Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. This is Ian, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC. Katherine, you may begin your conference.

[Katherine Schneider, Head of IR]

Thanks, Ian. Good morning, everyone. Before we begin today’s call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that, by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings.

This audio cast is copyright material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday, after the market closed, the company issued an earnings press release and posted the supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the Investor Resources section. These documents should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC.

This conference call is being recorded today February 23, 2018, for replay purposes. So with that, I'll turn the call over to Brendan McGovern.

[Brendan McGovern, CEO and President]

Thank you, Katherine. Good morning, everyone, and thank you for joining us for our fourth quarter earnings conference call. As usual, for the format of the call, I'll start by providing overview of our fourth quarter results as well as key highlights for 2017. Jon Yoder will discuss our investment activity and portfolio metrics; Jonathan Lamm, our CFO will discuss our financial results in greater detail. Finally, I'll conclude with some closing remarks before opening the line for Q&A.

So with that, we are pleased to report a solid quarter for our shareholders. Net investment income per share was $0.47 in Q4, which brought net investment income per share for the full year to $2.07 or 11.4% return on common equity for 2017. Our net investment income covered our dividend by 104% in the quarter, 115% for the full year 2017. We believe that this performance is a result of attractive yields on our assets combined with a low operating expense structure.

As we announced after the close yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of March 30th. For the full year 2017, total distribution to shareholders were $1.80 per share which creates [ph] dividend yield of 10% based on net asset value at the end of Q4. We are very pleased to have successfully executed on our strategy for 2017 and I would like to highlight a few key accomplishments.

First, the exempt of order that we received from SEC during the first quarter of 2017 was a significant development for our shareholders. The order enables the company to participate in transactions alongside other BDCs managed by GSAM which in turn enables us to increase the single lien diversification of the portfolio while not altering our investment strategy.

As a result, the number of underlying companies in our portfolio increased year-over-year from 40 to 56 representing a 40% increase in single lien diversification. Furthermore, the average notional size of our debt investments decreased from 30 million to 22 million while at the same our total investments grew 8%.

Next, during the second quarter of 2017 we executed an accretive equity offering for our shoulders. While our shares have consistently traded at a premium to NAV, this offering represented our first since the March 15, March 2015 IPO reflecting a patient and prudent approach to new capital formation.

In addition to being accretive to book value net of expenses, the offering did not inhibit our ability to maintain an optimal capitalization. In fact, the average debt to equity ratio in the quarter of our equity offering was flat for the preceding quarter. This contributed to a quarter over quarter increase in net investment income per share for the quarter in which we closed the equity offering rather than the net investment income dilution that BDC investors have experienced after an equity offering.

Finally, we continue to leverage a Goldman Sachs platform to enhance the right size of our balance sheet. During the fourth quarter of 2017, we increased the total commitments under our revolving credit facility with $620 million and subsequent to quarter end; we increased the facility to $695 million and extended the maturity date to 2023.

We believe that our ability to affect new capital for our credit facility at attractive terms is reflecting from the strength of the GSAM platform. In addition, the extended maturity is an important benefit as we look to capitalize on market opportunities in the years ahead.

Moving onto investment performance and credit quality. Overall, credit quality remains stable, on a weighted average basis, our portfolio of companies have grown revenue and earnings at a healthy rate over the past 12 months. As we close the year, we had one investment on nonaccrual status representing 0.1 of 1%, 1/10 of 1% of the investment portfolio at cost and nothing at fair value.

The decrease quarter-over-quarter was driven by Bolttech coming off nonaccrual as a result of the successful restructuring of that investment. Subsequent to quarter end, our board of directors approved the renewal of the company’s stock repurchase plan. The plan authorised the company to repurchase upto $25 million of its’ common stock if the market price is below the company’s most recently announced NAV per share, subject to certain regulatory and other limitations.

We believe that buying back shares if they are trading at a discount NAV is an effective use of the company’s capital. During fiscal 2017, there were no purchases made under the stock repurchase plan. With that, let me turn it over to Jon Yoder

[Jon Yoder, COO]

All right, thanks Brendan. We witnessed strong levels of transaction activity in the middle-market throughout 2017, primarily driven by M&A activity, but also by refinance. As has been widely noted, significant capital formation need to occur for investment strategies focused on private middle-market corporate assets to net, including both private equity and private debt. This capital formation generally put pressure on spreads, structures and terms for private loans.

As we begin 2018, there are early signs that some of the factors that drove investor demand for these assets are beginning to reverse. For example, we’ve begun to see a modest rise in risk-free rate in the U.S. and in places around the world. If this trend continues, we believe more capital will flow into risk-free asset and dampen enthusiasm for private assets.

In addition, we are starting to see economic growth rates pick up in other developed countries in emerging markets. This has the potential to stem the flow of capital to U.S. domestic companies most pointedly U.S. middle-market companies since they generally have limited or no overseas exposure.

Finally, with recent weakness in the U.S. dollar and projection expanding budget deficits in light of recent legislative activity offshore investors may have less appetite for U.S. dollar denominated assets such as middle-market companies.

Now to be clear, we are not seen evidence yet that capital formation for U.S. middle-market assets is materially abating. But we are seeing more clients examine their allocation to these assets and begin to consider modulating their pace of investments.

Given this backdrop, and looking forward, we feel very good about the BDC structure and the balance sheet stability that it provides. We believe that managers with a stable balance sheet will be well positioned to take advantage of opportunities if capital flows into middle-market assets reverse.

Now turning to the results for the fourth quarter, new investment commitments and findings were $141.6 million and $126.4 million respectively. New investment commitments were across seven new portfolio of companies and two existing portfolio of companies. One investment to highlight this quarter was our first lien loan to data which is a provider of business continuity and disaster recovery software, hardware and services, which are sold through managed service providers to small and midsize businesses.

The proceeds of this first lien loan were used to support Datto's acquisition of another SaaS-based company. Our credit thesis was centered on the Company’s attractive financial profile including a highly recurring revenue model with the majority of revenue tied to subscription contracts with strong customer retention, a flexible OpEx and CapEx Structure which led to high margins in a low loan to value with a top-tier sponsor.

We were excited to lead this transaction and believe it speaks to the strength of our sourcing as well as disciplined underwriting standards. Builds and repayment activity totaled $42.8 million, driven primarily by the full repayment from one portfolio of company as well as portfolio of sales including these syndication of investments in three portfolios of companies.

The full repayment this quarter was our second lien investment in Securus technologies that was fully repaid at par. This was an investment that we’ve spoken to our shareholders about in the past as we previously took an unrealized markdown on this investment to 54% of par in response to heightened level of risk surrounding potential regulatory orders that could have resulted in lower revenues.

Notwithstanding our view that Securus would likely be successful in offsetting the impact of a reduction in revenues with a corresponding decrease in its cost structure, our valuation policy requires us to mark-to-market each of our investments every quarter and consider all potential risks at hand.

We were pleased with the outcome for this investment as we were able to earn back the unrealized markdown and get repaid at par. During the course of 2017, we were able to maintain stable yields on our investment portfolio notwithstanding broader market trends.

The weighted average yield on our investment portfolio at cost was largely unchanged during the year. We began the year at 10.6% and ended the year at 10.8%. The modest increase was driven primarily by an increase in LIBOR throughout the year though was partially offset by a decrease in spreads.

Turning to the overall investment portfolio, as of December 31, 2017 total investments in our portfolio were $1,258.3 million at fair value, and this was comprised of 89.5% senior secured loans including 32.4% in first lien, 21.8% in first lien last out unit tranche, and 35.3% in second lien debt, as well as 0.3% in unsecured debt, 2.9% in preferred and common stock and 7.3% in the senior credit fund.

We also had 30.2 million of unfunded commitments as of December 31 bringing total investments and commitments to $1,288.5 million. As Brendan mentioned earlier, we’ve been pleased in our ability to significantly increase the single main diversification of our portfolio year-over-year.

At December 31, 2017 had 56 portfolio companies operating across 29 different industries as compared to 40 portfolios of companies a year ago. Turning to credit quality, the weighted average net-debt-to EBITDA of the companies in our investment portfolio at quarter end was 5.3 times, unchanged from the prior quarter. The weighted average interest coverage of the company’s in our investment portfolio at quarter end was 2.3 times, down modestly from 2.5 times for the prior quarter. We continue to believe that the growth of the U.S. economy combined with low levels of unemployment, the strong backdrop for our portfolio of investments plus middle-market companies.

In general, we continue to see solid operating performance across our portfolio. The senior credit funds remains the company’s largest investment at 7.3% of the company’s total investment portfolio. We continue to be very pleased with the stable performance of our investment in the SEF since its inception and for the full year 2017.

The senior credit fund produced a 12% return on our invested capital over the trailing 12 months. As a reminder, the senior credit fund is focused on upper middle-market loans that are typically narrowly syndicated. Over the course of 2017, we witnessed tighter spreads and loser terms in this part of the market and borrowers took advantage by engaging in significant refinancing activity.

In response, we took a cautious approach to new originations throughout the year and brought portfolio growth down to near zero. In fact, the total size of the portfolio is modestly lower year-over-year.

During the fourth quarter, we and our partner originated $57.8 million of investments for the senior credit fund in three new companies and two existing portfolio of companies. The senior credit fund had sales and repayments of 52.5 million. As a result of this investment activity, the total size of the investment portfolio and commitments were $484.2 million at quarter end.

While the size of the senior credit fund’s portfolio did not grow during the course of 2017, we were pleased to have been able to produce attractive yields on the portfolio throughout the year.

The weighted average yield on investments in the senior credit fund began the year at 6.9% and we ended the year at 7.7%. This increasing yield is primarily attributable to the increase in LIBOR that occurred through the year.

First lien loans comprise 96.8% of the total investment portfolio within the senior credit fund and all of our investments are floating-rate with LIBOR floors. No investments are on non-accrual status. The Senior Credit fund also remains well diversified with investments in 34 companies operating across 18 different industries.

I’ll now turn the call to Jonathan to walk through our financial results.

[Jonathan Lamm, CFO and Treasurer]

Thanks, Jon. We ended the fourth quarter of 2017 with total portfolio investments at fair value of $1,258 million, outstanding debt of $546 million and net assets of $726 million. Our net investment income per share was $0.47 as compared to $0.47 in the prior quarter.

Earnings per share were $0.31 as compared to $0.45 in the prior quarter. During the quarter, our average debt to equity ratio was 0.7 times as we deployed capital into new income producing assets.

We ended the fourth quarter with a debt to equity ratio of 0.75 times up from 0.61 times at the end of Q3.

Turning to the income statement, our total investment income for the fourth quarter was $34.2 million relatively unchanged from $34.4 million last quarter. The decrease quarter-over-quarter was primarily driven by lower prepayment related income.

Total expenses before taxes were $14.7 million for the fourth quarter as compared to $15.1 million in the prior quarter. Expenses were down quarter-over-quarter, primarily driven by a decrease in incentive fees.

Incentive fees may vary quarter-to-quarter as we net our capital losses whether realized or unrealized against pre incentives, net investment income calculation. We believe this feature provides proper alignment of incentives as the fee is based on total return.

We ended the quarter with net asset value per share at $18.09 versus [Indiscernible] from the prior quarter. Our supplemental earnings presentation provides a NAV bridge to walk you through these changes.

The company had $32.1 million in accumulated, undistributed net investment income at quarter end, resulting from net investment income that has exceeded our dividend in past quarters. This equates to $0.80 per share on current shares outstanding.

As Brendan mentioned earlier, we were active on the right side of our balance sheet. During the quarter, we increased the total commitments under our revolving credit facility to $620 million. Subsequent to quarter end, we increased the facility size to $695 million and extended the maturity date to February 2023.

With that I will turn it back to Brendan.

[Brendan McGovern, CEO and President]

Thanks, Jonathan. Overall, we are pleased to have produced solid results for the quarter and for the full year 2017. As always, we thank you for the privilege of management capital and we look forward to continuing to work hard on behalf of shareholders over the course of 2018.

With that Ian, let’s open up the lines for questions.

[Operator]

[Operator Instructions]. Your first question is from the line of Jonathan Block from Wells Fargo Securities.

[Jonathan Block, Wells Fargo Securities]

Hi, good morning and thank you for taking my questions. So Jon, you know I noticed as we look through the customer originations that you’ve done this quarter whether it’s a lithium or data, you yourself kind of led those transactions and leading transactions in this day and ages is actually quite an accomplishment, transaction are hard to locate, to underwrite and more probably to win, so just give us a sense on what allowed you to easily win that transaction when it’s very very difficult in this environment to compete and so maybe talk through a few of those competitive advantages for the folks on the call.

[Jon Yoder, COO]

Sure, so John, thanks so much for your call and you time this morning. So yes, look Data [ph] and lithium are transactions what we are certainly proud of where we think they are really high quality companies and we are supporting a really first class sponsor in both these transactions. It’s a sponsor that we’ve spent a lot of time cultivating relationship with. It’s one that is also has Goldman alums in important and significant positions. So we think we are benefitting there from our alumni network.

I think the other thing is both of these companies are software providers. And so, that’s an area where we think we’ve got a real specialized expertise. We spent a number of years really building up our relationships in that industry and really developing a strong underwriting expertise where I think that not also positions us very well, but I agree, I think the last thing that’s really been be key comes of our ability to win these transactions is something we’ve talked about on earlier calls, which is our exemptive order. And you know to remind everybody who isn’t familiar with what that is, an exemptive order is something that you need from the SEC in order to allocate a deal across several different investment funds, that’s managed by – that are managed by the same manager. In our case, we do have two other private BDC’s in addition to GSPDs and that gives us balance sheet that allows us to be relevant to some of these larger transactions. And since we can allocate these transactions across our three different clients, -- it means we can speak for a larger whole size and as I say makes us much more relevant. So and as they say, a combination of a lot of hard work in developing relationships with a really important sponsor, the benefit of having Goldman alums in locations within that sponsor, and having real specialized expertise, the relevant industry as well as has the ability to speak for size because of our co-investment order. Those are really the factors that allowed us to win these transactions.

[Jonathan Block, Wells Fargo Securities]

Got it. Then you know look, we understand how technical marks work, particularly in the SCF or the other balance sheet credit fund, so no need to belabour at the point, particularly given that some or more liquid energy you’ll had in the past in some of the telecommunication space, that had gone up and down and actually done quite well overtime. The question is if you did have one liquid name that traded down in the SCF this quarter and that kind of accounted for a decent amount of the unrealized loss, could you, do you possibly see that as a good opportunity for additional capital, particularly would you expect the credit to revert, so if a credit’s pushed down by a few small ticket orders of you know small lot sizes that might create an additional opportunity for you to own more of the credit in size and benefit on the upside given someone else’s for sale.

[Brendan McGovern, CEO and President]

Hey, Jon depending on – I’ll take a crack and Jon can chime in as well. So yes, if you look at the SCF overall, we talk about allowing, very pleased with performance for the full year 2017. We earned about a 12% return on that investment, which is certainly higher than what we’re earning on balance sheet. So it’s been a nice asset for us overall. We did, as you alluded to, in this quarter has a markdown in one name within that, though, diversified portfolio, there is 34 different names in that portfolio and that’s company called Global Knowledge.

It’s also a little bit of unusual investment, Jon gave the stats earlier in the prepared remarks about 97% of that book is in true first lien. That happened to be one position where we own both first and second lien. And so a few things to note; one that the company’s performance actually continues to be reasonably good, from our perspective the performance relative to marks’ a little bit unusual. We think is very light trading that contributed to the marks, but we do look to those fair values when we do mark those assets.

We have this quarter seen a replacement within that specific name, so we recouped about half of that unrealized gain so far through Q1 within that name, so overall not lot to see within that overall investment. In terms of your question around adding to the opportunity as I alluded to, Jon described in his remarks, we tend to focus on pretty narrowly syndicated and not incredibly liquid names within that strategy, Global Knowledge would fit that bill. So that the mark that we saw was from our perspective was result of that relative lack of liquidity.

In addition, we are -- within that SCF one things we benefit from is the financing which is really predicated on having a very diverse portfolio. So our total exposures to that name is, I believe about $24 million of notional value, so not really good opportunity for SCF to add there, but certainly I think you’ve seen us do that in other opportunities over the course of many years in those relatively infrequent instances where there is a somewhat liquid underlier.

[Jonathan Block, Wells Fargo Securities]

Got it. Got it. Thanks for taking may questions.

[Brendan McGovern, CEO and President]

Thanks, Jon.

[Jonathan Lamm, CFO and Treasurer]

Thanks, Jon.

[Operator]

And your next question comes from the line of Leslie Vandegrift from Raymond James.

[Leslie Vandegrift, Raymond James]

Good morning and thank you for taking my questions.

[Brendan McGovern, CEO and President]

Good morning, Leslie.

[Leslie Vandegrift, Raymond James]

Just on the originations and repayments for the quarter, just top level on the amount, a little bit lighter, not too low, but what the outlook is? Was that just bit of fourth quarter slow activity or do you see that going into 2018?

[Brendan McGovern, CEO and President]

So, Leslie, I’ll make a few there. So, we think it was a pretty solid origination number for the quarter, one of things that you did was I guess down a bit was really more on the repayment side, it relatively light repayment that caused us to be closer to the upper end of our target leverage ratio. So I think as we think about managing the originations obviously what we’re thinking through is trying to stay within that target leverage ratio. So I think that if anything with the [Indiscernible] provided some cap on how much origination that we do in fourth quarter.

But I think your broader question is round overall activity levels, frankly the fourth quarter was across the middle market are relatively robust quarter for transaction levels. We’re seeing in -- the first quarter historically has been a bit of a seasonally slower quarter. I would say, obviously we’re still -- the first quarter is not over yet, but first quarter is not shaping up to be terribly slow like it has in some quarters past. Feels like there's still a fairly healthy transaction environment out there, so we’re not anticipating a lack of attractive investment opportunities, but as I say keep all that in the context of – we’re managing our balance sheet to stay within our target leverage ratio and so we’re not going to over lever ourselves just because there are -- just because we possibly could.

[Leslie Vandegrift, Raymond James]

Okay. And then on the tax changes that came through in December, we’ve seen some other BDCs in the space talk about benefit to net asset value or the underlying fair value of your portfolio companies, just from a bit of release of stress on the tax in there. Have you seen that? Do you see it possibly coming in -- later in 2018 as we’re a bit more aware of exactly what’s going to hit company tax-wise?

[Jonathan Lamm, CFO and Treasurer]

I think certainly, we’ve done our own analysis on our companies of what we think the impact of tax reform might be. And overall it doesn’t seem like it should have a very material impact across the portfolio. That being said, I do think it’s early to be drawing a lot of conclusions, bear in mind that the tax changes are only in effect here starting in 2018. And so the first quarter isn’t even over, so obviously we haven't gotten first quarter results from our portfolio companies that reflect the new tax regime. So we'll -- little early to draw hard and fast conclusions. But broadly speaking as we've done our analysis we don't expect tax reform to have a major impact on the portfolio.

And dynamic as you know Leslie, I'm sure is, yet you have competing forces that are driving cash flow in the tax reform, one being obviously the lower tax rate which is been really helpful to producing more free cash flow, obviously competing with that is the cap on the interest deductibility at 30% EBITDA. And so at a very high level for companies that are levered to the way most of the companies that are levered it’s a relatively neutral impact. But as I say we’re not drawn any hard and fast conclusions yet until we get the benefit of all first quarter numbers when companies are applying the new tax regime.

[Leslie Vandegrift, Raymond James]

Okay. And then last question. As LIBOR finally starts to move a bit here faster than even base rate movement, where do you see your interest expense going to, because it was higher in fourth quarter 2017? Is that a good run rate from here or are we backing out because of the pension debt deal?

[Jonathan Lamm, CFO and Treasurer]

The change to the revolver wouldn’t have any impact in terms of how interest or interest expenses would move. So as LIBOR continues to increase if it does so that you can see a corresponding increase to that. We do have some fix debt in our balance sheet, but the majority of the balance sheet on the right side of financing is being revolver which will float up.

[Leslie Vandegrift, Raymond James]

So, there is no -- so meaning there's no fees in there?

[Jonathan Lamm, CFO and Treasurer]

The fees and the amend and extend of the revolver get amortized, we do it every year, so the fee shouldn’t really change -- shouldn't change the cost to invest overall.

[Leslie Vandegrift, Raymond James]

Thank you for answering my questions.

[Brendan McGovern, CEO and President]

Thank you, Leslie.

[Operator]

And your next question comes from the line of Derek Hewett from Bank of America Merrill Lynch.

[Derek Hewett, Bank of America Merrill Lynch]

Good morning everyone. What is the growth prospects – am I echoing?

[Brendan McGovern, CEO and President]

We can hear you fine, Derek.

[Derek Hewett, Bank of America Merrill Lynch]

Okay. What are growth prospects for the senior credit fund over the next year or so given the current market conditions? And then also what we see a increasing that the fund commitment at some point since its close to capacity?

[Brendan McGovern, CEO and President]

Yes. I’ll take a quick crack at that. As we always talk about, Derek, we generally don't set those kinds of targets. We’re not looking to allocate capital from a top-down basis. As we’ve described this quarter basically the asset growth was relatively flat. And I think we talked about it with you sometime last quarter as well. We continue to have within the existing SCF before we take on any incremental equity commitments, some additional asset capacities. So relative to our capacity we are bit under leverage and we also have the ability to both win our partner, put down incremental equity capital. So I think both of us have invested about 94 of the 100 that we’ve committed and there’s increment leverage available to us.

That being said, we still remain focused and bullish on the prospects to grow that part of our investment strategy over time. It's about 7.2% of the assets today. It's been close to 10% of the other point in time. It has been a very attractive experience. It’s our biggest investment. It’s been frankly are more successful, so, quite focused on that. One opportunity that we do have in the context of as we've acknowledged a tighter market were spreads are bit more challenging is to look at the right side of our balance sheet within the SCF, so we’re spending a lot of time there as well.

So, overall as we look over the course of 2018, we try not to make projections, but we would anticipate that we end up increasing both our partner’s equity commitment to the vehicle, as well as focusing on restructuring the liability side. I think with the benefit of getting that done we should be able to continue to produce very attractive returns on equity capital that we and our partner are putting down in to SCF.

[Derek Hewett, Bank of America Merrill Lynch]

Okay, great. Thank you very much.

[Operator]

And your next question comes from the line of Christopher Testa from National Securities Corp.

[Christopher Testa]

Hey, good morning guys. Thanks for taking my questions. Just following up on Derek’s question, to the extent that you’re looking to potentially increase the commitment capacity, I know right now, obviously the market is very, very frothy and lightly and broadly syndicated market, but would you be looking to potentially increase the capacity sooner rather than later so that you're prepared in case there is a substantial dislocation or is it something you're happy to kind of wait on for quite some time?

[Brendan McGovern, CEO and President]

Yes. Now look, Chris, its something that we’re actively focus on as I described. When you look at the SCF and there's obviously a ton of disclosure, sitting here today we do feel well position to take advantage of opportunities in addition to the equity capital that is committed but undrawn which is about $12 million between we and our partner. There is also some additional leverage capacity that we've availed ourselves to produce pretty significant asset growth relative to existing portfolio. That being said, we are focused on getting the upsize of the equity commitments in order to be long-term positioned. So its something that we’re actively working on and we’re hopeful I’ll come back with that -- with some news on that as we look forward in 2018.

[Christopher Testa]

Okay, great. And just segueing from that, to the extent we’re able to get more capital commitments and you do this, what type of reduction in the SCF credit facility cost, would you be looking at just kind of ballpark estimate?

[Jon Yoder, COO]

We think we can reduce the costs there by potentially up to 70 basis points.

[Christopher Testa]

Got it. And I’m just curious to, obviously these are more lightly syndicated loans, the broadly syndicated loans have reached a whopping 85% call it, wider as I call it free. How does that contrast with the lightly syndicated market?

[Brendan McGovern, CEO and President]

Yes. So within the sort of the lightly syndicated market, in terms of the overall portfolio both– well, let me start with the originations in the fourth quarter. About two-thirds of the new originations we did in the fourth quarter were covenanted. And overall on the portfolio it’s about 90% of the portfolio that is covenanted. So again I think it goes to what I said in our prepared remarks. We’re not looking to chase the market and just grow for growth sake and instead we’re not looking to make a top-down decision to say, hey, we got to get the thing x number of assets by x period in time.

So we think we’re continuing to be selective and do our work on each individual single name. We continue to value covenants. We think they are an important piece of been successful in most cases in middle-market lending and so as you can see from our statistics still pretty focused on it.

[Christopher Testa]

Got it. Okay. And one of the themes that we've heard from lot of your peers is that spreads seems to be sort of bottoming out somewhat and sponsors have generally push the envelope on structures as much as they possibly can hopefully. So just curious how – what your guys take is on that and obviously how that plays in your outlook for sponsor deal flow relative to the private wealth channel going through 2018?

[Brendan McGovern, CEO and President]

So look, a few thoughts there. So you’re obviously right, there's a lot of capital that’s been formed within private equity community, a lot of dry powder still sitting on the sideline there. The inventory of companies that’s owned by private equity firms continues to grow, grow fairly rapidly. And so that has a couple of effects. One is, as it relates the non-sponsored side what we’re seeing is that non-sponsored companies are choosing –or people who form companies, family-owned companies, entrepreneurial formed companies are choosing to sell their companies at earlier stages in their lifecycle than perhaps they would in the past.

The evaluations that they’re able to obtain through selling to private equity firms are not in many cases dramatically different than what they would get if they waited until later and sought a public IPO exit where they might be a public market valuation.

[Christopher Testa]

Got it.

[Brendan McGovern, CEO and President]

So there is frankly the capital formation, the private equity side definitely has implications for the non-sponsored channel. That being said, we certainly are very active on in looking for and evaluating opportunities on the non-sponsored side as well. In fact we’ve redoubled our efforts there I would say over the last two, three quarters. And we’re turning over every stone that we can there.

On the sponsored side, the dynamic – the other implication of having all this dry powder and all this activity on the sponsor side is, I think its been widely reported is that valuation multiples have been pushed up.

[Christopher Testa]

Right.

[Brendan McGovern, CEO and President]

And so leverage levels, looking at long-term trends have also risen. Nothing quarter over quarter, but certainly if you go back and look over the course of the number of years you would see higher general leverage levels in the market today than there were in years past. But we would also say that the expansion in leverage multiples is less than the expansion in overall enterprise values that are been ascribed to these companies by sponsors. So what that means is that loans to value are actually coming down, if you measure loan-to-value based on the purchase price that sponsors are paying for these companies relative to the amount of debt they’re utilizing to capitalize the companies. So it’s a complex formula, but I think those are some of the key implications that the investor should be aware of.

[Christopher Testa]

Okay. That’s great color. Thank you for that. And last one from me. With the undistributed taxable income per share around $0.80 and you guys consistently outearning the dividend. I could certainly appreciate the conservative dividend policy versus having to potentially cut it at a later date, but what in your opinion would be the catalyst for you to potentially bump up the regular distribution even by a penny or so?

[Brendan McGovern, CEO and President]

Look, we don't think that's something that the shareholder in general will value as we look at retaining that income, that undistributed income and looking how the market is valuing our company overall. We think that’s a better way to produce shareholder value. We certainly do with our board spent a lot of time on dividend policy. Over the overlong term could thing change? I think you’d have see a very long-term trend where we feel like we have very material significant capability of our earning, our state of dividend. But overall we, as you alluded to, Chris, would be much more mindful of exposing the company and the shareholders to the some point in future having, after raising dividend having to cut it.

So it's a put and take and overall, the lens that we look to evaluate that question is what’s going to be the best outcome for shareholders and at present we think maintaining the dividend policy and retaining that income is the best outcome for shareholders.

[Jonathan Lamm, CFO and Treasurer]

Yes. And if I could just elaborate on that, I mean, as Brendan mentioned we've been really pleased about the valuations that the market has ascribed to our shares and clearly if a dollar in our company is valued at a $1.15 by the market, it's better to keep that dollar in the company versus distributing where its going to be only worth the dollar. So, I think that’s kind of the idea that Brendan was alluding to.

[Jon Yoder, COO]

Yes. I would just add to that, that cost of keeping it in is relatively low excise tax costs.

[Jonathan Lamm, CFO and Treasurer]

Of course.

[Christopher Testa]

Okay. Now those are all great points, guys. And thank you very much for take my questions.

[Jonathan Lamm, CFO and Treasurer]

Thanks, Chris.

[Operator]

And your next question is line of Jim Young from West Family Investment.

[Jim Young, West Family Investment]

Hi. Couple of questions first, how much of your capital are you managing in your two private BDCs. I’m just trying to get a sense is that 1.25 billion in the public BDC but in total how much money are you putting to work in this space?

[Brendan McGovern, CEO and President]

Hey, Jim, it’s Brendan. So both of those other vehicles are public filers, so you can look and feel and touch those entities. Each of them have drawdown structures where we have multiyear drawdown periods. And each of them have roughly 1.1 billion of equity capital. And to-date we've drawn your approximately about 40% of the capital base of those entities.

[Jim Young, West Family Investment]

Okay. Thank you. And then my second question is, with respect to your proprietary deal flow from the private wealth management channel, can you give us a sense as to how many deals you’re seeing from that channel? And what the outlook looks like into 2018?

[Brendan McGovern, CEO and President]

Yes. Sure. So, look, we’re continue to see a lot of deals from that channel on a virtually daily basis we are getting the opportunity to see more new deals, so very active as I mentioned in response to the earlier questions, we’ve actually – we doubled our efforts there in the last couple of quarters in response to frankly a lot of flow. Those deals tend to be longer tailed meaning that unlike any sponsor process where typically there is from a deadline of when a sponsor needs capital in order to complete the acquisition and many of these transactions with non-sponsor deals they don’t come with those sort of built in timing requirements and so rather it’s a more drawn out process.

So it’s hard for that reason to make predictions on how much capital we are going to deploy in that channel in 2018. But I can assure you that it’s a channel we are continuing to be very very focused on and as I say have actually been growing our resources dedicated to that channel and in recent quarters.

[Jim Young, West Family Investment]

Great. Thank you.

[Operator]

At this time there are no further questions. Please continue with any closing remarks.

[Brendan McGovern, CEO and President]

Well we thank you all for your time on this Friday morning and as always if you do have additional questions, reach out to Katherine and the team and we look forward to speaking to you next quarter.

[Operator]

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. fourth quarter 2017 earnings conference call. Thank you for your participation. You may now disconnect.