Kenneth Lee

Kenneth Lee followed up on the software book, asking about confidence in recovery rates for software companies given the lack of tangible assets and how valuations are assessed.

Answer

Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, stated that software businesses are the best-performing part of their portfolio. He acknowledged public market rerating but noted that even with a 25% markdown, their software exposure remains 2x covered. He emphasized the defensive nature of their first lien, large, sponsor-backed businesses and the significant equity in underperforming assets.

Kenneth Lee inquired about Blackstone Secured Lending Fund's (BXSL) leverage outlook, specifically where it might trend in the near term given deployment opportunities and share repurchases, and also asked about recovery rates for software companies considering their lack of tangible assets.

Answer

Teddy Desloge, Senior Managing Director, confirmed BXSL's current gross leverage at 1.3x and net at 1.25x, reaffirming the long-term target of 1.25x and expecting to manage near the high end of that range. Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, addressed software recovery rates by highlighting the strong performance of their software businesses, two times enterprise value coverage even after public market rerating, and the significant equity support from sponsors for any underperforming assets.

Kenneth Lee asked about the trend of new investments having a lower average EBITDA and a potential shift toward the core middle market, and also inquired about the outlook for new investment spreads.

Answer

Chief Financial Officer Teddy Desloge confirmed new deals had a median EBITDA of $138 million, reflecting better relative value in the core middle market. Co-CEO Brad Marshall added that while asset spreads have tightened, liability costs have also decreased, keeping net interest margins steady. He expects spreads to be stable with a potential for medium-term widening as M&A activity increases.

Kenneth Lee from RBC Capital Markets asked about recent trends in deal terms and documentation and requested an update on the contribution from 'reverse originations'.

Answer

Co-CEO Brad Marshall stated that recent deals had spreads of 500-515 bps with 40% LTVs, and that they have successfully maintained strong lender protections, particularly around collateral and EBITDA add-backs. He also confirmed that the 'reverse origination' strategy remains a meaningful contributor, accounting for 35-40% of activity where they have an incumbent position, leveraging the broader Blackstone platform's coverage.

Kenneth Lee asked about the perceived risk and potential valuation impact of AI across Cannae's current portfolio, particularly within its fintech and software associated companies.

Answer

CEO Ryan Caswell stated that Cannae has extensively considered AI's impact. He believes their largest investment, Black Knight Football, is largely insulated from AI, while financial services and other portfolio companies are protected by long-term contracts and critical customer processes. He added that these companies are actively integrating AI for efficiency and are proactively addressing potential disintermediation risks.

Kenneth Lee asked about Cannae's strategic priorities, including accelerating into sports and entertainment, potential monetizations of non-sports investments like the restaurant group, the updated outlook for the JANA partnership, and the perceived risk of AI across Cannae's fintech and software portfolio.

Answer

CEO Ryan Caswell detailed the ongoing portfolio transformation, confirming the review of non-sports assets for monetization, including strategic alternatives for the restaurant group. He expressed continued optimism for the JANA partnership, noting that new investments would align with the board's sports and entertainment focus. Caswell also addressed AI risks, stating that while Black Knight Football is less impacted, other portfolio companies are proactively implementing AI for efficiency and security.

Kenneth Lee of RBC Capital Markets inquired about Cannae's capital return plans following the Dun & Bradstreet sale, specifically asking about the potential for a tender offer, the allocation of share repurchases, and the timeline. He also asked for an outlook on further portfolio monetizations, an update on the JANNA partnership's deal flow, the rationale for continued investment in Black Knight Football Club (BKFC), and the timing of the upcoming annual shareholder meeting.

Answer

CEO Ryan Caswell explained that Cannae has already repurchased $150 million of its $300 million target via open market buys and will continue this strategy, with all purchases made from third-party shareholders. While the long-term plan is to exit public securities, there is no immediate rush. Caswell noted the JANNA partnership is generating preliminary proprietary opportunities. He affirmed that BKFC is a key investment creating significant value and that Cannae will likely maintain its ownership stake. Finally, he stated the annual meeting will occur in the fall after the D&B transaction closes to ensure shareholders are fully informed.

Kenneth Lee inquired about the financial profile of JANA Partners following Cannae's increased stake, asking about its AUM and future ownership plans. He also asked about any recent discussions with the investor Carnot Capital.

Answer

An executive, Ryan Caswell, stated that JANA's AUM is north of $2 billion and performing well, but declined to provide specific revenue figures. He confirmed there are no current plans to increase the 50% ownership stake. Regarding Carnot Capital, Caswell referred to public information and affirmed Cannae's commitment to its strategic plan while remaining open to dialogue.

Kenneth Lee requested more color on the JANA Partners partnership and the activity level on potential deals. He also asked for specifics on potential incremental capital investments in Black Knight Football, particularly for player transfers and stadium development.

Answer

Ryan Caswell, an executive, described discussions with JANA Partners as "very active" on a few specific targets that could be highly additive for Cannae. For Black Knight Football, he identified future capital needs including player transfers, a potential increase in their stake in Lorient, a possible smaller team acquisition, and infrastructure development. Regarding the stadium, he stated they are in the early stages of deciding between redeveloping the current site or building a new one, with more clarity expected by the next earnings call.

Kenneth Lee inquired about the capital investment outlook for Black Knight Football (BKFE), including near-term player acquisitions and physical CapEx. He also asked for an update on the JANA partnership's pipeline for private investments and what financing sources, including a potential equity offering, would be considered for new deals.

Answer

Ryan Caswell, an executive, explained that BKFE's capital needs for the second half of the year will be determined after the January transfer window. He noted the Bournemouth training facility is the main CapEx project and is nearly complete. Regarding the JANA partnership, Caswell stated that while discussions are constructive, no deals are imminent. For financing, he confirmed the primary source would be selling existing public securities and that an equity offering is not being considered at current share prices.

Kenneth Lee inquired about the spreads Blue Owl Technology Finance Corp. is observing on new investments, including quarter-over-quarter movements and future expectations in this area.

Answer

Erik Bissonnette, President, noted that spreads have been persistently tight for deals negotiated in Q3 and Q4. He anticipates a widening of spreads, particularly in the software universe, due to expected lesser participation from other lenders. He highlighted attractive rates and LTVs on substantial assets in Q1.

Kenneth Lee inquired about the activity level for Blue Owl Technology Finance Corp.'s refreshed share repurchase program, considering the company's leverage capacity, and also asked about quarter-over-quarter movements and future expectations for spreads on new investments.

Answer

Jonathan Lamm, Chief Financial Officer, confirmed the upsized repurchase program ($200M to $300M) and noted that ongoing lockup releases affect liquidity, limiting maximum activity. Craig Packer, Chief Executive Officer, reiterated confidence in the portfolio and willingness to use the program. Erik Bissonnette, President, stated that Q4 activity reflected persistently tight spreads from Q3/Q4 negotiations but anticipates a widening of spreads, especially in software, due to reduced participation and the need for specialized investors.

Kenneth Lee inquired how the 99.7% mark received for the recent loan sales compared to OBDC's previous fair value marks. He also asked about the potential inputs and considerations the board would take into account when setting the common dividend going forward.

Answer

Craig Packer, Co-President of Blue Owl Capital Inc, confirmed that the 99.7% sale price was consistent with OBDC's existing fair value marks, which have been close to par for the past year, validating their valuation process. Regarding the dividend, Mr. Packer stated that the board considers earnings, expected earnings, credit performance, dividend coverage, and the overall outlook. He noted that while credit is strong, lower base rates and tighter spreads are impacting earnings, and the dividend will be thoroughly assessed quarterly, especially next quarter, as the full effects become apparent.

Kenneth Lee asked for clarification on how the 99.8% mark received for the loan sales compared to previous fair value marks. He also inquired about the potential inputs and considerations the board uses for setting the common dividend going forward.

Answer

Craig Packer, Co-President of Blue Owl Capital Inc, clarified that the fair value was 99.7%, consistent with marks over the last year, and emphasized that buyers agreed to pay their book value, validating their valuation process. Regarding the dividend, Mr. Packer explained that the board considers earnings, expected earnings, credit performance, dividend coverage, and outlook. He noted that while they prefer a stable base dividend, lower rates and tighter spreads impact earnings, and they will thoroughly assess the dividend with the board each quarter as the full impact is felt.

Kenneth Lee followed up on previous discussions regarding Caret, asking if progress on its liquidity or monetization still depended on a pickup in market activity or investor sentiment. He also inquired about the company's increased emphasis on share buybacks for the coming year, seeking details on potential levels, payout ratios, and how leverage considerations would factor into these decisions.

Answer

Chairman and CEO Jay Sugarman clarified that while not a specific dependency, a growing Caret and underlying portfolio, coupled with stabilizing office valuations (as seen with the recent UCA increase), would make it easier to attract wider investor interest. CFO Brett Asnas affirmed the belief that the stock is discounted and that buybacks are a priority. He stated the company is cognizant of its leverage target (around 2x or lower) and aims for leverage-neutral buybacks, exploring capital recycling and hybrid solutions, with more updates to follow.

Kenneth Lee inquired if Caret's liquidity or monetization progress still depends on market activity and investor sentiment, and sought clarification on potential levels, payout ratios, and leverage considerations for future share buybacks.

Answer

Chairman and CEO Jay Sugarman explained that while not a specific dependency, growing Caret and the underlying portfolio, coupled with stabilizing office valuations (as seen with UCA's recent increase), creates a more favorable environment for broader investor interest. CFO Brett Asnas affirmed the stock's discounted level and the objective to execute buybacks in a leverage-neutral manner, targeting a leverage ratio around 2x or lower, utilizing capital recycling strategies.

Kenneth Lee sought clarification on the returns from affordable multifamily, asking if the economic yields on these ground leases are higher than other property types. He also asked for confirmation that portfolio dispositions are a key gating factor for executing the new share repurchase program.

Answer

Chief Investment Officer Timothy Doherty clarified that the cost of capital and target economic yields for affordable housing deals are the same as for conventional multifamily transactions. Chairman and CEO Jay Sugarman confirmed that the buyback program is contingent on sourcing capital in a leverage-neutral way, which involves looking hard at the portfolio for asset sale or JV opportunities, as they do not want to increase debt.

Kenneth Lee inquired about the potential contribution of fee revenues from third-party assets under management (AUM) over time, asking if growth primarily depends on increased loans under management or other avenues. He also sought color on client demand and investor types for loans in the secondary market.

Answer

Jack MacDowell (CIO, Chimera Investment Corporation) stated that growing fee-earning capabilities is a focus, bifurcated into managing third-party loans (with synergies from HomeXpress production) and discretionary credit funds/separately managed accounts. He noted strong secondary market demand for non-QM loans from a consortium of buyers, including insurance companies, dealers, and asset managers, highlighting Chimera's potential as a one-stop shop.

Kenneth Lee from RBC Capital Markets asked about the expected contribution of fee revenues from third-party assets under management (AUM) growth, potential avenues for a significant increase in fee-related earnings, and the current client demand and investor types for non-QM loans in the secondary market.

Answer

Jack MacDowell, CIO of Chimera Investment Corporation, stated that diversifying earnings through fee-earning capabilities is a focus. He explained that the third-party AUM group manages loans, generating fee revenue, and they aim to grow this business externally and through synergies with HomeXpress production by retaining asset management functions. He also mentioned building separately managed accounts. For secondary market demand, he noted strong interest from a consortium of buyers including insurance companies, dealers, and asset managers, leading to tightening non-QM AAA spreads.

Kenneth Lee inquired about Acadian Asset Management Inc.'s outlook for capital returns, specifically regarding share repurchases in the context of the increased quarterly dividend, and whether there are specific payout ratios or guardrails. He also asked for the composition of net flows in Q4 2025, including any outsized mandates or driving strategies.

Answer

CFO Scott Hynes clarified that the increased dividend signals confidence in durable free cash flow and is not a binary choice against share repurchases. He stated that share repurchases will be a priority in 2026, following a Q4 2025 pause for refinancing, and that the company aims to move towards a net cash position long-term. CEO Kelly Young explained that Q4 2025 net flows were diverse across enhanced, extension, and emerging markets strategies, balanced between international and U.S. clients, with no single dominant mandate driving the numbers.

Kenneth Lee asked about Acadian Asset Management's outlook on capital returns, specifically regarding share repurchases in the context of the recently increased quarterly common dividend, and if there are any specific payout ratios or guardrails. He also inquired about the composition of net flows in Q4 2025, seeking details on driving strategies or outsized mandates.

Answer

CFO Scott Hynes explained that the increased dividend signals confidence in the business's durability and strong free cash flow, not an either/or with share repurchases. He stated that share repurchases would be a priority for the year, with the Q4 pause (due to refinancing) now over, and the company aiming for a net cash position long-term. President and CEO Kelly Young clarified that Q4 2025 net client cash flows were diverse, without a single dominant mandate, driven by a balance of enhanced, extension, and emerging markets strategies across international and U.S. clients and various vehicle types.

Kenneth Lee of RBC Capital Markets inquired about the composition of Acadian's institutional pipeline, particularly the role of enhanced equity and equity extension strategies, and asked for an updated outlook on capital returns and the firm's excess cash position.

Answer

CEO Kelly Young confirmed the institutional pipeline remains robust and diversified, with enhanced and extension strategies as key themes. She noted the team is successfully replenishing the pipeline as mandates are funded. CFO Scott Hynes added that Acadian remains committed to returning excess capital to shareholders over time while ensuring a resilient balance sheet, taking a thoughtful and balanced approach to deployment each quarter.

Kenneth Lee from RBC Capital Markets inquired about the potential for meaningful changes in the competitive landscape due to recent OCC/FDIC changes to leveraged loan guidance for banks. He also asked if Ares Capital has observed any recent loosening of deal terms or documentation, such as EBITDA add-backs.

Answer

Kort Schnabel, CEO of Ares Capital Corporation, believes the relaxing of leveraged lending guidance won't significantly change bank behavior, as the primary driver remains punitive regulatory capital requirements. He stated that they are 'not really' seeing loosening of deal terms or documentation; if anything, there's a heightened focus on documentation, which has been a priority for Ares for years.

Kenneth Lee inquired about the potential impact of recent OCC/FDIC changes to leveraged loan guidance for banks on the competitive landscape and any recent changes in deal terms and documentation, specifically regarding loosening of EBITDA add-backs.

Answer

CEO Kort Schnabel believes the relaxing of leveraged lending guidance will not meaningfully change bank behavior, as the guidance was not strictly enforced, and regulatory capital requirements remain the larger driver. He noted that documentation terms have not loosened; if anything, there's a heightened focus on them due to headlines around broadly syndicated market transactions, which has been beneficial for the direct lending space.

Kenneth Lee inquired about Ares Capital Corporation's process for avoiding off-balance sheet financing, such as receivables financing, and how such arrangements are identified and flagged during the due diligence phase of new investments.

Answer

CEO Kort Schnabel explained that off-balance sheet financing is flagged through an exhaustive due diligence process, including third-party quality of earnings reports and mandatory disclosure of all liabilities by companies. He emphasized that Ares' documentation includes strict parameters and tight baskets that limit securitization facilities and other off-balance sheet liabilities, which are thoroughly monitored throughout the investment's life, differentiating their approach from the broadly syndicated market.

Kenneth Lee inquired about Ares Capital Corporation's methods for avoiding off-balance sheet financing, such as receivables financing, and how these arrangements are identified during due diligence.

Answer

Kort Schnabel (CEO) explained that off-balance sheet financing is identified through exhaustive due diligence, third-party quality of earnings reports, company disclosures, and strict documentary protections (baskets) that limit securitization facilities. He emphasized that these protections are tighter than those typically found in the broadly syndicated market.

Kenneth Lee of RBC Capital Markets asked about the relative pricing and returns for deals in the core and lower middle market segments compared to the upper end. He also sought confirmation that equity co-investment exits are sponsor-driven and asked about the outlook for future realizations.

Answer

CEO Kort Schnabel explained that smaller companies typically offer wider spreads, potentially 50 basis points or more, but at leverage levels that can be several turns lower than large-cap deals. He confirmed that equity exits are primarily driven by sponsors and are sporadic, declining to provide forward guidance on future realizations but emphasizing their long-term strategic value in offsetting losses.

Kenneth Lee asked if Ares Capital is seeing more attractive opportunities in the upper middle-market segment due to recent volatility and inquired about further opportunities to optimize the company's liability structure.

Answer

Incoming CEO Kort Schnabel confirmed they are seeing more attractive large-cap deals, similar to the 2022-2023 period, and emphasized the company's ability to pivot between market segments. CFO Scott Lem stated that while they continue to optimize financing costs, such as the recent 20+ basis point reduction on their largest credit facility, rising market bond spreads present a headwind for new unsecured debt.

Kenneth Lee asked for the company's latest outlook on the potential for credit losses, both for ARCC and the broader industry, given the healthy economic backdrop.

Answer

Then-CEO Robert DeVeer expressed that he was very pleased with credit performance, which has been better than anticipated. He highlighted that the portfolio is holding up 'extraordinarily well,' with non-accruals remaining below historical averages and strong underlying profit growth. He attributed this to the strength of the U.S. economy and the portfolio's quality and diversity.

Kenneth Lee noted the improvement in portfolio interest coverage ratios and asked if management still anticipates an increase in credit losses or if conditions are improving. He also requested color on amendment activity and revolver drawdowns.

Answer

CEO Robert Kipp DeVeer described the current credit environment as stable, with low non-accruals, and stated he does not expect a significant increase in defaults from these strong levels. Co-President Kort Schnabel added that amendment activity was stable to light and that revolver draws by portfolio companies had decreased during the quarter.

Kenneth Lee asked about Voya Financial's expectations for Investment Management organic growth in 2026, specifically identifying products or offerings driving this growth, and inquired about the outlook for voluntary benefit loss ratios, confirming if they would remain around 50%.

Answer

Mike Katz (CFO, Voya Financial) stated that Investment Management expects to continue growing above its long-term 2%+ organic growth target in 2026, with positive breadth across the domestic market in Q1, driven by strong investment outcomes and performance fees. Key growth areas include insurance fixed income (public and private), U.S. institutional DC target date offerings, and international income and growth in thematic equities. For voluntary benefits, Mike Katz expects a modest increase in loss ratios from 50% in 2025, as part of providing more customer value, but anticipates net margins to remain intact due to efficiency efforts. Jay Kaduson (CEO of Workplace Solutions, Voya Financial) added that 1/1/2026 sales showed commercial momentum for voluntary products, with the new Integrated Leave and Disability Claim Solution contributing to growth and retention.

Kenneth Lee asked about Voya Financial's expectations for organic growth in Investment Management for 2026, following nearly 5% growth in 2025, and inquired about specific products or offerings expected to drive most of that growth. He also asked for the outlook on voluntary benefit loss ratios for 2026.

Answer

Heather Lavallee, CEO, expressed satisfaction with 2025's momentum and stated that Voya expects to grow above its long-term 2%+ organic growth rate assumption in 2026, with positive breadth across the domestic market in Q1. Key drivers include strong investment outcomes, continued strength in insurance fixed income (public and private), target date offerings in U.S. institutional DC, and international income/growth and thematic equities. Michael Katz, CFO, indicated a modest increase in voluntary benefit loss ratios for 2026, consistent with plans to provide more customer value, but expected net margins to remain intact due to efficiency efforts. Jay Kaduson, CEO of Workplace Solutions, added that voluntary market growth is expected in 2026, supported by the new Integrated Leave and Disability Claim Solution and a focus on pricing execution and claims automation.

Kenneth Lee of RBC Capital Markets asked if the strong institutional net inflows in Investment Management were due to any single large mandate.

Answer

Matthew Toms, CEO of Investment Management, clarified that the $5.2 billion in institutional inflows were broad-based and not lumpy. He cited strong demand across multiple strategies, including private fixed income, private equity secondaries, core fixed income, CLOs, and a differentiated income and growth strategy, which gives the firm confidence in its growth outlook.

Kenneth Lee asked for an update on the company's latest thoughts regarding dividend coverage, particularly in light of the current interest rate outlook.

Answer

Tanner Powell, CEO, explained that the $0.38 dividend was met, partly due to a slightly lower incentive fee. He highlighted significant accretion opportunities from deploying Merck proceeds (previously low-yielding) and the ability to remark liabilities in the current market, along with resolving non-accrual positions, as key mitigants against lower base rates. The board decided to keep the dividend intact, and future reevaluation will consider the actual rate trajectory versus anticipated changes and the impact of these three levers.

Kenneth Lee sought clarification on the Merx investment, asking if the four remaining aircraft were part of a securitization and if further insurance payments were expected. He also asked about common themes among the new non-accrual investments and any potential link to tariffs.

Answer

CEO Tanner Powell confirmed the Merx securitizations have been fully paid off and the remaining aircraft are owned unencumbered. He also stated that the vast majority of insurance proceeds have been received. President Ted McNulty explained that the new non-accruals were due to company-specific issues and cost pressures, with one notable theme being balance sheets constructed in a lower interest rate environment.

Kenneth Lee from RBC Capital Markets asked about MFIC's reliance on M&A activity for new originations, the outlook for add-on investments, and the company's current spillover income and its usage policy.

Answer

Executive Chairman Howard Widra clarified that MFIC is not wholly reliant on M&A, citing growth from the existing portfolio and continuation funds. He noted that MidCap's large origination volume provides MFIC with ample selection, mitigating the impact of a market slowdown. Mr. Widra also stated that spillover income is currently minimal following a previous special dividend, but the eventual monetization of the Merx investment could generate more, which would be evaluated at that time.

Kenneth Lee of RBC Capital Markets inquired about the drivers of fee income, specifically its connection to prepayments, and asked for an updated outlook on the factors influencing the pace of rotating non-directly originated assets acquired in the recent mergers.

Answer

CEO Tanner Powell explained that while loan prepayments accelerate the recognition of original issue discount (OID), the impact is not overly dramatic outside of the life sciences vertical, which has more robust call protection. President Ted McNulty added that the pace of asset rotation is a balance between managing deployment, market risk, and vintage exposure. He noted they prioritized selling the lowest-yielding assets first. Tanner Powell also emphasized that asset liquidity is a key consideration to avoid catalyzing losses during the sale process.

Kenneth Lee asked about the challenge of integrating potentially very different cultures or mindsets between traditional and alternative asset managers when considering M&A opportunities in the alternatives space. He also requested any specific callouts, such as outsized mandates, regarding the positive global, non-U.S. equity net inflows.

Answer

David Brown, Chairman, CEO, and Director, acknowledged the cultural integration challenge as a significant factor that has led Victory Capital to patiently observe and learn in the alternatives space. He stated that future alternative deals would address this issue through structuring and careful product selection. Regarding global, non-U.S. equity net inflows, David Brown noted strong demand for this asset class both domestically and internationally, driven by excellent product performance and robust distribution, but did not highlight any specific outsized mandates.

Kenneth Lee inquired about the challenges of integrating potentially very different cultures or mindsets between traditional and alternative investment businesses when pursuing inorganic opportunities in the alternatives space.

Answer

David Brown, Chairman, CEO, and Director, acknowledged that cultural integration is a significant consideration and a reason for their patient approach to alternatives. He stated that strategies like structuring and product type selection can mitigate these challenges, having learned from observing others in the space.

Kenneth Lee from RBC Capital Markets questioned the timeline and key factors for introducing Victory products into Amundi's non-U.S. distribution network and sought an update on the M&A outlook.

Answer

CEO David Brown outlined that the rollout of Victory products into Amundi's network will occur throughout 2025 and into 2026, with initial post-close flows likely coming from existing Amundi U.S. products. He also stated that the asset management industry is primed for consolidation and Victory Capital intends to be an active participant, noting the current M&A discussion pipeline is the most compelling he has ever seen.

Kenneth Lee inquired about the current state of bid-ask spreads in M&A discussions and the primary motivations of potential sellers. He also asked for color on institutional investor sentiment and activity following the recent election.

Answer

David Brown, Chairman and CEO, stated that he believes bid-ask spreads are converging as increased market and political certainty creates an environment where people are ready to transact. He noted that seller motivations, driven by industry pressures, are intensifying. On institutional sentiment, he suggested that post-election certainty will likely remove uncertainty and encourage more allocations, potentially fostering a 'risk-on' environment.

Kenneth Lee of RBC Capital Markets asked for quantification of the Amundi-related transaction expenses incurred to date and inquired about client conversations regarding fixed income allocations.

Answer

President & CFO Michael Policarpo quantified the Amundi-related expenses at a "couple of million dollars" to date, primarily for legal and advisory fees, with no significant future costs expected. CEO David Brown confirmed strong client interest in fixed income from both institutional and intermediary channels, driven by anticipation of Fed rate cuts. He noted Victory is well-positioned to capture these flows with its Victory Income Investors franchise.

Kenneth Lee asked about the operating leverage benefit seen in asset management, inquiring about variable expenses that could increase with market or AUM growth, and any updated margin outlook for that business. He also sought confirmation on the AWM distribution expense ratio outlook.

Answer

EVP and CFO Walter Berman noted that normal volume-related variable expenses in asset management are well-managed, and transformation efforts continue. He reiterated that the 42% margin in Q3 was above their target range, driven by favorable market conditions and expense discipline. Walter Berman confirmed that the 66-67% range for the AWM distribution expense ratio remains the case.

Kenneth Lee of RBC Capital Markets asked about the bank's asset portfolio allocation, specifically the mix of fixed versus floating rate securities, and inquired about the run-rate earnings outlook for the Retirement & Protection Solutions (RPS) segment.

Answer

Executive Walter Berman clarified that the bank's portfolio mix was adjusted during the quarter to be 87% fixed-rate securities to manage interest rate impacts. For the RPS segment, he stated that fundamentals are solid due to strong sales and a stable liability base, suggesting the current earnings level is sustainable.

Kenneth Lee asked if a significant change in the interest rate environment could alter the decision to retain the long-term care (LTC) block. He also inquired about the potential for greater long-term synergies between the insurance and asset management businesses.

Answer

CFO Walter Berman stated that a change in the rate environment would not alter their thinking on LTC, as the investment portfolio is well-positioned. CEO Jim Cracchiolo elaborated on the deep integration already present, where Columbia Threadneedle manages assets for RiverSource and the bank, creating synergies that benefit all segments and enhance the overall client value proposition.

Kenneth Lee asked if the decline in spread and rate sensitivity reflects a tempered risk appetite, and for updated thoughts on dividend coverage given the macro and rate outlook.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, clarified that the decline in sensitivities was partly organic due to lower mortgage rates, and their risk posture is not overly conservative, maintaining some dry powder. He expressed strong confidence in the dividend's safety and ample level, citing the 92% hedge ratio.

Kenneth Lee inquired if the decline in Annaly's spread and rate sensitivity quarter-over-quarter reflected a tempered risk appetite, and sought updated thoughts on dividend coverage given the macro and rate outlook.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, explained that the decline in sensitivities was partly organic due to lower mortgage rates and a slightly lighter Agency MBS position, but affirmed that their risk posture is not overly conservative. He expressed strong confidence in the dividend's safety, citing its healthy yield and a 92% hedge ratio.

Kenneth Lee of RBC Capital Markets asked about the outlook for non-sponsored investments, given they constituted 30% of Q2 originations, and inquired if there have been any changes in documentation or terms on new investments.

Answer

President Robert Stanley stated that the 70/30 sponsor to non-sponsor split in Q2 was close to their historical average. He noted a robust pipeline for the second half across both channels. Stanley confirmed that they have not seen any degradation in documentation standards or covenant packages over the last year, attributing this stability to their sourcing strategy which avoids the most competitive areas of the market.

Kenneth Lee of RBC Capital Markets asked about the outlook for non-sponsored investment opportunities and whether there have been any recent changes in investment terms or documentation standards.

Answer

Vice President Robert Stanley reported that the Q2 origination mix (30% non-sponsor) was near historical levels and that the pipeline for the second half of the year is robust across both sponsor and non-sponsor channels. He affirmed that documentation standards and covenant packages have remained stable over the past year, attributing this to their strategy of sourcing deals away from the most competitive market segments.

Kenneth Lee of RBC Capital Markets asked for the outlook on Lane 2 and Lane 3 (complex, non-sponsored) investments and whether more opportunities are materializing. He also inquired if the new ATM program signaled a shift toward more frequent capital raises.

Answer

President Bo Stanley stated that while wider stress may take more time to develop, TSLX is already seeing interesting opportunities in these lanes. Regarding the ATM, CEO Joshua Easterly and CFO Ian Simmonds reiterated that there is no change in their disciplined capital-raising philosophy. The ATM is simply a more cost-effective tool for shareholders, and they will not issue shares unless it is accretive to both NAV and ROE, noting they let the balance sheet shrink in the quarter rather than issue capital without compelling opportunities.

Kenneth Lee from RBC Capital Markets asked if TSLX's lower portfolio overlap compared to peers is primarily due to its non-sponsored activity. He also inquired about any recent changes in loan documentation or terms.

Answer

CEO Joshua Easterly confirmed that the lower portfolio overlap is directionally driven more by their non-sponsored deal flow. Both he and President Robert Stanley stated that underwriting standards and documentation have remained consistent and disciplined over the past 12-18 months, and they will pass on deals that lack such discipline.

Kenneth Lee asked if the portfolio's lower-than-average overlap with peers is primarily due to non-sponsored deals and inquired about any changes in loan documentation or terms beyond just spreads.

Answer

CEO Joshua Easterly confirmed that the non-sponsored portion of the portfolio is the primary driver of its differentiated composition. Both Easterly and President Robert Stanley stated that underwriting standards and documentation have remained consistent over the last 12-18 months, and they continue to pass on deals that show a lack of discipline.

Kenneth Lee from RBC Capital Markets asked for details on plans to expand the 'degrees of freedom' for the credit franchise, the pipeline for new credit products, and the outlook for seed capital needs and the annual payout ratio.

Answer

CEO Jason Gottlieb mentioned evaluating structures to access private markets with the existing credit team and potentially launching a private fund for the M Sites global unconstrained strategy. CFO C.J. Daley stated the firm is well-positioned with its $140 million seed capital book and expects to redeem some capital over the next 12-18 months. He noted the firm has debt capacity for M&A but feels well-capitalized for current needs.

Kenneth Lee from RBC Capital Markets asked about faster-growing segments within the intermediated wealth channel and whether new strategies are needed to optimize growth. He also requested color on institutional RFP and due diligence activity amid market volatility.

Answer

CEO Eric Colson noted that the different asset allocation needs of wealth clients create opportunities for new strategies, and that recently matured strategies like EMsights and Global Unconstrained are well-positioned for this channel. Regarding institutional activity, Colson described Q1 as a period of significant client communication and equity rebalancing, highlighted by a $1.2 billion outflow from Mid-Cap Growth. He noted increased interest in credit but characterized the quarter as having more client dialogue than transactional action.

Kenneth Lee inquired about the near-term outlook for seed capital needs and the pipeline for new product development, particularly in private markets. He also asked about the potential cost implications of adding a new portfolio manager to the International Value team.

Answer

CFO Charles Daley stated that the current seed capital level of $158 million is sufficient for foreseeable needs, and the firm is beginning to recoup some of this capital. Executive Jason Gottlieb revealed that while conversations are active across asset classes, the most traction for new strategies is currently in private real estate. Regarding the new PM, Mr. Gottlieb noted there will be talent acquisition costs, but significant efficiencies will be gained by leveraging existing infrastructure, avoiding a full de novo build-out.

Kenneth Lee of RBC Capital Markets asked about the potential impact of a steepening yield curve on the portfolio, particularly the benefits for MSRs. He also inquired about the company's current risk appetite, noting a slight increase in rate exposure.

Answer

Nicholas Letica, VP & CIO, explained that while the portfolio is hedged across the curve, a steeper curve is generally positive for mortgage spreads as it incentivizes bank investment. For MSRs, he described counterbalancing effects: lower float income from lower front-end rates versus lower prepayment assumptions from higher long-term forward rates. He clarified that rate exposure was virtually unchanged and that they like the current risk environment, viewing mortgage spreads as historically generous and well-supported.

Kenneth Lee from RBC Capital Markets inquired about the economic structure of the new residential transition loan SMA, particularly fees, and asked if the insurance M&A strategy could include fixed annuity platforms.

Answer

Chairman, President & CEO Michael Nierenberg confirmed the SMA includes both management and performance fees but stressed the strategic importance of the partnership for attracting future third-party capital. Regarding insurance, he affirmed that a fixed annuity platform could be a possibility, but the initial entry into the market would be through a smaller, scalable platform rather than a large-scale acquisition.

Kenneth Lee of RBC Capital Markets asked for details on the economics of the new strategic partnership for residential transition loans, specifically regarding management and performance fees. He also followed up on potential insurance M&A, asking if it could include fixed annuity platforms.

Answer

Michael Nierenberg, Chairman, President & CEO, confirmed the partnership includes both management and performance fees but stressed that the strategic value of the relationship and the doors it opens are more significant than the immediate economics. He affirmed that potential insurance M&A could indeed include fixed annuity platforms, but reiterated the strategy is to acquire a smaller, foundational business to grow, rather than buying a fully scaled company at a high premium.

Asked about fundraising targets for the Sculptor asset management business and the rationale for launching the Rithm Acquisition Corp. SPAC in the current market.

Answer

The company has multiple funds in the market but prioritizes performance and responsible capital deployment over specific fundraising targets. The SPAC was launched as a low-cost option to generate asset management fees and pursue off-balance sheet acquisitions in a market that now offers more reasonable valuations compared to the 'silly frenzy' of 2021-2022.

Kenneth Lee of RBC Capital Markets questioned the specific initiatives planned to grow Sculptor's credit business, the fundraising expectations for the upcoming year, and the outlook for Sculptor's expense base post-acquisition.

Answer

Michael Nierenberg, Chairman, CEO, and President, stated that growth is led by strong investment performance, which attracts LPs. While considering platform M&A, the primary focus is organic growth. He anticipates a "pretty good year" for fundraising but provided no specific targets. He described the expense outlook as "business as usual" (BAU), with an ongoing focus on creating synergies across all platforms.

Kenneth Lee from RBC Capital Markets asked for more detail on initiatives to grow Sculptor's credit business, fundraising expectations for the year, and the outlook for Sculptor's expense base.

Answer

Michael Nierenberg, Chairman, CEO, and President, emphasized that growth at Sculptor is led by performance, which attracts capital. He mentioned that while they are looking at potential M&A for platforms, their primary focus is on organic growth driven by strong returns. He expects a 'pretty good year' for fundraising. Regarding expenses, he stated the outlook is 'business as usual' (BAU), with a continuous focus on evaluating expenses and creating synergies across all operating platforms.

Kenneth Lee from RBC Capital Markets asked about recent net flow trends at Sculptor and which strategies offer the most attractive organic growth opportunities, particularly regarding direct lending expansion.

Answer

CEO Michael Nierenberg reported that Sculptor's AUM grew by a few billion dollars, driven by performance and inflows to its real estate, credit, and CLO platforms. He highlighted scaling the private credit business as a key focus and mentioned the long-term goal of entering the insurance space to complement its asset generation.

Kenneth Lee from RBC Capital Markets asked about the recent net flow trends at Sculptor, the most attractive areas for its future growth, and what form Rithm's planned expansion into direct lending might take.

Answer

CEO Michael Nierenberg reported that Sculptor's AUM is up a few billion dollars since the last report, with growth across real estate, CLOs, and multi-strat funds, driven by strong performance. He identified private credit as a key growth area. Regarding direct lending, Nierenberg stated they are actively looking to grow in that space, potentially in partnership with Sculptor, to capitalize on the pullback from banks.

Kenneth Lee from RBC Capital Markets asked about the current spreads on new private loan investments and their potential near-term trend, and also inquired about the outlook for dividend income from the portfolio.

Answer

CEO Dwayne Hyzak and Managing Director Nicholas T. Meserve addressed spreads, noting that after downward pressure in late 2024, they have stabilized and could potentially widen given market uncertainty. On dividend income, CEO Dwayne Hyzak explained that while it's variable, the lower middle market portfolio continues to perform well, and he expects strong dividend contributions to continue in Q2, with the longer-term outlook dependent on the economy.

Kenneth Lee asked for updated thoughts on preferred leverage ranges amid macro uncertainty and requested more detail on consumer-related risks and downside protections within the asset-based finance (ABF) portfolio.

Answer

Chief Investment Officer & Co-President Daniel Pietrzak stated that the target leverage range of 1.0x to 1.25x was established to handle all market conditions and remains unchanged, highlighting the company's $3.2 billion in liquidity and strong liability structure. Regarding the ABF portfolio, he clarified that consumer-related exposure is small (approx. 3%) and focuses on secured risk or high-FICO prime borrowers, citing investments in PayPal and Discover as examples with strong risk mitigants.

Kenneth Lee of RBC Capital Markets inquired about FSK's confidence in its dividend outlook for 2025, particularly the role of spillover income, and asked for commentary on the trend of spread compression per unit of risk.

Answer

Chief Investment Officer Daniel Pietrzak affirmed the dividend guidance of $2.80 for the year, explaining the policy of using a base plus supplemental distribution allows for returning excess earnings from prior high-rate periods to shareholders. Chief Financial Officer Steven Lilly added that FSK has 2.7 quarters of dividend coverage in spillover income, which would be reduced to a more normal target of 2.3 quarters by year-end. On spreads, Mr. Pietrzak acknowledged a more borrower-friendly market with spread compression but noted that the total return of roughly 10% on new deals remains attractive.

Kenneth Lee requested more detail on asset-based finance (ABF) opportunities, including typical benchmark rates and spreads. He also asked for clarification on what portion of the quarter's PIK income was from loans originally underwritten as PIK versus those that elected the option.

Answer

Daniel Pietrzak, CIO, clarified that ABF investments are often structured to create a stable, fixed-rate return profile targeting the mid-teens, rather than being benchmarked like traditional loans. He noted the market opportunity is significant due to a lack of scale capital in the space. In response to the second question, Pietrzak stated that roughly half of the PIK income was from loans originally underwritten with that feature.

Kenneth Lee inquired about Palmer Square BDC's outlook on leverage amid the current macro backdrop, potential investment opportunities in liquid loan markets, and the drivers behind portfolio paydowns during the quarter.

Answer

President Matt Bloomfield stated that the company is comfortable with its current leverage. He noted that while it's still early to heavily deploy capital, they are monitoring opportunities in tariff-impacted sectors. Bloomfield clarified that the vast majority of Q1 paydowns resulted from refinancing activities in a tight-spread environment, with only a small number of discretionary sales for relative value.

Kenneth Lee of RBC Capital Markets inquired about Palmer Square Capital BDC's macro outlook, specifically regarding leverage targets, potential investment opportunities in liquid loan markets, and the nature of portfolio paydowns during the quarter.

Answer

Matthew Bloomfield, President, responded that the company is comfortable with its current leverage. He noted that while it's still early to heavily deploy capital, they are monitoring opportunities in tariff-impacted sectors. Bloomfield clarified that the vast majority of Q1 paydowns resulted from refinancing activity amid a tight-spread environment, rather than discretionary sales.

Kenneth Lee of RBC Capital Markets questioned the sustainability of the newly recalibrated $0.36 base dividend for the remainder of the year and inquired about the near-term outlook for investment sales and prepayments.

Answer

President Matt Bloomfield explained that the new base dividend was set conservatively after analyzing various market scenarios, providing flexibility in a deal environment that currently lacks attractive risk-reward opportunities. He noted that refinancing activity was elevated in Q4 due to tightening spreads and has continued into 2025, while new M&A and LBO volume is expected to remain muted in the near term.

Kenneth Lee of RBC Capital Markets asked for the rationale behind operating below target leverage and the potential to increase it, and also sought details on the drivers behind increased buyer interest in lower middle market portfolio companies.

Answer

Dwayne Hyzak (Executive) and Ryan Nelson (Executive) explained that lower-than-expected investment activity and a large repayment from the Pearl Meyer exit contributed to the below-target leverage. They stated the company intends to increase leverage by funding new net investment activity with a greater portion of debt and being less active in the ATM program. Regarding buyer interest, Hyzak noted that high-quality companies naturally attract strategic or private equity buyers, and Main Street supports these exits when they are attractive to all parties, but did not provide specifics on active confidential discussions.

Kenneth Lee asked for clarification on the portfolio yield decline, specifically the typical lag for floating-rate adjustments. He also inquired how KBDC benefits from fee income when prepayment activity increases.

Answer

Co-CEO Kenneth Leonard explained that the yield decline was mainly due to lower SOFR, with the adjustment lag depending on whether borrowers use 1, 3, or 6-month rate locks. CFO and Treasurer Terry Hart clarified that upon prepayment, any remaining unamortized Original Issue Discount (OID) is accelerated into current income, providing an example from the quarter where two repayments generated approximately $1 million in accelerated OID.

Kenneth Lee asked about the competitive landscape in the core middle market, questioning if KBDC is seeing an increased level of competition. He also requested further details on the company's plans to optimize its debt stack.

Answer

Co-CEO Douglas Goodwillie explained that the core middle market has less competition than the upper middle market, where most large alternative asset managers focus their capital, and that KBDC has not been meaningfully impacted by new entrants. CFO and Treasurer Terry Hart detailed plans to optimize the debt stack by first extending the maturity of the corporate facility, likely with price improvement, and then supplementing the debt stack with either additional bank debt or unsecured notes as leverage increases.

Inquired about potential future expense reductions following the company's streamlining and the outlook for cash usage and share repurchases for the remainder of the year.

Answer

The company will maintain expense discipline and expects to see operating leverage benefits rather than absolute expense reductions. Cash will continue to be used opportunistically for organic growth through seeding new strategies and for share repurchases, with no predetermined allocation between the two.

Inquired about the reason for the slight increase in the fee rate during the quarter and whether the company plans to seek a renewal of its share repurchase authorization.

Answer

The executive confirmed the fee rate increase was primarily due to a product mix shift, as higher-fee emerging market strategies performed relatively well in Q2. Regarding capital allocation, while a new share buyback authorization is expected in due course, there is no immediate urgency given the current level of excess capital, which is prioritized for both buybacks and seeding organic growth.

Kenneth Lee asked for more detail on the dynamic of corporate clients shifting cash between direct paper and money market funds, and whether this could create flow lumpiness. He also requested an update on capital management strategy and the outlook for M&A.

Answer

CIO for Money Markets, Deborah Cunningham, clarified that while most clients cannot easily switch between direct repo and money funds, a small number of very large clients can, which can lead to significant volume shifts. On capital management, CFO Thomas Donahue announced a new 5 million share repurchase authorization, stating the company expects to be active given the current stock price. He noted there was nothing to announce regarding M&A.