Sixth Street Specialty Lending Inc
NYSE:TSLX
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
19.79
22.26
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Sixth Street Specialty Lending Inc
Earnings Call Analysis
Q3-2023 Analysis
Sixth Street Specialty Lending Inc
The narrative of the company's quarterly performance begins with a declaration of strong financial results, boasting an adjusted net investment income per share of $0.60, translating to an annualized return on equity of 14.4%, and an adjusted net income per share of $0.77, for an 18.5% annualized return. The modest discrepancy between adjusted and reported metrics was clarified as a noncash expense tied to fees on unrealized gains, emphasizing the company's preference for a metric that better reflects its operational success. Simultaneously, net asset value (NAV) per share increased to $16.97, notably surpassing its Q1 2022 value, signaling resilience and growth through a turbulent market.
A pivotal shift is occurring as private credit steadily gains market share from the broadly syndicated loan market, as evidenced by a publicized reduction in leveraged loans. Such changes point towards an increasing direct lending dominance at least until collateralized loan obligation (CLO) activity picks up. Amid this changing landscape, the company reported augmenting its capital deployment into favorable conditions, stressing both the competitive nature of the investment market and the critical role of astute asset selection and portfolio management taking center stage in delivering shareholder value. A keen observation arises that a higher-for-longer interest rate scenario could introduce challenges, notably possible default increases; nonetheless, the company exudes confidence in navigating these complexities.
The field of direct lending is becoming crowded as players compete for deals, pushing the company to reinforce its differentiated strategy. This environment has fueled the company to allocate nearly $1 billion in new investments, which constitute about 30% of the current portfolio. The persistence of capital availability and competitive dynamics underscores the necessity for discernment in investment choices. Echoing this approach, the company has chosen to pass on certain opportunities, reflecting their tailored risk tolerance and commitment to investor capital.
Underpinning the steady increase in NAV, the portfolio has reaped benefits from favorable market adjustments. Accounting practices have been meticulously followed, especially regarding noncash accrued capital gains incentive fees, which are related to the company's net realized and unrealized gains. The emphasis on record levels of investment income, alongside managing expenses and fund mechanisms such as undistributed income, conveys a company in control of its financial trajectory. With a significant portion of the portfolio affected by past interest rate hikes now recovered, the company anticipates further improvements in asset values, positioning itself for continued success in a challenging macroeconomic environment.
You don't have any saved screeners yet
Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s Third Quarter ended September 30, 2023, Earnings Conference Call. [Operator Instructions] . As a reminder, this conference is being recorded on Friday, November 3, 2023. I will now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.
Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.
Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the third quarter ended September 30, 2023, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30, 2023. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.
Thank you, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our President, Bo Stanley; and our CFO, Ian Simmonds. For our call today, I will provide highlights of this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A.
After market closed yesterday, we reported strong third quarter financial results with adjusted net investment income per share of $0.60. Corresponding to an annualized return on equity of 14.4% and adjusted net income per share of $0.77 corresponding to an annualized return on equity of 18.5%. From a reporting perspective, our Q3 net investment income and net income per share, inclusive of accrued capital gains incentive fee expenses were 57 and 74, respectively. The $0.03 per share difference between the adjusted and reported metrics is a noncash expense related to accrued fees on unrealized gains from the valuation of our investments. As a reminder, we exclude the $0.03 per share in the presentation of our adjusted results. If this year were to have ended on September 30, and we were to calculate the capital gains incentive fee as payable to the adviser and cash it would have been 0 given the gains driving the fee accrual or unrealized.
Our net investment income this quarter continued to be a function of robust net interest margin attributable to the asset sensitivity of our floating rate portfolio in this higher rate environment. The difference between this quarter's net investment income and net income of $0.17 per share was driven by $0.11 per share from unrealized gains largely from the impact of credit spread tightening on the values [indiscernible] and $0.06 per share from net realized gains. As many of you will recall, market volatility increased last year at the start of the rate hiking cycle.
And during Q2 2022, LCD first lien, second lien credit spreads widened by 123 and 206 basis points, respectively, creating downward pressure on the fair value marks across our portfolio and resulting in a $0.40 decline in net asset value per share related to spread movement alone. Over the 5 quarters since that time, net asset value per share has increased by $0.70 from $16.27 to $16.97, and now is above our Q1 2022 net asset value per share of $16.88 for 2 primary reasons. First, the underground portfolio from Q2 2022 has experienced fair values that have pulled towards par as first lien credit spreads have tightened 78 basis points. This has resulted in approximately $0.26 of uplift to net asset value per share.
Second, we have generated net investment income in excess of our quarterly base and supplemental dividends which has contributed $0.31 to net asset value per share over the 5-quarter period. This over earning is driven by our disciplined approach of deploying capital into investment opportunities that exceed our cost of capital inclusive of any credit losses. With substantial levels of both capital and liquidity available, we were able to deploy capital into a better environment in terms of both economics and underwriting standards. This has led to a successful deployment of nearly $1 billion of capital into new investments over the last 5 quarters, representing approximately 30% of the in-the-ground portfolio today.
The remaining increase is attributable largely to accretion of OID from new investments, company-specific valuation marks and net realized gains. Shifting now to the macro landscape. The overriding theme this year has been the realization that we are in a higher-for-longer scenario and the potential impact that brings to the economy. Zooming in on this topic for levered corporate credit, the higher for longer backdrop is twofold, including one that is immediate and the other one is delayed.
Over the last 12 months -- over the last 12 to 18 months, BDCs, for example, have experienced higher portfolio yields from the rise in base rates, contributing to elevated operating return on equity relative to historical averages. This outperformance has been largely universal across the sector given the floating rate asset sensitivity of these vehicles. The real differentiation will become evident when we start to see the lagged impact of higher rates play out across portfolios. This will likely be in the form of increased defaults followed by losses. We believe that in the long run, the strength of our asset selection and portfolio management capabilities will differentiate our returns for shareholders.
These competencies are deep within our culture. It has been built over decades and gives us confidence in our ability to continue to provide top-tier results and to shareholders for the foreseeable future. At quarter end, net asset value per share was $16.97, up $0.23 per share or 1.4% from the June 30 figure of $16.74. This growth was primarily driven by the continued over earning of our base dividend and net realized and unrealized gains from investments as discussed earlier. Yesterday, our Board approved the base quarterly dividend of $0.46 per share to shareholders of record as of December 15, payable on December 29. Our Board also declared a supplemental dividend of $0.07 per share related to our Q3 earnings to shareholders of record as of November 30, payable on December 20. Our Q3 2023 net asset value per share adjusted for the impact of the supplemental dividend at $16.90. With that, I'll now pass it over to Bo to discuss this quarter's investment activity.
Thanks, Josh. I'd like to start by sharing some thoughts on activity levels in the public and private markets, followed by observations on the competitive environment. Activity levels have picked up in the back half of 2023 as we continue to see a steady trend of private credit taking share from the broadly syndicated loan market. The total amount of outstanding in the leveraged loan index has declined by $23 billion or 1.6% over the last 12 months, and 2023 is on track to be the first year to show year-over-year decline since the global financial crisis. This shift has brought increased deal flow to the direct lending market, which we expect to continue as a broader reopening of the BSL market is largely dependent upon CLO creation, which remains challenged. Until the CLO machine resumes, which represents the largest buyer base of leveraged loan markets at roughly 65%, private credit is expected to continue to dominate as a leading credit provider to fund M&A transactions.
Notably, approximaely 1/3 of CLOs are now out of their investment period, with that the total increasing to approximately 40% by year-end. Without substantial and unexpected new CLO volume, this amount of the vehicles and harvest would imply a potential decline in the participation for longer maturity credit financings. That being said, the return of the BSL market in the future is inevitable, but we do believe there's been a more permanent structural shift to direct lending that will persist.
Under this lens, we expect to see a portion of the $130 billion of leverage loans maturing by the end of 2025 to come to a private credit, creating opportunities to put capital to work when interesting opportunities arise. While activity levels have picked up in the pipeline building, we are in a much different investment environment today than we were 12 months ago. At this time last year, capital was generally constrained across the sector as funding activity in 2021 in the first half of 2022 peaked post COVID and repayment activity started to slow. Today, available capital has increased as a result of a low M&A activity through the first 3 quarters of the year, combined with a significant amount of dry powder from fundraising efforts in the private credit space.
This dynamic has increased the amount of capital and number of players chasing and competing for new deals. With competition generally higher today compared to a year ago, deal terms are shifting as lenders are eager to deploy capital. As always, we are remaining true to our core underwriting tenants and are focused on investment opportunities that present the best risk return for our shareholders. Despite the moderately more competitive backdrop, we continue to see borrower demand for financing partners with deep sector expertise and a broad range of underwriting capabilities. For the third quarter, we had $206 million of commitments and $152 million of fundings. These fundings were across 8 new and 2 upsides to existing portfolio companies.
Our new investments this quarter were primarily first lien loans across 6 diversified user industries. New investment opportunities represented 97% of total fundings for the quarter with just 3% of funding activities supporting upsize to existing portfolio companies. Consistent with the moderate uptick of M&A activity in the third quarter, the majority of new investments were to support acquisitions. To highlight one of the largest funding Sixth Street [ enlcosed ], it seems secured credit facility to support Lone View Capital's acquisition of Smartlinx solutions. Our expertise in health care IT space provided a competitive advantage, their ability to act with speed and certainty within a tight time line to support the sponsor's acquisition in a competitive process.
Consistent with many of our other investments in the software services space, Smartlinx has a highly recurring revenue base, combined with multiyear contracts, providing long-term visibility into revenues. On the repayment side, we had 7 full and 11 partial investment realizations totaled $159 million in Q3. For our 3 largest payoffs, 1 was driven by an acquisition while the other 2 were driven by refinancings. For both refinancings, the successful growth of the underlying portfolio companies allowed them to access a lower cost of capital in the bank market, thereby providing a positive outcome for both our borrowers and our shareholders.
Although the higher rate environment generally yields less portfolio turnover, we expect to continue to see opportunistic repayment activity in our portfolio, providing us with incremental capital for new deployment opportunities. Shifting now to the health of our existing portfolio. The portfolio remains in good shape despite the higher for longer macro environment that Josh mentioned earlier. Management teams across our portfolio, companies have shown an increased focus on liquidity management and are placing a much higher importance on capital allocation decisions today. similar to last quarter.
We are continuing to see top line growth slowing as general slowdown and uncertainty in the economy has led to softness in bookings. However, we are still seeing revenue and EBITDA growth year-over-year and quarter-over-quarter across our portfolio. Although we have yet to see the demand destruction that we might have expected by this stage in the rate hiking cycle, we are starting to see signs of the consumer weakening at the margin as wage growth has slowed and consumer confidence is on the decline. Despite these developments, our portfolio is generally insulated from consumer discretionary trends given the B2B nature of the majority of our portfolio companies.
Moving on to portfolio composition. In Q3, our portfolio's weighted average yield on debt income producing securities at amortized cost increased from 14.1% in the prior quarter to 14.3%. This increase was driven by the impact of higher interest rates. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment points on our loans of 0.9x and 4.7x, respectively, and their weighted average interest coverage declined marginally from 2.1x to 2.0x, driven by the impact of higher cost of funds for our borrowers. As of Q3 2023, the weighted average revenue and EBITDA of our core portfolio companies was $209 million and $69 million, respectively. In terms of portfolio underwriting and credit quality, we continue to be thoughtful about our loan structuring process with utmost focus on protecting our principal against losses from credit risk and other market factors.
At quarter end, we had approximately 2 financial covenants pro loan agreement and had effective voting control on 91% of our debt investments. In addition, we have meaningful call protection across our debt portfolio. From a credit quality standpoint, we continue to see stable deposit performance trends across a significant majority of our portfolio. The performance rating of our portfolio remains strong, with a weighted average rating of 1.17 on a scale of 1 to 5 with 1 being the strongest. Non-accruals are minimal at 0.7% of the portfolio at fair value with no new portfolio companies added to nonaccrual status from the prior quarter. With that, I'd like to turn it over to Ian to give our financial performance in more detail.
Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.60 and adjusted net income per share of $0.77. Total investments were $3.1 billion, up slightly from prior quarter. Total principal debt outstanding at quarter end was $1.7 billion and net assets were $1.5 billion or $16.97 per share prior to the impact of the supplemental dividend that was declared yesterday. Our debt-to-equity ratio decreased slightly from 1.16x as of June 30 to 1.15x as of September 30, and our weighted average debt-to-equity ratio for Q3 was 1.18x. We continue to have significant liquidity for the size of our balance sheet with $952 million of unfunded revolver capacity at quarter end against $197 million of unfunded portfolio company commitments eligible to be drawn.
At quarter end, our balance sheet and funding profile were in excellent shape. Shortly after our Q2 earnings call in August, we capitalized on what proved to be a small execution window and raised unsecured debt in the investment-grade capital markets. We priced a $300 million 5-year bond offering at treasuries plus 295 basis points, consistent with our overall risk management framework to have floating rate assets and liabilities, we used interest rate swaps, matching the principal amount and maturity of the bonds and converted the effective cost of these new notes to SOFR plus 299 basis points. We were very pleased with the strong reception we received from investors for our offering. We continue to view the unsecured market as an important component of our debt capital stack, irrespective of underlying base rates. The issuance also rebalanced our funding mix to 56% unsecured debt.
In terms of our debt maturity profile, the issuance of the 2028 notes essentially prefunded our nearest maturity, which does not occur until November of 2024. We with nearly $1 billion of liquidity on our secured revolver, we have plenty of capacity to satisfy this maturity. Moving to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.60 per share from adjusted net investment income against our base dividend of $0.46 per share. As Josh mentioned, there was $0.03 per share of noncash accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.20 per share impact. Net realized gains added $0.06 per share to NAV primarily from the exit of our equity investment in Clear Company, which generated an unlevered 19.7% IRR and 2.5x MOM upon payoff.
Other changes represented $0.08 per share NAV reduction, which includes $0.06 per share as we reversed net unrealized gains on the balance sheet related to investment realizations and $0.02 per share primarily from net unrealized losses on investments from company-specific events. Shifting to our operating results detailed on Slide 9. We generated a record level of total investment income for the second consecutive quarter of $114.4 million up 6% compared to $107.6 million in the prior quarter. Walking through the components of income, interest and dividend income was $107.5 million, up from $102.6 million in the prior quarter, driven primarily by higher all-in yields.
Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were also higher at $2.5 million compared to $0.9 million in Q2 given the slight increase in repayment activity we experienced in Q3. Other income was $4.4 million compared to $4.1 million in the prior quarter. Overall, fees remained relatively muted during Q3 relative to historical trends as many of our payoffs were older vintage investments, including our largest prepayment, ChiroTouch, which was in the portfolio for over 6 years and generated an unlevered 14.9% IRR and 1.7x MOM for FLX shareholders. Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees was $61.4 million, up from $57.2 quarter. This was primarily due to the upward movement in reference rates which increased our weighted average interest rate on average debt outstanding from 7.1% to 7.5%.
We estimate undistributed income of approximately $1.01 per share at quarter end. As always, we will continue to review the level of undistributed income as the tax year progresses to ensure we minimize potential return on equity drag from the excise taxes, while prioritizing returns to our shareholders. Through the first 3 quarters of the year, we've generated an annualized return on equity on adjusted net investment income of 14.2% and on adjusted net income of 17%. We are pleased with these strong results, driven largely by higher underlying reference rates tighter credit spreads on the valuation of our portfolio, and most importantly, the avoidance of losses on our investments. Based on our performance through Q3, and we expect to meaningfully outperform the top end of our previous guidance range of $2.17 of adjusted NII per share for full year 2023, and exceed the corresponding return on equity based on adjusted net investment income of 13.2%. With that, I'll turn it back to Josh for concluding remarks.
Thank you, Ian. In closing, I'd like to take a minute to discuss how we're thinking about the future of private credit. It sounds like a big topic. As Bo mentioned earlier, the massive shift towards private credit has significantly increased the dry powder and a number of players in the space. While there are more firms in today's market, we continue to be one of the few who can drive structure and terms given our ability to write sizable checks with speed and certainty of execution. In addition to the significant capital base across the Sixth Street platform that provides attractive investment opportunities for SOX, we believe that our long-term success in today's growing market will be a productive 2 key differentiators.
First, SOX benefits greatly from the shared resources of the Sixth Street platform. We just returned from our Annual General Meeting of [ Lumine ] Partners in San Francisco last week. We're leaders in each of our business units across the franchise came together to provide insights and updates on different segments of the market. The broad range of sector expertise and cross -- combined with cross-platform collaboration enhances the deployment opportunities available to SOX as evidenced by higher all-in returns net of losses relative to the sector.
And second is our continued focus on the shareholder experience. Since our first investment in 2011, we have worked to uphold a distinguished return profile for investors by working to avoid credit losses and being disciplined allocators of our shareholders' capital. This has been our commitment to shareholders since inception. As a final note and probably to end on a somewhat somber topic in our prepared remarks, the world fills very much in a dark place right now.
There's a lot of pain and suffering. Risks and instability are elevated both economically and from a geopolitical standpoint. With this in mind, what we can do is focus on aspects that are within our control, including active portfolio management and optimal capital allocation. With that, thank you for your time today. Operator, please open up the line for questions.
[Operator Instructions] . Our first question comes from Finian O'Shea with Wells Fargo Securities.
Everyone on Josh, first question on the direct lending platform. It looks like you're head count jumped up a bit this quarter. So, seeing if you could double-click on that, particularly if it relates to adding a new strategy or if this is part of your build-out to larger market origination.
First of all, thanks for the question. Look, we always continue to add resources across the platform. Some of that's been in general sponsor coverage given the opportunity in the direct lending market given the challenges in the broadly syndicated loan market. In addition to that, we've added other expertise, for example, in the health care side with the senior hire that used to work with us at Goldman, so we continue to add resources for stakeholders and shareholders.
Great. And just another higher-level question. You mentioned that you expect the lag impact of rates to place through that sounded like it related more to the economy but obviously, direct lending borrowers have already been feeling this sort of on the front line of experiencing the higher base rates. And as we know, most have sort of treaded water so far at very low interest coverage. So can you talk about the sort of state of the union on the sponsor side dealing with this? Is there maybe fatigue setting in? Or is there dry powder running off or anything that would say, finally catalyze a wave of keys being handed over? Or is there still a lot of runway in your view?
Yes. Thanks, in. Look, I think what's been a little shocking to us, and quite frankly, why we're in this higher for longer moment is that the economy has been relatively robust. So if you look at the portfolio quarter-over-quarter growth, I think it's been about 6% in our portfolio. Earnings have been kind of in line with that. quarter-over-quarter, year-over-year revenue growth has been about 12%. And so you've had this -- you've had, obviously, fixed charges go up, but you've had given the strength of the economy and the strength of the U.S. consumer, which is showing on the margin, some signs of weakening, but still historically is in a relatively good position.
You've had a decent backdrop for revenue growth and earnings growth that you haven't had a huge -- although you've had declining coverage, you haven't had a huge pinch. I think on the sponsor side and capitulation side, I don't think we're seeing it. For example, on lithium, which I think is Cronos on the schedule of investments, as a software business that has some idiosyncratic challenges, but the sponsor put in a ton of capital to support the business for just a year extension. And so I think we have that market like yield to maturity and the sponsor put in a whole bunch of capital to continue to support the business. So I think that was only 1 or 2 kind of credit amendments this quarter. But it feels like we're -- sponsors continue to support the business. There continues to be fundamentals continue to be okay to good, although coverages are declining.
One moment for our next question.
In just real quick. The 1 other thing I just want to address, which I think you saw that uptick we -- for comprehensive purposes, we've added the -- our European direct lending team, we see a lot of opportunity there. That's obviously part of the bad bucket, but we did -- we have done some European deals in the U.S. fund. And so that team was added to the disclosure generally. So I think that is a piece of your first question.
Yes, that makes sense. And just to clarify that, that team existed at Sixth Street previously? Or did you.
No, most have existed, although we got into it.
Our next question comes from Mark Hughes with Truist Securities.
Yes. Thank you. Good morning. Related to the last question, any specific numbers you can share in terms of the percent of the portfolio maybe at or below 1x in terms of interest coverage and kind of how you're modeling that progressing through 2024 if we do stay higher for longer?
Yes. So look, outside of the -- the math quickly, outside the nonaccrual name, it's about 5% the non-occuring name of American achievement. And although I would say 2 of those are really good businesses there to just continue to make investment and have a ton of liquidity. So it's still at a reasonably low level. And again, I think companies are really focused on capital allocation and solving for cash flow.
So I don't know if that's the peak number, but it's surely companies are very much focused on it. The other thing I would say is interest coverage across the portfolio. So we just talked about the tail. But across the portfolio is about 2x. And so it ended up down slightly. And I think that's LQA annualized. And obviously, we're kind of peakish rates. And I think that was basically flat, down 0.1% quarter-over-quarter.
Appreciate that. And then Bo, you mentioned only 3% upsize this quarter. Was that -- is that reflective of maybe pressure on the companies that they are not in a position to raise more capital? Or is that just some normal variation perhaps?
Yes, I think it's really more driven by still a rather anemic M&A market. So when we see a lot of upside as the portfolio companies, it's generally M&A related or it can be an investment related. As Josh just mentioned. I think companies have been focused on capital allocation, they are investing heavily prior when interest rates were lower, cost of capital is lower now folks just in terms of people investment, in terms of the capital investments are really focused on areas that drive high ROIC. So you're seeing less of that and more focus on getting super efficient, driving more cash flows. But the big driver for this would be M&A.
Our next question comes from Robert Dodd with Raymond James.
So going back to 1 of your comments Josh on Tim's question. I mean when you look at what's going to be the differentiator for private credit businesses and obviously low term, you normally bought out to credit. Your comment being that the sponsors are stepping up. The economy is only really weakening at the margin. So what kind of time frame do you think the credit differentiation between portfolios, between managers, between shareholder returns, what kind of time frame do you think that's going to manifest on?
Yes. Thanks. I think -- let me repeat the question back understood it, which was if there's differentiation in shareholder experience based on credit losses, when does that start appearing? Is that the question, Robert?
Yes.
Yes. Okay. So let me start off and say, I think -- what we should have said, if it wasn't clear, is that there will be more differentiation. I think there is -- if you look at the data and you know the data both and I do, there has been -- even in the benign credit environment of the last 8 to 10 years, there's been significant differentiation already across the space as it relates to investor experience, most of that driven by credit losses. And so I would say that the differentiation already kind of exists. I think since -- if you look at since our IPO, for example, I think ROE for the space have been averaged about 7% top quartile has been about -- first pointing to the top quartile about 9%. We've been to 13.3%, most of that's been on the credit line. And so there's already been vast kind of experience already. The funny thing about credit and losses and defaults, they tend to lag the economy.
And so I would suspect that it will happen in the next 12 to 15 months if it does happen. I would say the other vector I would think, if I expect that private credit -- so I think there's going to be dispersion and experience for private credit for people. I also think on the margin private credit, we'll do better than broadly syndicated credit. I think the big differentiator for private credit generally has been their ability to tilt into industries. And historically, that's financed higher-quality industries. Put aside health care services for a second, which we don't really have exposure to.
But they got to pick better industries and they were -- they didn't have to be index huggers. So I would expect that private credit outperforms on the loss line and on the total return line, broadly syndicated credit. And I would expect that there will be differentiation within private credit. That -- more differentiation, that differentiation already existed for this moment in time.
Got it. I appreciate. The second thing that kind of has historically driven your ROE performance has been the fee income, and you tend to get more core protections than an average private credit lender, et cetera. When I look, you did disclose the -- if I look at your core protection in the portfolio, the potential core protection on the portfolio today versus principal -- it's the lowest level it's been in a year. I mean there's been -- fee income was up this quarter, but what's left looks to be relatively potentially lower -- is that -- is some aging out of the portfolio and that's just taking the ratio of the 2 lines. Is some aging and portfolio? Or is that just a random volatility hit?
I think -- let's come back to exactly, but I think some of that -- if you're looking at the fair value as a percentage of core price, I think.
I'm taking the ratio of that versus the fair value as a percentage of principal to get the fair value as a percentage of the core price Yes, the spare vantage of.
On the fair value of percentage of core prices, most definitely, that went up because fair value went up. But the portfolio is most definitely stuck around longer than usual, given spreads have -- we've been in a wider spread environment, so repayments have slowed. And so there's been a slow -- I won't call it aging out, but there's been a roll down of core price in the book. And so I think if you look at the fair value side, the fair values are up a little bit and repayments have slowed a little bit.
Our next question comes from Melissa Wedel with JPMorgan.
A lot of them have actually already been asked and answered. So I thought it might be helpful to look at maybe a couple of the new investments made during the quarter. There were a couple that were larger in size. If I'm looking at this right, maybe Skylark and Acura those are listed as manufacturing and transportation sectors, respectively. Just wondering if you could walk through sort of your thinking there on -- are those a bit more cyclical? How do you get comfortable with that? I would appreciate it.
Yes. Yes. Mercura is actually a software business, mostly for providing software and outsourcing business providing support solutions and cost management and payments for -- to support the maritime and shipping industry. So think of it as business services, software in the shipping industry. And so we don't -- we think we're a little bit cyclical, but not cyclical, but very, very high-quality business. The other name you mentioned and I think a Skylark the ERP to the manufacturing again, a European investment software ERP business, mostly end markets manufacturing, so not cyclical.
[Operator Instructions] our next question comes from the line of Ryan Lynch with KBW.
First question I had was just kind of a long, maybe kind of bolted question regarding your comments on.
We're excited about that, Ryan. That's a good mine.
All right. Well, it kind of has to do with just your comments on the broadly syndicated loan market, a lot of deals maturing by the end of 2025 and that as a potential opportunity. There's already been a decent amount recently of direct lenders taking out some broadly syndicated loans. look at [indiscernible] Highland and Finastra. I don't believe that fire has kind of been an active participant in that market, but please correct me if I'm wrong in that. So I would just love to hear a couple of questions on. How do you view those kind of because I'm sure you've looked at those deals. How do you view those current deals that have been refinanced out of the broadest low market, the quality of those deals -- are those deals in the future that, that potentially could come out?
Would those be deals that would go into the BDC? Or would that go more your perpetual private BDC that maybe has a little bit more of an upper middle market focus. And then 1 of the critiques or the fears is that, investors have is that, the broadly syndicated loan market is a little challenged right now, but the fact maybe changes a little bit, and that could open back up. there's a fear of why are these investors going to private credit versus payment, it's already in the broadly syndicated low market, why not stay in there when potentially you could get better term. So why would they go to the private credit market unless if they are guys who cannot finance in the broadly syndicated loan mark, so kind of like adverse credit selection. So kind of you can go over some of that at all.
Let me -- I want to correct on the record. We don't manage a perpetually non-credit BDC. So I want to make sure that is clear for people. We have an institutionally backed drawdown private vehicle, but that is very, very different structurally. So I want to thank the direction side. Yes.
Look, let me take you -- I don't want to talk about specific credits. What I would say is that the great thing about our business is that we get up every day, we get to make -- we get to underwrite and make decisions that we think are appropriate for our shareholders' capital. And so the names you mentioned we've looked at, and we didn't participate, and that's a great thing about a marketplace. People can have different views, different views about required returns, cost of capital, documents, momentum, all those things.
And people have different risk tolerances and people have different incentives about putting money work. We're not putting money to work et cetera. So I don't -- I -- like that's a great thing about a marketplace. And that's what our investors pay us for. The second thing, I think you said is kind of what's happening in the broadly syndicated loan market. Look, I think the broadly syndicated loan market is most definitely structurally more challenged. That market has -- been 60% buyers have been CLOs, 60% of those capital structures are AAAs. AAAs are difficult to find in place today outside of a unique buyer base, particularly in Japan. And so that -- and that market is starting to amortize -- and the -- so that's the technical backdrop of that market.
And the fundamentals of that market, my guess are going to weaken. Downgrades are outpacing upgrades recoveries have been low. And so a lot of those -- a lot of the existing CLOs are going to start amortizing and people are going to have to find, and they're subject to weighted-average life tests, et cetera. So the fundamentals are weakening slightly, the technicals are not great. Capital is going to have to find a new home and some of it's going to flow as an opportunity set into the private market.
And I wouldn't call -- I wouldn't necessarily think that's all adverse selection. Although people are going to have different views on what that should be priced at and what are good credits and bad credits, et cetera. And by the way, I'm not suggesting the deals that we've passed on were bad credits. So I don't think there's a -- hey, all these things are going to be adversely selected -- in addition to that, sponsors and companies have different business models and might need new capital and might -- which won't be available and might value certainly more, which is not available in the broadly syndicated loan market.
So I don't think it's as linear as things are going to roll all the back credits are going to roll into the private credit market. at all. So I think the 1 thing I also should note is that people talk about a maturity wall in the broadly syndicated loan market. in the global financial crisis, which never really materialized. The difference between today and in 2009 and '10 is that policymakers have the ability to lower rates and push people back into risk assets. And today, the policy makers don't have that. So I think the maturity wall is going to have to be -- it's going to be harder to deal with.
Okay. That's helpful get good background thought for response and all that. The other question I had, maybe for you, Ian, you guys talked about some of the declines in NAV in 2022 from spread widening you guys have had, and it continued this quarter of some spread, I think, tightening and increase kind of an uplift from spreads. I'm just curious, I know this is something we could probably calculate on our own by looking at your portfolio, but I'd just be curious if you have any sort of commentary on how much of that spread do you think is still -- and meaning an uptick in loan values, do you think it's still to be recovered? Or do you think we're kind of mostly you're done with it at this point?
Well, I think we're a little over halfway done, Ryan. So there's a little bit more to come. Some of that will come back to us through natural repayment activity. But we're probably, let's call it, 2/3 of the way on that particular pool of assets that was in place back in June of 2022.
Yes. I mean, I think we try to do a pretty good job of bridging it, which is some of the portfolio, we try to look at the portfolio in apples-to-apples basis before the Fed rate hiking cycle started. And I think we did it on a per share basis and how much of that has come back, and then obviously, the portfolio that we put in the ground in the wire spread environment, most definitely as spreads have tightened, got a lot of that benefit. And so I think Kansas I think that we'll go back to the script as you describe -- and then I think we -- I think is right. And when I look at the fair value of like 98.5% or something like that, my guess is probably going to seats right.
Okay. Understood. I appreciate the time today. That's all for me.
And I'm showing no further questions at this time. I would now like to turn the conference back to Josh for closing remarks.
Great. Well, first of all, thank you for your participation. We'll keep working hard for you. Obviously, as I said in my final remarks, [ full stark ] dark out there in the world, with elevated risk. We'll keep working hard. And I hope everybody enjoys their Thanksgiving and holiday season to come, and we'll talk to people after Q4 in Q1, if not sooner. Thank you so much.
Thanks, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.