think, to deal flow within our market TBD, of course, in terms of when that money gets invested.

But I think we all ourselves in the general marketplace has very high conviction that that capital will be deployed in the coming years. 2023 obviously was very quiet relative to prior years, so TBD there, but that’s a, a very helpful tailwind backdrop that we have that we think will result in more deployment within the private credit market. But, but you’re right, there’s, there’s a handful of other variables that are going to impact the timing of activity within the private equity ecosystem. The election, obviously towards the end of the year is a significant event. We have some background noise.

Robert Dodd

Sorry for that. Maybe. That’s, yes, that’s my dog right there.

Jeffery Levin

Okay, alright, No worries. So but yeah, there’s a handful of events, Robert, as you notice and factors that are going to really impact what volumes look like this year, the election, as you noted, the rate environment macroeconomic conditions more broadly. I think we’re all hopeful that the spread between what buyers are willing to pay and what sellers are willing to, to sell at from a price perspective that narrows and there’s more of a meeting of the minds, to offset some of the lack of LBO volume.

We’ve seen a fair amount of add-on activity across the market both last year. So to help offset the the LBO volume. So we’re definitely a beneficiary having a portfolio across our private credit platform of over 200 names. Those incumbencies are very helpful both in terms of retaining those assets in a change of control event, but also as those businesses need more financing.

So I think we’re well positioned there. We have a really well diversified book across this fund as well as the others that we manage. So look, we’re, we’re cautiously optimistic that volumes will pick up, but again, I think, relative to some other players in the space, when you look at our size, so the $15.5 billion that I noted across the platform and this, this vehicle being included in that number $15.5 billion is a relatively modest amount of capital when you compare it to the origination power that we have both across our private credit investment team here.

And then obviously the other tentacles that we have out when you include the Morgan Stanley investment banking capital markets in that private market solutions business that I mentioned earlier when I was addressing one of Fin’s questions. And so we think that that dynamic in that imbalance, I’ll, I’ll call it, which is favorable to us of deal flow relative to capital, is really healthy for us and our shareholders definitely benefit from that and are being able to be highly selective as we deploy capital and deploy capital at a pace that we think is prudent, even in a market where deal flows a little bit slower. Obviously we’re not immune to the broader deal environment, but I think we’re we’re really well positioned for some of those reasons.

Robert Dodd

Got it. Thank you on, on that. And actually, next question, kind of also a follow up to comment on the median EBITDA versus the weighted average, right? 80 versus 150. Would you, would you like that to now, would you, would you prefer a narrower distribution where maybe the mean and the median a person together, or, or do you like that being opportunistic at, at the large company end of the market, but also having a significant portion of your portfolio in, in relatively small ebitda? What should, what should we, should we expect the median to creep up? Can you give us any color on kind of like what the long term preferred company size would be in the portfolio?

Jeffery Levin

Yeah, sure. That’s a great question. Look, I think we’re the, the markets obviously don’t stay static, right? There’s points in time when some of the larger companies and some of those financing opportunities we think offer really good risk return. There’s points in time when the, what I’d call the core middle market businesses, $25 million, $30 million, $40 million, $50 million of EBITDA where there’s really good value there.

So it’s I, I wouldn’t tell you that I necessarily would like to see that spread narrow between the weighted average and the median. Some of our bigger positions, most of our bigger positions have been in larger companies, and that is by design. But again, we were in a market in 2023 when the syndicated, when the syndicated loan market was not in a great place. And private credit was a beneficiary of being able to get exposure to larger companies offering really good risk reward.

Obviously the dynamic today is different than that, and so we’re always evaluating the credit quality and the risk return of each independent transaction that we originate and spend time on conducting diligence. But I wouldn’t tell you necessarily there, there’s plenty of deals that we do that are in the million, $30 million, $40 million, $50 million $60 million EBITDA range that we like just as much as a company that generates 200 million of EBITDA.

And that could be, given the sector that they’re in, it could be the diversification of the revenues there. It could be a management team, management team that we think is exceptional, a, a, a sponsor that we’ve seen operate over the last 20 years. And we really believe in their strategy and their execution capabilities. And so there’s a lot that goes into the, the way we break down these credits.

And as I mentioned, we have a senior team that’s been doing this investing up and down the size spectrum, for quite a long time. And so it’s to be determined what the, what the median and mean EBITDAs look like over the coming quarters and years. But rest assured we’ll continue to break down every opportunity individually and deploy capital based on the risk return.

Operator

Once again, that is, once again, that is star one. If you would like to ask a question, we’ll take our next question from Melissa Whittle with JP Morgan.

Melissa Whittle

Good morning. Thanks for taking my questions today. Wanted to start with how you’re thinking about leverage generally your target range, but then also given the environment today and the deal flow that you’re seeing, where within that range would you ideally like to be?

Jeffery Levin

Yeah, so I’ll start and then Dave Pessah here, our CFO given the opportunity to speak as well no change in terms of the the leverage target. One to one and a quarter continues to be the target. Obviously we’re below that range given the capital call that we did at the end of the year. And then obviously IPO proceeds as well. So really no change in terms of that strategy. We’re going to work to get within that range.

I would tell you as soon as practical, we’re, we’re not in a rush to get there. We want to deploy capital really carefully, methodically, so no change in how we deploy capital because we’re under levered today. But no change in terms of the range. Dave, anything else that?

David Pessah

And I would just say that we’ll, we’ll, we’ll try to strive to be probably at the midpoint of that range is, is really the ideal spot. And what, what be benefits us is that our debt stack is well diversified too, just to mention. So we, we have, we have two different types of credit facilities. Our unsecured notes are, are laddered quite well as with, with the nearest at the, at in the fall of 2025, and then the one after that in 2027. So we, we do have definitely a lot of room to maneuver within our debt capital stack.

Melissa Whittle

Certainly that makes sense. In terms of sort of progress in levering the portfolio certainly take your point that there’s no rush to do that, but eager to do it as soon as it’s practical. Is there anything that you can share with us in terms of sort of progress quarter to date, given that we’re, we just entered the month of March?

David Pessah

We’re, we’re actively deploying capital as, as Jeff kind of alluded before I, our, our goal is to somewhere between the next two to three quarters to get back up into that Midco. But that’s, that’s, that’s how we’re actively thinking about the, the growth of our portfolio.

Operator

And once again, that is star one. If you would like to ask a question, our next question will come from Kenneth Lee with RBC capital markets.

Kenneth Lee

Hi, good morning. Thanks for taking my question. Realize it’s always difficult to, to forecast, but just want to delve into, into potential expectations around debt pay downs over the near term. And relatedly, how do you think about any potential trajectory in terms of fee income over, over the near term? Thanks.

Jeffery Levin

Sure. Ken, thanks for the question. Good to hear from you. When you say debt pay down, do you mean the loan investments that we’ve made being repaid?

Kenneth Lee

Yes, that, that’s it.

Jeffery Levin

Okay, great. Yeah. Look, in, in in the fourth quarter, five deals we saw full repayments in combination of refinancing dividend recaps, businesses trading from one sponsor to another. look, I think as the portfolio seasons, and we started investing out of this pool of capital, as I mentioned in Jan 2020. So as the portfolio seasons repayments will increase. I would expect 2024 repayments will be higher than 2020, ’21, ’22 and ’23 for obvious reasons.

There’s a bit of a natural hedge, I think though, as well in that if there’s a if there’s an M&A market, an LBO market where these businesses are trading from one sponsor to another, that would mean that there’s a fair amount of deal flow where we can deploy capital as well. So I think there’s a natural uptick in repayments that people should expect over this year relative to prior years for that reason, just natural seasoning of the of the portfolio.

Obviously that’ll be partially driven by just the overall deal environment as well. But I also think it, it, it presents opportunities so it know across the deals that that were repaid, we could have deployed redeployed capital into all the situations and, for certain reasons, sometimes we do and sometimes we don’t. And so, the, the portfolio management side of what we do, while we have a fully robust effort here led by Rebecca who’s here with me and so we do a lot of work on a weekly, monthly, quarterly basis mining this portfolio, really getting our arms around what is happening. And just ’cause the deal was a great one for the last three or four years, may not mean it’s a great one for us for the next three or four or five years. And that could be based on a different type of capital structure.

It could be more leverage, it could be a use of proceeds via a dividend, it could be a covenant package that we don’t like. And so the, the, the, the resetting of these deals and the refinancings of them does provide us opportunity to get out if we so choose. And typically we have the option to roll as well, if we want to. And so it’s not necessarily a bad thing in my opinion. A as, as repayments and refinancings may take up over the course of the year. And to your, to your second question on the, the fee related income associated with repayments, that that is not a major part of our top line investment income. For the most part, about 98% of our, our income, just this last quarter alone was really relatively just in pure interest in dividend income. And on average, the prepayment income is roughly around 1% of our total income.

Kenneth Lee

Gotcha. Very helpful there. And just one, one follow up if I may, and this is piggybacking an earlier question around focus on between the upper middle market and middle market segments. Why don’t we just further flesh that out? Could there be a more relative attractiveness within, for example, the middle market segment, especially as the broadly syndicated loan markets have been normalizing? Thanks.

Jeffery Levin

Sorry, I, I missed the middle, a couple of the words broke up in the middle of your question. I apologize. Do you mind just repeating the question?

Kenneth Lee

Yeah. Just in terms of focus between the middle markets or the upper middle market segments, wondering if you could just further flesh it out in terms of the attractiveness.

Jeffery Levin

Yes, yes. The focus was the word I didn’t get. Sorry for that. Okay. yeah, look, I think the it, it goes without saying. I think that given the health of the syndicated loan market right now, that some of the largest deals that in 2023 would’ve potentially come to the private credit market. So think the $2 billion — billion, $2 billion, $3 billion type financings that may have come to the private credit market last year, given the health of the syndicated loan market, those deals certainly could go to the public market this year. There’s obviously several factors that management teams and private and private equity owners think about when it comes down to choosing between private credit and syndicated. It’s not all about price.

Obviously prices is an important component, but also the terms, the certainty, execution and so and so forth. And so, as I said before, our, our focus is all over the map in terms of size here in the US. And so, we, we won’t change our coverage strategy or our investment strategy based on the syndicated loan being stronger. So for example, we cover sponsors of all sizes. And so it’s not like we’ll take the foot off the gas uncovering some of the largest sponsors, the $10, $15, $20, $25 billion fund sizes. ’cause A lot of those private equity managers invest in large companies, but they also come down market all the time.

And so we’ll continue to stay in front of all those sponsors, both through our investment team dedicated to private credit, as well as leveraging the broader institution. As I mentioned before the number of, number of the largest opportunities that we saw last year. Again, those, we may or may not have the opportunity to deploy capital into this year, depending if those company, if those deals go to the syndicated market.

So you may find that over the course of the year, if there’s just more general middle market opportunity to deploy capital, that we skew that way, that would be a symptom of the opportunity set. But again, really breaking down every deal individually. But it’s only early March, right? A lot is going to happen over the course of the year. And TBD frankly, in terms of where within the size spectrum we think offers the most value from a risk return standpoint. ’cause I said earlier, these markets won’t stay static, that’s for sure.

But I do think that we’re exceptionally well positioned to capitalize and invest really well, irrespective of what’s happening in the syndicated loan market relative to private credit. Again, based on our sourcing pipes and our differentiation in the market, and how we can really provide management teams and private equity owners with, frankly, a lot more than just the financing product. And we can really help them as partners, create equity value for themselves to ensure that we can get in, whether we lead them or get into these narrow clubs that for the deals that offer the best risk return and really avoid adverse selection at all costs.

Operator

Thank you. We’ll take our, we’ll take our next question from Vilas Abraham with UBS.

Vilas Abraham

Hey good morning everybody. A lot of my questions have been asked already, but may maybe can you guys talk a little bit just about your overall outlook on, on credit quality from here? And any EBITDA growth trends that you could share from your portfolio? That’d be helpful as well. Thank you.

Jeffery Levin

Yes, yes, sure. Great question. So, look, the, the portfolio’s in great shape, as you heard from us before, we, have deployed this capital extremely carefully. We’ve intentionally avoided the deeply cyclical sector, so there’s no, there’s no retail, there’s no restaurants, there’s no energy. The, we’re, we’re diversified really by every metric, by company, by industry, by sponsor. 94% of the book has mentioned is at the top of the capital stack, first lien senior secured paper, very modest loan to value, as we mentioned earlier.

So we think that the portfolio, frankly, is insulated from quite a lot of volatility just given the sheer portfolio construction. Not to mention again, the quality of the investment team in terms of who’s been deploying the capital here. So we feel really good about the, about the health of the portfolio.

Obviously the cost of borrowing has increased over time, given what [indiscernible] done. But the businesses that are in our portfolio, and frankly I think across the direct lending market broadly as well, of course there’s outliers, but companies have been able to service this debt. The pick percentage of the portfolio here is exceptionally low. Companies from a revenue and EBITDA standpoint have continued to grow both organically and inorganically. So we feel the book is in really good shape.

Of course, with any loan business, time is risk. And so back to my point earlier about portfolio management, we we take that extremely seriously and monitor this portfolio on a formal basis quarterly. But the information flow is frequent and we meet to discuss any names that we have to on an ad hoc basis. And so that’s a really organized process here where we use that information and take it into account as we deploy new capital as well. So we, we watch those trends carefully. So again, we’re the, the book’s in great shape. We don’t, we don’t we don’t think that’s going to change over the course of the year, but of course, macro macroeconomic conditions change as well. And so it’s a really area of focus for us.

Vilas Abraham

Okay. That’s helpful. Thanks Jeff. And maybe one for David. Any latest thoughts you can share with us on potential subsequent unsecured note issuance and how you might be thinking about that?

David Pessah

Yeah, and so on the unsecured side, it’s, it’s good to see that the market has reopened over the last quarter and, and seeing a, a bunch of issuances across the board. It is something that we as a management team are collectively looking at and will be opportunistic. There’s nothing that we need to do immediately, but we will again look to see what makes the most sense in terms of our unsecured debt. And, and to mention right now, I think our unsecured physicians are roughly around 47% of the, of our total debt stack.

Operator

[Operator instructions] we’ll now take a follow up from Melissa Whittle with JP Morgan.

Melissa Whittle

Hi, thanks for taking my follow up here. I wanted to circle back to dividends and how you’re thinking about that payout policy. Obviously you guys have established the 50 cent base dividends and you have pre announced a couple of specials in the back half of this year. To the extent that the BDC is out earning that base dividend level, how are you guys thinking about deciding what to do with that? Is that something that the board thinks about on a quarterly basis, or should we expect you guys to approach that as sort of a year- end decision? Thanks,

David Pessah

And thanks. Thanks Melissa, for the follow up question here on dividend policy. It’s something that us as the management team and collectively with, with the board, obviously have constant dialogue associated with it. What I, what I would say is that our dividend, the, the, the $0.50 is our, our regular distribution that we declare for Q1. That’s our sixth straight $0.50 distribution on a, on a, on a quarterly basis. As I would think about the forecast for the future, we do have those $0.02 sorry, the $0.210 special distributions at the tail-end of this year. It’s something us as a management team will evaluate at the end of the year to, to assess what our spillover income is and ultimately decide if it makes sense to add in another supplemental dividend at that point in time?

Operator

You ended up appear there are no further telephone questions at this time. I’d like to show the call back to Jeff Levin for closing remarks.

Jeffery Levin

Great. Thank you. Look, on behalf of the management team, we greatly appreciate those who joined the call today. We’re very excited to embark on this journey as a public company, and we believe we are well positioned to capitalize on the sector tailwinds through our deal sourcing advantages and discipline approach to credit investing, as I mentioned.

And I want to thank our entire team who’s worked exceptionally hard to accomplish our IPO in January. And I believe this team, our platform and the strategy we’re employing is well positioned to deliver value for our shareholders in the quarters and years to come. And we look forward to providing an update on our first quarter 2024 earnings call in May. Thank you.

Operator

And once again, that does conclude today’s conference. We thank you all for your participation. You may now disconnect.