Finian O'Shea

Finian O'Shea of Wells Fargo inquired about the potential impact of recent AI advancements on GBDC's software portfolio, specifically addressing concerns regarding enterprise SaaS-based companies, future AI progress, and the implications for loan-to-values and capital access in the software market. He also asked if higher capital costs could amplify risks for software models.

Answer

CEO David Golub acknowledged the rapid advancement of AI and its potential to disrupt some software companies, emphasizing GBDC's 20 years of experience and proprietary risk mapping framework in software lending. He detailed GBDC's preference for enterprise-critical platforms with sticky workflows and proprietary datasets, and its avoidance of content creation, analytical overlay, and tool-based software. Golub stated that GBDC feels confident in its current portfolio positioning after a real-time review. Regarding capital access, Golub suggested that a more challenging environment for software companies to access broadly syndicated loans could be positive for private credit specialists like GBDC, leading to more opportunities and better pricing, though he views a quick market bounce-back as unlikely. He anticipates the market becoming more selective over the longer term.

Finian O'Shea of Wells Fargo & Company asked about the potential impact of recent AI advancements on GBDC's enterprise SaaS software portfolio, expressing concern about future AI progress affecting existing credits.

Answer

David Golub, CEO of GBDC, addressed the 'SaaSpocalypse,' acknowledging rapid AI advancement and potential disruption. He detailed GBDC's 20 years of software investment experience, proprietary risk mapping, and AI risk assessment. Golub emphasized GBDC's preference for enterprise-critical platforms with sticky workflows and proprietary datasets, and working with AI-expert sponsors, while avoiding content creation, analytical overlay, and tool-based software. He expressed confidence in the portfolio's current positioning but stressed vigilance. Regarding capital access for software companies, Golub outlined scenarios where increased challenges could benefit private credit specialists like GBDC through better opportunities and pricing, anticipating a more selective market long-term.

Finian O'Shea inquired about the portion of Oaktree Specialty Lending's portfolio currently underperforming its original security or underwriting, and the progress in resolving legacy issues.

Answer

Raghav Khanna, Managing Director and Co-Portfolio Manager, Oaktree, detailed their monitoring of underperforming assets, including non-accruals, restructured equities, and positions marked below par. He noted that most significantly marked-down positions are public, with some technology names experiencing pressure from small CLO selling, but are expected to rebound.

Finian O'Shea asked about the current picture of Oaktree's underperforming portfolio assets, including those marked below par, and sought insights into potential interesting software investment opportunities given AI risks and market liquidity.

Answer

Raghav Khanna (Managing Director and Co-Portfolio Manager, Oaktree) clarified that underperforming assets include non-accruals, restructured equities, and positions marked significantly below par, noting that many are public positions influenced by small CLO seller trades. He also mentioned Oaktree's use of AI scorecards for software names but indicated insufficient market volume to act as a buyer despite attractive screen prices.

Finian O'Shea inquired about Ares Capital Corporation's dividend coverage inputs, specifically the allocation framework for junior or alpha-laden opportunities between ARCC and ASIF, and the strategic use of spillover income to support the base dividend.

Answer

CEO Kort Schnabel clarified that deal allocation between ARCC and ASIF is based on available capital and fund mandates, with ARCC's flexible mandate ensuring it receives a share of diverse transactions. CFO Scott Lem added that ARCC's profile is also considered. Regarding spillover income, Mr. Schnabel expressed confidence in covering the dividend, noting the spillover provides additional stability if core earnings temporarily fall below the dividend level, without speculating on specific usage scenarios.