Sixth Street Specialty Lending Inc
NYSE:TSLX
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Sixth Street Specialty Lending Inc
Earnings Call Analysis
Q4-2023 Analysis
Sixth Street Specialty Lending Inc
In 2023, the private credit market experienced a robust expansion, with private debt fundraising surpassing most asset classes and the leverage buyout (LBO) market in private credit growing to six times that of broadly syndicated finance. Despite an overall decline in transaction volumes reaching a ten-year low, down 37% from the ten-year average, the company capitalized on the shift from broadly syndicated to private credit markets. An integrated all-cycle business model and omnichannel sourcing approach enabled selective and active investment irrespective of market conditions. Fourth-quarter activities culminated in $316 million of commitments and $278 million in fundings across nine new and five existing portfolio companies, leading to impressive year-over-year growth of 18% in the portfolio despite a lower-than-average 15% portfolio churn rate.
The company's Q4 funding strategies were predominantly concentrated on first lien loans, which constituted 97% of new investments, affirming a commitment to senior positions in the capital structure. Prominent transactions included a senior secured credit facility for Kyriba, resulting in a gross unlevered asset level internal rate of return (IRR) and multiple on invested capital (MOM) of 13% and 1.7x, respectively. Investments focused on software and fintech sectors, reflecting a preference for businesses with resilient models, recurring revenues, and high barriers to customer exit. Notably, Bed Bath & Beyond's retail asset-based lending (ABL) investment continued to make periodic returns during its liquidation, with outstanding balances down to 1.3% of total assets.
The earnings report for Q4 indicated a solid financial standing, with net investment income per share at $0.62 and net income per share at $0.58. Adjusted for accrued capital gains incentive fees, the annual adjusted net investment income and net income per share stood at $2.36 and $2.66. Total year-end investments reached $3.3 billion, with principal debt of $1.8 billion and net assets totaling $1.5 billion. The portfolio showcased a robust performance rating of 1.16 on a 1-5 scale, an improvement fueled by new investments, while keeping nonaccruals insignificant at less than 1%. The debt-to-equity ratio grew slightly throughout 2023, and the funding mix was bolstered post-quarter end, with a significant increase in unsecured debt proportion to reinforce liquidity and debt profile.
The anticipation of a higher repayment activity in 2024 suggests a promising landscape for deploying fresh capital. The final quarter of 2023 saw older investments refinancing to benefit from tighter spreads, setting a precedence that could potentially lead to an uptick in opportunistic refinancings in the new year. January 2024 already marked a surge in the leveraged loan market's repricing activities, hinting at brisk activity and potential for value creation through additional fees associated with these transactions.
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Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s Fourth Quarter and Fiscal Year Ended December 31, 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 16, 2024. 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 fourth quarter and fiscal year ended December 31, 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-K 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 fourth quarter and fiscal year ended December 31, 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 our President, Bo Stanley; and our CFO, Ian Simmonds. For our call today, I will review our full year and fourth quarter highlights and pass it over to Bo to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A.
After the market closed yesterday, we reported fourth quarter adjusted net investment income of $0.62 per share or an annualized return on equity of 14.5%, and adjusted net income of $0.58 per share or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwind of the noncash accrued capital gains incentive fee expense, were less than $0.01 per share higher. The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations. Other drivers include unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investments.
For the full year 2023, we generated adjusted net investment income per share of $2.36, representing a return on equity of 14.4% and a full year adjusted net income per share of $2.66 or return on equity of 16.2%. Longtime followers of our business will know that we measure success based on returns. And 2023 was a strong year for shareholder returns. Excluding the post-COVID year rebound in 2021, full year return on equity on adjusted net income of 16.2% reflects the highest calendar annual return on equity since our IPO in 2014. While this partially reflects the round tripping of 2022 results, we viewed on a combined basis over the last 2 years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment.
Over the last 2 years, we experienced the fastest rate hike in cyclone history,y, contributing to increased volatility and economic uncertainty. Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023. While we don't have a complete set of pure data available yet, we believe these returns are nearly double that of our peers over the same 2-year period. That is supported by a 2-year return on equity on a net income of 6.5% for our peers, due September 30, 2023.
We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunity set by growing the balance sheet and issuing equity in May, while operating at the upper end of our target leverage range throughout the year. We lead into an investment environment where the deployment opportunities generated with earnings in excess of our marginal cost of capital. Our track record for efficiently allocating shareholder capital has been awarded as evidenced by our stock trading above book value.
As a result, our shareholders benefit from access to the more recent asset vintage. We believe this exposure will continue to drive differentiation in our returns relative to the industry. We are humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned in the future, starting with the health of the portfolio.
Despite the challenging operating environment over the last 2 years from elevated interest rates, higher inflation and uncertain geopolitical events, the portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter-over-quarter. We continue to have only one portfolio company on nonaccrual, which represents less than 1% of the total portfolio by cost and fair value. Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage of our portfolio companies.
While we highlight the overall health of the portfolio, the tails are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise in portfolios and losses drive divergence and returns, which I'll discuss further in a moment. The reality for private credit managers is the illiquid nature of the investment assets and the requirement to be long-only makes it challenging to reposition our existing portfolio with any level of speed as macroeconomic conditions change. We feel confident about the strength of our -- in the ground portfolio today for two key reasons.
First, as the deliberate asset allocation in our portfolio characterized by 91% first-lien senior secured loans to businesses, with strong underlying unit economics. And second is the significant exposure we have to recent vintage assets, which makes up nearly 40% of our debt investments by fair value as of quarter end. These investments were underwritten after the start of the rate hiking cycle and for higher quality companies with lower LTVs. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to the shareholders of record as of March 15, payable on March 28. Our Board also declared a supplemental dividend of $0.08 per share relating to our Q4 earnings to shareholders of record as of February 29, payable on March 20.
Our quarter end net asset value per share, pro forma for the impact of the supplemental dividend that was declared yesterday at $16.96 and we estimate that our spillover income per share is approximately $1.04. We would like to reiterate our supplemental dividend policies motivated by careful consideration of a number of factors, including the rig distribution requirements, not burdening our returns with excess friction costs incurred through excise tax, and our goal of steadily building net asset value per share over time. In connection with the Board, we analyze this framework on an ongoing basis.
Before passing it to Bo, I'll spend a moment on how we're thinking about the broader macroeconomic environment and the impact for the sector. As we've said on our last 2 earnings calls, we believe BDCs were at peak earnings, and we reiterate this view based on the shape of the forward interest rate curve. More broadly, our outlook for the sector remains cautious, as we know from history that credit deterioration takes time, and therefore, losses lag. This was evidenced during the global financial crisis, which began even in 2007 and defaults in the peak until 2009.
As the credit cycle continues to evolve in 2024, we expect to see 3 impacts for this sector. First is a decline in net investment income, driven by the downward shape of the forward interest rate curve. Second is an uptick in nonaccruals from credit deterioration resulting in further declines in net investment income. And third is a downward pressure on net asset value, driven by the potential for lower fair values from credit weakness and dividend policies in excess of earnings that result in a return of capital. The good news for our business is that we feel confident in our asset selection and credit quality, given our approach for being highly selective in our ability to lead an attractive investment environments.
Additionally, we view the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. This will result in potential for incremental economics through activity-based fees to offset the decline in net investment income from lower base rates. And finally, we are highly confident in our ongoing ability to over in our base dividend, which Ian will discuss in more detail.
With that, I'll pass it over to Bo to discuss this quarter's investment activity.
Thanks, Josh. I'd like to start by laying on some additional thoughts on the direct lending environment and more specifically, how it relates to the positioning of our portfolio and the way we're thinking about current opportunities in the market.
2023 was another productive year for private credit as the asset class continued to grow, in terms of both supply and demand. On the supply side, private debt fundraising continued to outpace most private asset classes and investors allocate more capital to the sector. As for demand, the number of LBOs [indiscernible] in the private credit market was more than 6x the number of finance in the broadly syndicated market in 2023, highlighting a clear preference for the private credit product. While private credit market share was up significantly in 2023, we expect to see a more balanced -- in 2024 as a syndicated market becomes more active again.
In terms of activity level. Transaction volumes are meaningfully lower in 2023. For context, total U.S. LBO transaction volume reached its lowest level in over 10 years, and was down 37% from the trailing 10-year average. Despite a general slowdown in M&A transactions, we benefited from the large market share shift from the broadly syndicated to the private credit market. As the BSL market regain share in the future, we feel confident in our ability to find deployment opportunities driven by the all cycle business model that we have created. This means that even when transaction volumes are lower or market share shifts, we remain active through our omnichannel sourcing approach that is not layered fully to M&A, sponsor activity or specific sectors. Further, we are not relying upon certain credit market conditions to prudently put capital to work while remaining highly selective.
In Q4, we provided total commitments of $316 million and total fundings of $278 million across 9 new portfolio companies and upsizes to 5 existing investments. We experienced $145 million of repayments from 4 full and 4 partial investment realizations. For the full year 2023, we provided $959 million of commitments and closed $808 million of fundings. New investments represented 94% of total fundings within 2023, with only 6% supporting upsizes to existing portfolio companies.
Total repayments were $469 million for the year, resulting in net portfolio growth of $339 million. In 2023, portfolio churn was 15%, which is less than half of our long-term average of 41% since IPO. This slowdown in portfolio turnover contributed to our second highest net deployment year, resulting in year-over-year portfolio growth of 18%. Given the tightening cycle and spreads, we expect to see increased level of repayment activity in 2024, creating incremental capacity for new investment opportunities.
On funding trends in Q4. 97% of our new investments were in first lien loans, reinforcing our long-term focus on investing at the top of the capital structure. All 9 new investments were cross-platform deals, where we leverage the size of 6 REIT's capital base to lead and participate in transactions that presented attractive risk-adjusted return opportunities for high-quality credits. Our sector selection remained largely consistent with the broader software theme across the portfolio, including several new investments in fintech companies. As we've said in the past, we are more focused on the resilience of the underlying business models rather than the specific sectors or industries. Exposure in our portfolio to software business is driven by the attractive fundamental characteristics we see in these companies, including variable cost structures, mission-critical solutions, recurring subscription-based revenues and high switching costs.
To highlight one of the largest transactions during the quarter, Sixth Street aged and closed on a senior secured credit facility to existing borrower, Kyriba, as part of a refinancing transaction. Over the life of the initial 6 REIT investment in 2019, Kyriba has shown strong growth, resulting in deleveraging, and has become a leader in cloud native treasury management software. Our long-term relationship with the company, coupled with Sixth Street's ability to commit to the entire facility provided an opportunity to continue to grow with a company we like and know well. The exit of the original facility generated a gross unlevered asset level IRR and MOM of 13% and 1.7x, respectively, for our shareholders.
We'd like to now take a moment to provide a quick update on one of our retail ABL investments, Bed, Bath & Beyond. Since our last update, we've continued to receive periodic principal payments through the liquidation process. At quarter end, the outstanding power balance represents only 1.3% of our total assets. Moving on to repayment activity. The majority of the payoffs expensed for the quarter were older vintage names that were driven by refinancings. As spreads tightened in the back half of the year, we started to see borrowers take advantage of the opportunity to lower their cost of financing. This has continued into 2024 as January marked the highest level of repricing activity in the leveraged loan market in 4 years. We expect this may drive an increase in opportunistic refinancings, which have the potential to lead to incremental activity-based fees.
In Q4, 2 of our largest payoffs, Price Chopper and Carlstar, which were 2021 and '22 investments, respectively, including call protection as the borrowers capitalized on the ability to access lower cost of capital. These investments each resulted in gross unlevered asset level IRRs of 16%. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized costs decreased slightly quarter-over-quarter from 14.3% to 14.2%. The weighted average yield at amortized cost on new investments, including upsizes for Q4, was 13.6% compared to a yield of 13.8% on exited investments.
Looking at the year-over-year trends. Our weighted average yield on debt and income-producing securities at amortized cost is up about 90 basis points from a year ago. The significant increase in our yields in 2023 illustrates the positive asset sensitivity of our business from increased base rates in addition to our selective origination approach across themes and sectors. Moving on to the portfolio composition and credit stats. Across our core borrows from whom these metrics are relevant, we continue to have a conservative weighted average attach and detach points of 0.9x and 4.7x, respectively, and the weighted average interest coverage remained constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to run rate borrower EBITDA.
As of Q4 2023, the weighted average revenue and EBITDA for our core portfolio companies was $230 million and $79 million, respectively. Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.16 on a scale of 1 to 5, with 1 being the strongest representing an improvement from last quarter's rating of 1.17, driven by growth in the portfolio from new investments. We continue to have minimal nonaccruals with only one portfolio company representing less than 1% of the portfolio at fair value, and no new names added to nonaccrual status during Q4.
With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.
Thank you, Bo. We finished the year with a strong quarter from an earnings and investment activity perspective. In Q4, we generated net investment income per share of $0.62, resulting in full year net investment income per share of $2.31. Our Q4 net income per share was $0.58, resulting in full year net income per share of $2.61. We accrued $0.05 per share of capital gains incentive fees in 2023. However, none of this amount was payable at year-end. Excluding the $0.05 per share that was accrued this year, our adjusted net investment income and adjusted net income per share for the year were $2.36 and $2.66, respectively. At year-end, we had total investments of $3.3 billion, total principal debt outstanding of $1.8 billion and net assets of $1.5 billion or $17.04 per share, which is prior to the impact of the supplemental dividend that was declared yesterday.
Our ending debt-to-equity ratio was 1.23x, up from 1.15x in the prior quarter, and our average debt-to-equity ratio also increased slightly from 1.18x to 1.22x quarter-over-quarter. For full year 2023, our average debt-to-equity ratio was 1.2x, up from 1.03x in 2022. We operated at the upper end of our previously stated target leverage range during the year and issued equity to take advantage of an attractive investment environment, despite lower portfolio churn. We have started to see repayment activity pick up in 2024, which we expect will continue.
In terms of our balance sheet positioning at year-end. We had $820 million of unfunded revolver capacity against $226 million of unfunded portfolio company commitments eligible to be drawn. Our funding mix was represented by 52% unsecured debt. Post quarter end, we further enhanced our funding mix and liquidity profile through a $350 million long 5-year bond offering in early January. Adjusted for the issuance, our funding mix reached approximately 70% unsecured, increased our unfunded revolver capacity to approximately $1.1 billion and further improved our debt maturity profile.
As discussed on last quarter's call, following the issuance of unsecured notes in August 2023, we have effectively prefunded our nearest maturity of $347.5 million of 2024 notes, which occurs in November. With over $1 million of liquidity on our secured revolver following the January offering, we have plenty of capacity to satisfy this maturity. As a result, we feel that our balance sheet is in excellent shape.
Moving to our presentation materials. Slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth. We added $0.62 per share from adjusted net investment income against our base dividend of $0.46 per share. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.13 per share impact to net asset value. There was a $0.15 per share decline in NAV from net unrealized losses, driven by portfolio company-specific events. Other changes included $0.04 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations, and $0.01 per share uplift from net realized gains on investments.
Pivoting to our operating results detailed on Slide 12. We generated a record level of total investment income for the third consecutive quarter of $119.5 million, up 4% compared to $114.4 million in the prior quarter. Walking through the components of income. Interest and dividend income was $112.1 million, up from $107.5 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 $3.5 million compared to $2.5 million in Q3, driven by call protection on 2 of our largest payoffs. Other income was $3.9 million compared to $4.4 million in the prior quarter.
Net expenses, excluding the impact of a noncash reversal related to unwind of capital gains incentive fees with $65 million, up from $61.4 million in the prior quarter. This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from 7.5% to 7.8%, and higher incentive fees as a result of this quarter's over earning.
During 2023, higher interest rates provided an earnings tailwind for BDCs. As interest rates increased, the floating rate assets that comprise the majority of BDC portfolios contributed to higher all-in yields for the sector. We earned $2.36 per share of adjusted net investment income, which reflects our highest annual operating earnings since inception. While we believe that operating earnings for BDC has likely peaked in 2023, we feel that our business is positively positioned to continue to outperform the sector in 2024, driven in part by our liability structure.
As a reminder, 100% of our liabilities are floating rate as we use interest rate swaps on our fixed rate unsecured bonds to swap them to floating. Given the shape of the forward interest rate curve today, and the expectation that rates will decline in 2024, our cost of funding will also decrease. As a result, the earnings profile of our business will show less sensitivity to falling rates relative to our peers. That being said, we recognize that being levered at approximately 1 to 1x debt to equity, minimizes the impact from liability sensitivity for us and the industry. Ultimately, we believe it is all without the left-hand side of the balance sheet as asset selection has greater impact.
Before passing it back to Josh, I want to provide a framework for how we are thinking about guidance for this year. We are mindful that the movement of spreads will be a key variable for NII in 2024, including the impact it has on the level of activity-based fees we expect to earn. Based on our financial model, which incorporates the forward curve and assumes spreads and leverage remains constant, we expect to target a return on equity on net investment income for 2024 of 13.4% to 14.2%. The lower end of this range reflects muted activity-based fees similar to what we experienced in 2023, while the upper end reflects a more normalized level of activity-based fees.
Using our year-end book value per share of $16.96, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $2.27 to $2.41 for full year 2024 adjusted net investment income per share. Given our belief that the sector has reached peak earnings, we are mindful of the earnings power of the business as interest rates decline with respect to our dividend level. Assuming our balance sheet remains constant as of quarter end, we expect every 25 basis points decline in reference rates to lower net investment income by $0.03 per share on an annualized basis. Based on the forward curve, this framework illustrates that our base dividend of $1.84 per share remains well protected through 2026.
Back to you, Josh.
Thank you, Ian. There's a lot to be excited about for the year ahead. As you heard from Bo and Ian, the pipeline continues to build and the balance sheet is in excellent shape. More importantly, we believe we have the right team and resources to differentiate our business to benefit shareholders going forward. Beyond the dedicated direct lending team, we leveraged the knowledge and sector expertise across the Sixth Street platform, including our energy, health care, retail asset-based lending teams. This broad range of sector expertise not only widens the top of our origination funnel but also allows us to provide financing solutions for more complex and unique investment opportunities. As one of a few lenders with these capabilities, we can generate alpha from these transactions. We remain focused on finding the best risk-adjusted return opportunities for our stakeholders and feel that asset is well positioned to do so.
In closing, I want to take a moment to thank each and every shareholder of our business for your continued support over the last decade. Next month marks our 10-year anniversary since our initial public offering in March 2014. Over this period through the end of 2023, we have generated an annualized return on adjusted net income of 13.5% and a total return for shareholders of 276% on a dividend reinvested basis. We have achieved these results by protecting our stakeholders' capital through sound capital allocation and minimizing credit losses.
We are proud of the track record we've delivered over this period of time and believe we are well positioned to continue building upon what we have achieved thus far.
With that, thank you for your time today. Operator, please open the line for your questions.
[Operator Instructions] Our first question comes from the line of Mickey Schleien from Ladenburg Thalmann.
Yes. Josh, there's a lot of demand as you mentioned, for private debt capital from larger borrowers. And I see that the portfolio's average EBITDA has about doubled over the last couple of years. I'm assuming some of that is just organic growth of your borrowers, but some of it is probably due to going upmarket. And I'm curious how you're viewing the terms available in the upper-middle-market versus the middle market where you've had excellent results historically.
Mick, thank you. Look, I think what we've seen is the best risk-adjusted return and quite frankly, the most activity levels has been upmarket. Maybe that changes. But we have seen, at least, from our perspective, the kind of the lower- middle-market and middle market, not as active as a big market. And our capital has been more valuable in the upper middle market, given up until now, the broadly [indiscernible] market was shut down. My guess is that ebbs and flows over time. And with SLX, I think our shareholders get both, and we can go upmarket, and given that we have a big platform and big pools of capital SLX shareholders can participate in the upmarket deals. .
And then given that mid-market deals where we still write $30 million to $50 million positions are also imported to SLX. So I think we can -- we're uniquely positioned where we can toggle between markets, and we can participate in both. Not many players who can do that. Some are so large, if they don't care about the middle market. Some are small that they don't have the balance sheet to participate upmarket. But we've gone with the risk-adjusted returns and activity levels have been. But my guess is that changes.
Thanks for that, Josh. That's helpful. And just one follow-up. Ian, could you repeat how much accelerated OID and prepayment fee income was accrued in the quarter?
Sure, Mickey. Accelerated OID and prepayment, it was about $0.04 per share.
It was -- that was recognized, not [indiscernible]
Recognized.
Yes. That's actually earned.
Our next question comes from the line of Brian Mckenna from Citizens JMP.
So I believe last year was a record year of deployment for the broader Six Street platform. And Josh, I think you've said in the past, you prefer investing environments where there's a lack of capital and liquidity broadly in the market. So with sentiment in the capital markets recovering here to start the year, how should we think about deployment activity throughout 2024 for the firm relative to 2023?
Yes, great question. So I think you -- on the [indiscernible] inside, no doubt last year was our largest deployment here across the Sixth Street platform in funds. I would suspect that -- I would suspect it's same, slightly down maybe. I think activity levels -- general activity levels in the environment are going to be better. But market share is going to be down. And so last year, activity levels were really, really muted. I think as Bo mentioned, it was like 25%. What -- Bo what specific have you mentioned about M&A volumes?
Yes. There was a 10-year historic low down 37%.
Historic low. I think that's most definitely for a variety of reasons. One is less volatility in the interest rate curve. So people -- private equity dry powder pressure on DPI for private equity responses to get money back to LPs. There's a lot of reasons why that's going to change on the activity level front. I think private credit market share will go down. And I think Sixth Street's market share in the private credit will probably stay the same to go up given our capability. So I would say it's probably similar to same. Last year was a really unique opportunity to deploy capital. And look, I don't know if this is clear in the transcript. But I think there's a circle for Sixth Street shareholders, which is -- we deploy capital well. We protect the balance sheet, stock trades above book value.
Then those shareholders were actually able to participate in times like last year because we were able to raise capital. Few were able to raise capital in that environment. And 40% of the assets today or assets in the post rate or from a post rate hiking cycle of a more interesting vintage to be honest. So most of that vintage were not -- did not end up in the current publicly traded BDC shareholder base. And so I'm very proud of what we've been able to do and I'm very -- I'm thankful for the [indiscernible] shareholder support. That and ultimately, they got access to that vintage, of last year's vintage.
Yes. Got it. Super helpful. And then just to follow up, ABS is another area of focus across the broader alternatives industry. So how are you thinking about this opportunity at Sixth Street? Are you looking to expand capabilities here. Is there a potential to add some of these assets to TSLX's portfolio over time? And then could you maybe just walk through how these yields on these types of deals compared to the relatives kind of regular way direct lending deals that you're doing in [indiscernible]?
I think it's [indiscernible] or maybe it's in pre quarter. I think we had one last quarter. So ABS, is a large focus for us. We have a spectacular partner. We always have the capability business. We have a spectacular partner in Michael Dryden, who ran that business at Credit Suisse, that we hired before the issues at Credit Suisse. And we've built out a team and expertise across kind of the different idiosyncratic asset classes in the ABS. We actually closed, it's called -- I think it shows up as CLGF Holdings on November 7 at $325 million secured term loan in -- for a borrow that's basically ABS collateral. So that shows up.
And that -- those yields I think we'll give me one second -- we'll come back to you. But what I think my guess is mid-teens. It is a mix of senior junior capital. Yes, that 15% kind of my guess. So look, we have those capabilities. We're excited about it. We're excited about the team at Sixth Street. I think that's part of the benefit for SLX shareholders is they get benefits this broad-based platform that quite frankly, a monoline standalone manager have a $3 billion BDC that could provide shareholders.
Our next question comes from the line of Finian O'Shea from Wells Fargo.
So first question with SSLP, the private BDC up and running now. Can you touch on the degree of overlap that they've had in origination so far? And then maybe how different the deals look? Like how far apart are they in, say, enterprise value. I'll leave it there.
Yes. So just for people to know, Sixth Street Lending Partners is a private BDC that's predominantly institutionally backed just like SLX, focused on the large cap space. And so how we define kind of thoughtfully to these offer is above $200 million credit facilities, SSLP has a first look below 200 SLX, given the size of the relative balance sheet. Given the co-investment order, I want to answer your question specifically, given the co-investment order requires once a public fund. So those would be SSLP or SLX invest in a company, they have to invest to continue to make follow-on investments.
And so the degree of overlap is high in that by name of a portfolio company. So you will see some small Toho positions. And if there's a duty -- effectively a duty to offer an SSLP, above $200 million, SLX will take a small piece of that so they might be able to participate in future transactions. If it's below $200 million, those credit facilities typically grow, SSLP will take a very small position. SLX will fill. And so the degree by number is high, the degree of portfolio overlap by like position size.
Awesome. That's very good color. Just a small follow-up on Bed, Bath & Beyond, you seem to flag that as a bit of a special case here maybe, but it's still pretty well marked. So I guess, can you give us some color on what the remaining collateral looks like? What kind of time line? Sure go ahead.
It's probably, my guess so today, we see [indiscernible] up 56%, including [indiscernible] launches back on our original investment. The collateral pools or a whole [indiscernible] of pools from -- ranging from receiving LCs back from -- on the vendor program with banks, from insurance, workers comp, LCs coming back to litigation pools. So there's strict varying kind of tails and time lines. But we -- as of now, we think we're pretty well supported.
Our next question comes from the line of Kenneth Lee from RBC Capital Markets.
In terms of the originations this year, last year, there was a considerable mix within new investments versus upsized or add-on financing. Wondering for this year, whether you would expect a similar mix or could be a little bit more balanced?
Yes. So I think our funding this year -- most of it was new, I think, Like 94% of it was new. We were the agent on a majority of that. I don't have a call. My guess is that it will probably be more balanced, portfolio company is becoming more active in doing add-ons. We've started to see a little bit of that. I think we're talking about name later today where there's, I guess, 2 names there that are upside opportunities. But I don't really have a crystal ball. The reality is, last year, anything that was new change of control, new buyout or financing had to be done in the private, credit market. And so we took advantage of that for shareholders.
Got you. Very helpful there. And then just in terms of a follow-up. Any updated outlook on potential opportunities from banks optimizing their balance sheets due to the changing regulatory framework.
Yes. Look, I would say broadly speaking, that means to call balls and strikes, Bank's balance sheet is still more stable, at least, the large -- the money for their banks. I think the deposit shifting that was happening where deposits were flowing in the treasuries has kind of peaked and slowed it might slightly be reversing on the margin. And so deposits are much more stable in banks. And so we are seeing banks come back into purchasing securities, including CLO, AAAs, et cetera. So that's been on a bank standpoint. I think that's been slightly different than last year.
I think the smaller banks or those banks that have significant commercial real estate exposure, obviously, are going to -- might not have liquidity issues like they did last year. So banks who had issued last year had liquidity issues and not. So First Republic, obviously, signature, you can go to the list. Banks this year, I think, are going to have more credit issues. Those credit issues will be around from my guess is commercial real estate, most banks don't hold noninvestment grade corporate credit of balance sheet.
Our next question comes from the line of Melissa Wedel from JPMorgan.
First, I wanted to clarify an answer, I think, Josh, that you had so one of the earlier questions around origination outlook for the year. I think you were referencing roughly the same or maybe a little lower. I wasn't sure if you were referring to sort of growth originations or net. Or were you talking about market share?
Yes. First of all, I was talking about this. I think the question was related to the entire Sixth Street platform. And so the platform last year, I think on the growth side of probably $4 billion to $5 billion of kind of origination. So obviously, some of that as discussed based on kind of appetite winning SLX. The question I was referring to was growth, but it was in the broader platform. Net, my guess is repayments will pick up this year. We had the lowest repayment here, I think, ever last year.
As I think Bo mentioned in the script, it was 15% portfolio turnover versus the average of like 40%. And so the average loan historically has been around for 2.5 years or something. And last year, which is not the math you should do, it would have been the average loan. Would have been around 5 years or 6 years, 5.5, 6 years. So I think -- my guess is growth will be the same to slightly lower, maybe, I don't know. We're investors. We're going to do things that we think are interesting for our stakeholders. But net, surely will be lower because the portfolio turnover will pick up.
Okay. I really appreciate that clarification. As a follow-up, I wanted to circle back to something Ian has said about the outlook for the upcoming year and sort of thinking about the ROE framework. It seems like one of the embedded assumptions there is that spreads on -- spreads will remain roughly stable with sort of the variable factor maybe being around activity levels. I guess I wanted to just get your thoughts on sort of spread stability if in an environment where you're seeing a reopening of the broadly syndicated market. And is that a fair assumption? Or could we see things narrow a bit more?
Yes. Look, I think we're kind of hedged on spreads, at least in the near term on earnings. Look, I think the earnings -- when you think about the activity level, even at the top end of our guidance, wasn't that high as it relates to NII per share. If you see spreads come in significantly, my guess is there's going to be a lot more activity level income in the book. So activity level income in 2023 was call it, I'm doing the math -- I mean, on accelerated OID and prepayment fees were $0.10 per share. In 2022, it was $0.27 per share. In 2021, it was $0.47 per share. So even in our 2024 estimates in the range, it's still pretty muted. So what I would say is, at least, for 2024, if spreads do come in and we see some pressure on net interest margin, surely with the activity levels pick up, activities to pick up.
Our next question comes from the line of Erik Zwick from Hovde Group.
Just a quick follow-up on the pipeline. I'm curious, as you look at it today, if there are any particular industries that are either comprising a larger share or look particularly attractive. And kind of on the flip side, if there's any industries that you're cautious are shying away from today?
Yes. So good question. Look, I think there's -- I would frame it as a couple of ways. I think there are -- in 2024, I'm more hopeful that our [ first ] company about that balance sheet opportunity set, which has historically been a kind of wane for us will come back. We're working on a couple of things that we think will provide good risk-adjusted returns that are complicated. So I think that's one theme. That is a theme. So good companies got balance sheets, capital structures that were put in place in a zero rate environment that's no longer a zero rate environment.
The second theme is, we have done actually more industrial and industrial services in the recent and I think last quarter and this quarter that will show up in the book. And so we like those businesses. We think they're kind of at mid-cycle slightly, maybe above mid-cycle earnings that are underwritable. There's certainly not at peak earnings. And so -- and we like have the dynamics there. Retail cash flow deals still we'll love. But retail, hopefully, will be another good opportunity for us. The consumer continues to shift wallet share.
I think you saw the negative print earlier this week on retail sales shifted from goods to experiences, the balance sheet for void during COVID, given the consumer can only spend their excess savings on goods. They're coming back down to earth. So I think that's going to be a good opportunity. And then we'll continue to operate in our sector themes such as software, et cetera. I do think you'll be more industrial. I do think you'll see the more complicated transactions show back up in 2024.
Our next question comes from the line of Robert Dodd from Raymond James.
So first one, maybe simple, maybe I missed it. Can you give us, Ian, for the ROE and the earnings guidance? What forward curve is factored into that? I mean today, it's 3 cuts, a month ago, it was 6 cuts. I think can you give us an indicator of what your goal practically [indiscernible]?
I think the exact page, by the way, which we got some help earlier. It was probably a week ago or what was last Tuesday was the forward curve we used. And rates are slightly up from there. But yes, that forward curve has been very, very tricky. But we use the forward curve as of last Tuesday and I think rates fall off a little bit or up from there. But hopefully that helps.
Got it. Got it. And then I think in your prepared remarks, you said -- I mean, there was some refinancing activity already in -- or repricing on in the fourth quarter, but those were '21s, '22s. So they did generate accelerated income, but not as much. If spread -- can you give us an idea of what you're thinking about how it could play out in '24? I mean if spreads do come in, did the '23 start refinancing your spreads to tighten up, which would generate considerably more income if they're younger versus older, I mean any thoughts on that?
Yes. Look, I think it's a great question. Obviously, there's more OID, unamortized OID and call protection in the '23 versus the older vintages. So you do you have that right. So you most definitely can see that happen. That has not modeled in. What you might have picked up in our guidance is that the very built -- the dispersion is higher. I think this year, in our guidance as it ever has been before.
That's right.
And it's because of the things that we're talking about on the last 3 questions. One is this more -- there's more volatility on the curve. The curve had 2 big moves last week. There's spreads and prepayment penalties. What I would say is in our base at whatever, $0.28 per share. We don't have that much in on accelerated [indiscernible] [ ROE ] prepayment fees. It's like $0.13 per share. So I don't, I don't know. The dispersion is wider for sure, our guidance moves wider for sure. And because the environment seems still continues to be volatile.
I appreciate that -- to cover that. I mean if the market is highly active $0.13 in one quarter, but I'll just leave, I think guidance. You're typically pretty conservative. So understood.
Our next question comes from the line of Maxwell Fritscher from Truist Securities.
I'm calling in today for Mark Hughes. Are you seeing any more competition in winning deals from the stepped-up fundraising and direct lending that Bo had mentioned, particularly if the broadly syndicated market becomes more competitive?
Yes. I mean, look, there's most definitely more competition and there's more capital raised. I think the overall, whatever you want to call it. Capital -- credit dry powder compared to private equity dry powder.I'm not a big -- I don't love that kind of theme because the moves in time, it doesn't always play out, but that so holds. But there's most definitely more competition. I think the good news and the bad news is that the asset class has been credentialized because it's provided a decent or a good risk-adjusted return for all different types of allocators and investors, but that leads to more competition. And so we'll continue, really need to adapt and evolve and iterate we can continue to provide: a, a great product service to our issuer with speed, and certainty and understanding their business; and also make sure we do that for shareholders and stakeholders. So there's most definitely more competition.
Got it. That's helpful. And so in the quarter for the new funding, there was a small step-up in equity investments. And I was just wondering if there's anything there or if that's just normal course of business.
Normal course.
I think there was some idiosyncratic to invest, but it's a normal level of activity. Yes.
Yes. I mean, look, I think part of what we try to be, we're investors. And if we -- if there's a chance to make a small equity [indiscernible] that's really accretive for shareholders, we'll do it on businesses we like. We -- our model is don't do it on everything. We're investors. Sometimes there's equity stories. We understand, and we can underwrite and sometimes, it's not. And -- but when we can, we'll put small pieces on the balance sheet.
Our next question comes from the line of Ryan Lynch from KBW.
First question I had was we've seen some of the data of some of the purchase price multiples coming down for new transactions as I think private equity is finally starting to want to exit investments for return capital. I'm just curious, have you seen the same decline in leverage levels on those transactions that you guys are seeing in the market? Whereas the loan to value on those businesses, which have been very low over the last year would still be in that same level. And the other question on that, are loan to values staying low? Is that really -- is that important to you? Or is it more important just the absolute leverage levels on these businesses versus the equity checks and loan to values?
Yes. First of all, the question, Well, I think valuations are all over the place. I don't -- I think we see them all over a place. I think generally, they're down. They should be down. Discount rates are up. So if you take a series of cash flows and you apply a higher discount rate to them, you're going to end up with a lower NPV. That lower NPV over the same current EBITDA or operating cash flow number is going to be lower. So I think generally, valuation should be down directionally because of the discount rates, weighted average cost of capital has most definitely gone up, given the move in treasuries.
When we think about -- and then I would say, given the move in, again, with 3 companies have less, generally speaking, have less capacity to take on debt and service debt given the higher interest cost. And so I think you most definitely have seen all those things. And I think LTVs are pretty stable. I would say -- the one thing I would frame up on LTVs is we don't look at LTVs. We look at LTVs, but through our lens, which is what do we think the business is actually worth. That may be consistent with what the sponsor is paying for it or not paying for. And we don't really get a whole range of comfort on the size of the equity check because they have a different kind of risk return profile than we do. We're kind of always short. We've written a call option, and we're short of put and they don't have that dynamic.
So I would say -- and I know I went deep. I would say we look at LTVs, it's through our lens, debt capacity is down because the rates are up. LTVs are pretty stable and valuations are slightly down. But they're all -- they continue to be all over the place.
Okay. That's helpful color. The other question I had is with the market, with BSL starting -- that market is starting to pick back up. I'm just curious, are you seeing any sort of new terms that are coming in, to deals that direct lenders are implementing in order to win deals. We've seen read and heard things like portability and things like that being put into to new deals. Are you seeing any sort of like unusual terms or terms kind of reemerge, that you guys aren't super comfortable with, in order for lenders to win deals as they're now more competing with the BSL markets?
Well, look, I don't know if it's a BSL thing. I mean I think we follow terms getting generally giving [indiscernible] because there was a whole much more private credit raise in the last 6 months or years. So I think terms generally have weakened. I think you have to look at it in the context of a idiosyncratic credit. And so is there more kind of light screen, springing covenants on revolver draws in large-cap private credit, yes. But I think the market does an okay job, decent job of making sure it's for the right credit. So most definitely, terms are continued, let's say, weakened, but continue to evolve. And that's part of -- hopefully what we bring to table being able to underwrite and make those decisions. Bo, anything to add there?
I think you hit it. It's -- what I would say is even though documents, in terms, are loosening, I think they're still on the margin better than they were kind of in the late cycle peak-ish levels in 2020, 2021. But with more competition will mainly from the direct lending market. They're seeing the general loosening of terms. We typically only play in deals, in fact, the only planned deals where we have a seat at the table and documentation. And we will not do deals if there's provisions that we're not comfortable with.
Okay. I just have one last one for me. You guys have never been -- you guys have always not been a been willing to step into some complex deals in the past. You guys have certainly done some asset-backed deals that have been complex. I'm just curious, do you have any sort of expertise across the platform and/or any desire for any transactions in the real estate space that could ever reach into TSLX's bucket, whether that's a direct loan? Obviously, there's going to be a lot of pieces to pick up in that space. It could be an opportunity. But I'm just not sure if you have that expertise or desire. Or whether it's a direct loan or even I know in the past, you've played in some of the structured products with CLOs. Maybe it's a structured product in that space. Just curious what's the appetite there and expertise in that area.
Yes. We have tons of expertise. We've invested billions and billions and billions of dollars in real estate. That was a large theme post the global financial prices the people might have read one of my long-time friends and colleagues at Goldman's came on, [ Julian ] [indiscernible], co-CIO, with Alan and myself across the platform. He's most definitely continue to focus on real estate and building out the expertise or augmenting the expertise we already have. As it relates to does it fit in that SLX, we'll have to get some thought into that. But we're sure we have the expertise, and we surely think it's going to be a unique area. Obviously, that is a bad asset. And so -- and that's a constrained bucket for us. I mean it's not constrained now, but it's a constrained resource. And so we'll also figure that out.
One moment for our next question. Our next question comes from the line of Bryce Rowe from B. Riley.
Just wanted to hit on some questions on the right side of the balance sheet. If you think about some of the repayment activity that you think will be a little bit more elevated in '24 versus '23, and put that in the context of where your debt-to-equity is at this point. Do you think you can kind of manage to that higher end of your targeted debt-to-equity range, meaning that I guess, net originations will be lower like you mentioned.
Yes. I think I met growth originations will be lower. My guess is net will be the same. So I think we'll be able to manage into that range. But I think people are asking growth, but I think that will -- I think that we'll be able to manage that into that reach.
And Josh, are you comfortable operating at the higher end of that range? Or would you prefer to be in the lower end?
I think we're comfortable in the range, in the -- at the end of the range. So we probably faded a range up to 1.25, and I think we're comfortable with that. At moments we've got above that, I think people remember we were 1.33 and did an equity raise to bring it back into the top end of the range. But I think we're comfortable in the range. I know we're comfortable with the range.
And then one more for me. You all mentioned pre-funding the '24 maturity. Does that kind of insinuate that you'll see the secure piece of the debt stack go up when we get to the end of the year? Or do you kind of like where you sit right now, pro forma, for the raise earlier here in '24?
Yes. I'll let Ian -- I'll color out and he can comment specifically. So I think our base case is -- SLX is not backed into the market this year in the bonds. But the market changes, and we reserve the right to be opportunistic, but that is the base case, which means that our secured debt, we will borrow under the revolver to repay the 2024. And so our funding mix will slightly change. That has 2 impact with secured versus unsecured funding mix. The other impact is that's our lowest cost of capital. And so it will bleed slightly into a lower cost of capital as we do that.
And the other thing I'd add to that, Bryce, is we talked about getting to 70% unsecured in our mix pro forma for the January deal. If you look back at where TSLX has been historically, we've been in the '80s. So when there are moments in time where it's opportunistic and it's beneficial for us to increase that funding mix, then we like that unsecured market.
Yes, the base case is we're funding on the revolver. We prefunded, like we said, we prefunded -- like we said in the script, we effectively prefunded that and got that off the table as the base case. And over time, should lower the capital.
Thank you. At this time, I would now like to turn the conference back over to Josh Easterly for closing remarks.
Again, thank you so much for your time. We really appreciate people's support. I hope people have an excellent Presidents' Day weekend, if you observe it, and we look forward to seeing people in the spring.
Thanks, everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect.