Ethan Kaye

Ethan Kaye asked about common threads or denominators contributing to the quarter's underperformance and markdowns. He also questioned if the emergence of AI and its risks to software companies were pressuring FSK's software-centric or software-adjacent investments.

Answer

Dan Pietrzak, Chief Investment Officer and President, identified medical/healthcare roll-ups (dental, vet areas) as a common theme for two new nonaccruals due to wage inflation and retention. Other underperformance was attributed to operational issues and government contract risk (Peraton, Cubic), with PRG being idiosyncratic. For software, Mr. Pietrzak stated that FSK's 16% software portfolio is actively evaluated for AI risk using a 20-data point framework, focusing on mission-critical products and proprietary data. He clarified that most mark drivers were operational, not AI-related, though Lionbridge Technologies' language translation business faced AI headwinds.

Ethan Kaye inquired whether the underperformance in some software-centric or software-adjacent names was linked to the emerging risks posed by AI, given the current market discussions.

Answer

Dan Pietrzak, Chief Investment Officer and President, clarified that software constitutes 16% of the portfolio and that AI risk has been assessed using a 20-data point framework, focusing on mission-critical products and proprietary data. He stated that most underperformance was operational, not AI-driven, with Lionbridge Technologies (language translation) being the primary exception facing AI-related headwinds.

Ethan Kaye asked for details on the asset sale process, specifically if it was a competitive auction with multiple bidders, how assets were selected and priced, and how management interprets the 94% valuation relative to internal marks, considering the characteristics of the sold assets.

Answer

John Kline, President and CEO of New Mountain Finance Corporation, confirmed it was a competitive process led by Evercore with multiple bidders, where Coller Capital offered the most attractive solution. He explained that asset selection was driven by NMFC's goals to reduce PIK income and diversify top positions, focusing on over-concentrated, high-PIK, and subordinated names. Kline viewed the 94% valuation as a fair, commercially normal discount that validated NMFC's internal marks and improved portfolio composition.

Ethan Kaye asked about the process of the asset sale, specifically if it involved multiple bidders and an auction-type process, and how the assets were selected and priced. He also sought clarification on how management interprets the 94% valuation relative to internal marks, considering asset characteristics like PIK and software, and typical deal discounts.

Answer

John Kline, President and CEO, confirmed it was a competitive process led by Evercore with multiple bidders, and Coller Capital offered the most attractive solution. He reiterated that NMFC proactively selected assets to reduce PIK income, concentration, and subordinated positions, rather than responding to buyer inquiries. Mr. Kline emphasized that the sale validated NMFC's marks on 'tougher to value' assets. He concluded that the 94% pricing represented a fair deal for both sides, with a commercially normal discount for the buyer, while allowing NMFC to improve portfolio composition and reduce scrutiny.

Ethan Kay sought clarification on repayment projections, specifically the $550 million over the first six months and an additional $1 billion throughout the year.

Answer

Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, clarified that $550 million represents committed repayments with clear line of sight. He explained that based on a typical repayment cycle of 15-20% annually, an additional $1-2 billion in repayments is expected over the balance of the year, given the latter vintages of the portfolio.

Ethan Kay inquired about the nature of the quarter's unrealized depreciation, asking if it was concentrated in a few positions or driven by broader market movements, and sought clarification on the expected repayment numbers for the year.

Answer

Teddy Desloge, Senior Managing Director, confirmed that the unrealized losses were concentrated in a small handful of positions, with 85% of the portfolio showing stable or improving fundamental trends. Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, added that the watchlist declined, and BXSL has a defensive, first-lien strategy with zero net realized losses over seven years. Brad Marshall clarified that $550 million in repayments have clear line of sight for the first six months, with an additional $1-2 billion expected over the balance of the year based on a typical 15-20% annual repayment cycle.

Ethan Kaye inquired about the specific red flags or warning signs Hercules Capital looks for to identify if AI disruption is materializing within its software portfolio, given its enhanced monitoring approach.

Answer

CEO and Chief Investment Officer Scott Bluestein explained that their monitoring involves aggressive, active, and consistent discussions with portfolio companies, executives, and VC partners, leveraging their scale for insights. They require monthly financials and compliance certificates, and investment teams engage in biweekly conversations to identify 'yellow flags' such as deteriorating KPIs or customer pushback in specific software verticals, enabling quick reactions.

Ethan Kaye asked about the specific red flags or warning signs Hercules Capital looks for in its enhanced portfolio monitoring to detect if AI disruption is materializing within its software investments.

Answer

Scott Bluestein (CEO and Chief Investment Officer) explained that their approach involves aggressive, active, and consistent discussion, conversation, and monitoring. He highlighted the benefits of Hercules Capital's scale, which provides access to numerous companies, executives, and VC partners, offering good insight into the ecosystem. He also mentioned robust documentation, monthly financials, compliance certificates, and biweekly conversations with most companies to identify "yellow flags" (deterioration in KPIs, customer pushback in specific verticals) early, allowing for quick and aggressive reactions.

Ethan Kaye of Lucid Capital Markets inquired about GBDC's outlook for a 'challenging 2026,' seeking clarification on whether this relates broadly to the leverage lending sector or specific GBDC challenges, and its implications for earnings and credit.

Answer

David Golub, CEO of GBDC, confirmed the challenging outlook for 2026 is broad, citing five-year low spreads, muted M&A activity, and elevated credit stress across both broadly syndicated and private credit markets. He noted that while GBDC is well-positioned, the environment makes it harder to achieve desired ROEs, contrasting with 'happy talk' in the industry. Golub remains optimistic about GBDC's long-term prospects but candid about current headwinds. He also addressed capital allocation, stating GBDC balances opportunistic share repurchases with redeploying capital into attractive new loans through portfolio turnover.

Ethan Kaye from Lucid Capital Markets asked for clarification on GBDC's outlook for a "challenging 2026," specifically whether this relates to the broader leverage lending sector or GBDC's specific challenges in earnings and credit. He also inquired about the deployment outlook, considering muted M&A activity, GBDC's leverage nearing its target range, and the balance between share repurchases and new loan originations.

Answer

CEO David Golub confirmed that the challenging outlook for 2026 is broad, citing lower base rates, tighter spreads, muted M&A, and a protracted credit cycle affecting the leverage lending sector. He acknowledged elevated credit stress across the market, including for GBDC, making it harder to achieve desired ROEs. Golub emphasized GBDC's strong relative positioning but stressed the need for candor about the headwinds. Regarding capital allocation, he stated GBDC will continue opportunistic share repurchases due to shares trading at a discount to NAV, while also seeking the best opportunities to redeploy capital into attractive new loans, balancing these multiple goals.

Ethan Kaye inquired about the drivers behind the sequential increase in median portfolio EBITDA from $150 million to $190 million and requested a breakdown of the $32 million unrealized depreciation beyond Pluralsight.

Answer

Raghav Khanna (Managing Director and Co-Portfolio Manager, Oaktree) attributed the median EBITDA increase primarily to new, larger cap originations in the fourth quarter. Chris McKown (CFO and Treasurer, Oaktree) confirmed Pluralsight accounted for 38% of the unrealized depreciation, with smaller marks in other private positions and quoted names also contributing.

Ethan Kaye asked about the significant sequential increase in the median portfolio EBITDA from $150 million to $190 million, seeking clarification on whether it was a strategic outcome or a result of the deal environment and company growth.

Answer

Raghav Khanna, Managing Director and Co-Portfolio Manager, Oaktree, explained that the increase was primarily driven by new originations in the fourth quarter, which involved larger cap companies, leading to a mix shift. He also noted that the overall portfolio EBITDA has been growing, contributing a smaller portion to the median increase.

Ethan Kaye inquired about the reasons for softer dividend income quarter-over-quarter and the sensitivity of Ivy Hill's dividend to interest rate changes.

Answer

Jim Miller (President) confirmed that non-recurring dividends from the prior quarter and exits of preferred yield/equity investments were the main factors for softer dividend income, noting that many preferred investments that paid off were PIK-ing, aiding PIK collections. Kort Schnabel (CEO) stated Ivy Hill's dividend is very sustainable, similar to ARCC's, due to its current out-earning of the dividend (107% coverage in Q3) and $130 million in retained earnings.