TPG Specialty Lending, Inc. Aktie

Good day, and thank you for standing by. Welcome to the Sixth Street Specialty Lending, Inc. Quarter 2 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Cami Senatore. Please go ahead.

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 second quarter ended June 30, 2026, 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 second quarter ended June 30, 2026. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck; and our CFO, Ian Simmonds. For our call, I will review our second quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will cover our financial performance in detail, and I will conclude with final remarks before opening the call to Q&A.

After the market closed yesterday, we reported second quarter net investment income of $0.43 per share or an annualized return on equity of 10.6% and net income of $0.43 per share or an annualized return on equity of 10.5%. Net asset value per share was $16.24 at quarter end, stable compared to the prior quarter. Our Board has approved a base quarterly dividend of $0.42 per share to shareholders of record as of September 15, payable on September 30.

Our second quarter operating earnings exceeded the base dividend level we established last quarter. As we discussed on our last earnings call, we expect activity-based fee income to normalize over several quarters following the market volatility experienced in the first quarter. Consistent with that expectation, repayment activity increased sequentially in the second quarter and contributed to $0.08 per share of activity-based fees during the quarter, although it remained below our long-term historical average.

Based on the repayment activity we have experienced thus far in the third quarter, we expect this momentum to continue and are increasingly constructive on activity-based fee income in the second half of the year relative to the first half. Following the meaningful widening of credit spreads in Q1, LCD first-lien spreads were largely unchanged during the second quarter, resulting in limited impact on the fair value of our debt investments from market inputs.

The stability of our net asset value per share in Q2 reflects the underlying credit quality of our portfolio, resulting from our consistent focus on disciplined asset selection, structural downside protection and active portfolio management. Portfolio company performance remains strong as evidenced by stable nonaccruals, improving interest coverage and consistent revenue and EBITDA trends. We believe this portfolio quality supports the durability of our business' core earnings power and our ability to generate ROEs in excess of our cost of equity capital through changing market environments.

Stepping back, we continue to operate in a market environment characterized by elevated interest rates, geopolitical uncertainty and evolving structural dynamics within private credit. Notwithstanding these uncertainties, the underlying economy has remained generally stable. Recent labor market data, including unemployment claims hovering near multi-decade lows, reinforces that view. We are also seeing early indications of a general pickup in transaction activity as we move through the back half of the year.

As companies and sponsors develop greater conviction around industry fundamentals and operating outlooks, we expect a more active M&A environment. For SLX, a more active market should support both increased origination opportunities and higher repayment activity. With that, I'll now pass it over to Ross to discuss this quarter's investment activity.

Thanks, Bo. I'd like to begin with the investment environment. Second quarter activity levels reflect the lagged effects of the market volatility experienced in the first quarter. Direct lending volumes declined by approximately half sequentially and compared to the second quarter of 2025, while private equity deal activity also slowed materially. Sponsor-backed M&A, which is an important driver of financing activity in our market remained constrained as limited exit activity and uncertainty around financing costs continue to suppress transaction volumes.

Despite that backdrop, our own investment activity stayed consistent with Q1. During the second quarter, we provided total fundings of $137 million across two new investments and capital called by our joint venture Structured Credit Partners. Our Q2 fundings are a result of our platform's reach and our focus on maintaining deep long-term relationships with our borrowers. Both of our new investments during the quarter were made with borrowers where Sixth Street had long-standing relationships and prior lending experience.

We believe this is particularly important in periods when market-wide transaction activity is limited. Our investment in [ Photo Holdings ], also known as Shutterfly, is a good example of this connectivity. As an investor in the company for several years, we have a deep familiarity with its business model and capital structure. This established relationship with both the sponsor and management enabled us to engage constructively on a refinancing of its existing debt resulting in a bespoke structured solution that includes significant contractual amortization, robust documentation and attractive economics for SLX shareholders.

We believe this transaction illustrates a core advantage of our platform, the ability to leverage long-term relationships, differentiated conviction and scale of capital to solve for complexity where traditional sources of capital may be less accessible. Pivoting to payoffs, we experienced stronger portfolio turnover during the second quarter relative to Q1. Total repayments in Q2 were $192 million, which drove net repayment activity of $55 million. Repayments increased by approximately 70% compared to first quarter, resulting in annualized portfolio turnover of 23% in Q2 and 18% for the first half of the year.

As Bo noted, this activity generated $0.08 per share of activity-based fee income in Q2. We benefit from embedded call protection and unamortized OID in our portfolio that provides meaningful earnings upside and stronger repayment periods. The repayment activity we experienced during the quarter was primarily driven by refinancings in either the private credit or broadly syndicated loan markets. An example is our investment in TS Imagine, a global financial technology provider, which was repaid in June.

The company refinanced its existing senior secured credit facility in the private credit market. Upon repayment, we received call protection, which contributed to an unlevered IRR of 15% and a 1.7x multiple of money for SLX shareholders. While transaction volumes remain muted on a broad basis, we are beginning to see earlier signs of a healthier direct lending market. Capital inflows have slowed and underwriting processes are becoming more disciplined, including with respect to documentation, lender protections, access to management teams and the depth of diligence lenders can perform.

We believe these developments should be beneficial for the sector over the long term. This shapes our view that we are in a period where the market prioritizes credit quality and certainty over pure speed, which aligns with our investor-first approach. The pace of new opportunities in our pipeline is accelerating. And while the timing of a broader recovery remains difficult to predict, we have the flexibility to remain selective. Our focus remains on leveraging the full breadth of the Sixth Street platform to identify those specific opportunities where we can earn the most attractive risk-adjusted returns for our shareholders.

Moving on to portfolio metrics and yields. At June 30, the weighted average total yield on our debt and income-producing securities at amortized cost was 11.2%, reflecting no change compared to March 31. Our omnichannel sourcing capabilities enabled us to put capital to work in a disciplined manner, demonstrated by a weighted average spread on new first-lien investments of 690 basis points, which compares to a spread of 527 basis points on new issue first-lien loans for BDC peers in Q1.

Our ability to originate new investments at attractive spreads remains an important differentiator. Over the trailing 12 months, our investment spread on new commitments, excluding structured credit investments, averaged 6.8%, largely consistent with the 7% spread on all floating rate investments across our existing portfolio. This alignment supports the durability of our forward earnings power and mitigates the potential for spread compression as the portfolio turns over.

In addition to maintaining discipline on new investment spreads, we remain focused on the high documentation standards that underpin our downside protection. At quarter end, we maintained effective voting control on 78% of our debt investments with an average of two financial covenants per investment, consistent with historical levels. Embedded call protection in our loan documents is a critical component of our underwriting process as it allows us to counteract reinvestment risk and drive long-term value for shareholders.

Before turning the call over to Ian, I'd like to provide an update on our existing portfolio companies, highlighting key metrics. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.3x, respectively, with weighted average interest coverage of 2.4x. As of Q2 2026, the weighted average revenue and EBITDA of our core portfolio companies was $465 million and $137 million, respectively.

Median revenue and EBITDA were $180 million and $57 million. Finally, overall portfolio performance remains strong as evidenced by a weighted average internal investment rating of 1.20 on a scale of 1 to 5 with 1 being the strongest. Credit quality continues to be stable with no new portfolio companies added to nonaccrual status during the quarter.

As of June 30, we had three portfolio companies on nonaccrual status, representing 1.3% of the portfolio at fair value. Top line growth has remained stable, while earnings durability has accelerated, signaling a resilient demand environment and increased operating scale across our end markets. Across our core portfolio companies, LTM revenue and EBITDA growth were approximately 8% and 11%, respectively. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. For Q2, we generated net investment income and net income per share of $0.43. Total investments were $3.3 billion, in line with the prior quarter. Total principal debt outstanding at quarter end was $2 billion and net assets were $1.5 billion or $16.24 per share. During the quarter, we completed two capital markets transactions to further enhance our debt maturity profile and balance sheet positioning. As mentioned on our last earnings call, we closed on an amendment to our revolving credit facility on the 1st of May, maintaining the pricing and key terms of the facility while extending the final maturity to May 2031.

Also during the first week of May, we issued $300 million of long 5-year notes at a spread of treasuries plus 180 basis points, marking the second tightest spread SLX has printed in the 5-year part of the curve. As we do with all our issuances, we swapped these fixed rate notes to floating at a spread of SOFR plus 185 basis points. This issuance illustrates execution on our underlying philosophy of proactively managing our liquidity needs with term unsecured financing and our commitment to enhancing the depth of our investor base with each issuance.

Following these transactions, our capital, liquidity and funding profile remain in excellent shape. For the second quarter, our average debt-to-equity ratio was 1.24x, up from 1.14x in the prior quarter, and our ending debt-to-equity ratio increased from 1.18x to 1.27x. Ending leverage was higher this quarter, driven by cash on the balance sheet held at quarter end that was subsequently used to satisfy the maturity of the 2026 unsecured notes in August.

Net of cash held at quarter end, ending net leverage was 1.17x, down slightly from 1.18x in the prior quarter. We had approximately $1.1 billion of unfunded revolver capacity at quarter end against $221 million of unfunded portfolio company commitments eligible to be drawn or coverage of approximately 4.9x. As of June 30, our funding mix was represented by 79% unsecured debt. Post quarter end, we repaid the $300 million of unsecured notes that matured on August 1, 2026.

The repayment modestly reduces our prospective weighted average cost of debt. Following the repayment and assuming the use of available revolver capacity and quarter end cash on our balance sheet, we had approximately $966 million of undrawn revolver capacity, representing more than 4.4x our eligible unfunded portfolio company commitments. We have no near-term maturities with our nearest obligation being $300 million of unsecured notes due in the second half of 2028.

As it relates to our equity capital, on two separate days during the month of June, our 10b5-1 stock repurchase program was triggered, resulting in the repurchase of approximately $500,000 of common stock, representing roughly 31,000 shares at an average price per share of $16.17. As a reminder, our 10b5-1 program is structured to execute automatically to buy back shares whenever our stock trades at a price that is at least $0.01 below our most recently reported net asset value per share.

This automatic framework underscores our conviction in our valuation marks, allowing us to systematically capture an accretive use of capital whenever market pricing diverges from our reported net asset value. This disciplined approach ensures we are allocating capital to the most value-enhancing opportunities for our shareholders. And for completeness on equity capital, we did not issue any shares through our ATM Program during Q2.

Pivoting to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV movement, we added $0.43 per share from net investment income against our base dividend of $0.42 per share. There was a $0.06 per share positive impact to NAV primarily from net unrealized gains on investments attributable to movement in equity market multiples. The impact of widening credit spreads on the valuation of our portfolio decreased net asset value by $0.04 per share.

The reversal of net unrealized gains on the balance sheet related to investment realizations resulted in a $0.02 per share reduction to NAV. And finally, there was $0.01 per share of net realized gains mainly from equity realizations in Caris Life Sciences. Moving on to our operating results detail on Slide 9. We generated $97.8 million of total investment income for the quarter, up from $93.4 million in the prior quarter. Interest and dividend income was $88.5 million, up modestly from the prior quarter. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were higher at $5.4 million compared to $3.4 million in Q1, driven by the increase in prepayment fees earned in Q2.

Other income was $4 million, up from $2.2 million in the prior quarter. Net expenses were $55.7 million, up from $52.4 million in the prior quarter, primarily driven by an increase in interest expense quarter-over-quarter. Our weighted average interest rate on average debt outstanding increased slightly from 5.5% to 5.6%. This was primarily the result of a shift in our funding mix following the 2031 notes issuance.

Lastly, on undistributed income, we estimate that to be approximately $1.12 per share at the end of Q2. Before handing it back to Bo, I wanted to provide an update on our ROE metrics. Year-to-date, we've generated annualized ROE based on net investment income of 10% (sic) [ 10.6% ]. As discussed on our first quarter call, we anticipate annualized ROE of 10% to 10.5% if full year portfolio turnover remains below 20%, with annualized ROE above 10.5% should portfolio turnover be higher. With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. In closing, we remain encouraged by the fundamental strength of our in-the-ground portfolio and the improving opportunity set across the direct lending market. While the global landscape remains marked by complexity and pockets of fragility, these are the environments for which the Sixth Street platform was built. We believe market activity may be approaching an inflection point. While there is an inherent lag between the transaction environment we are observing today and our reported results, we are increasingly confident that conditions are becoming more supportive of M&A activity.

The momentum we are seeing in our pipeline supports our expectations for a more active second half of the year. As conditions evolve, we expect to see a wider dispersion of outcomes across the market, and we believe SLX is well positioned to navigate this backdrop. Our confidence is rooted in the quality of our portfolio. Just as importantly, the breadth of the Sixth Street platform, including our thematic sourcing capabilities, sector expertise and scale of capital, which allows us to remain patient and disciplined, ensuring we prioritize opportunities where we can earn attractive risk-adjusted returns.

Periods of uncertainty often yield the most compelling deployment opportunities, and we believe our platform, liquidity and investment discipline uniquely position us to capitalize on this evolving market and drive long-term value for our shareholders. With that, thank you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

Ian, look, at the end of your comments, you touched upon the impact of -- potential impact of portfolio turnover. And I want to ask a couple of questions, one related to that. First, when we think about the dynamics that are driving normalization there, can you tell us a little bit about what is precipitating that activity? Is it the rebound in capital markets and equity prices driving valuations that make it attractive for sponsors to exit or just to be able to refinance on better terms?

Rick, thanks for the question. This is Bo. I'll take that. So there's, as you know, two components really that drive activity-based fees and payoffs within the portfolio. Those two components are first refinancings, which we saw last year a very active refinancing market with very tight credit conditions and compressed spreads. You're not seeing that activity materialize here in 2026 is generally, you're in a better spread environment to deploy. So you're not seeing a lot of activity-based fees or repayments related to the refinancings.

The second component that drives refinancings is M&A activity. And we were maybe a little different than others last quarter signaling to the market that we believe that market uncertainty, the war in the Middle East, higher energy prices, we're going to pause the market on M&A activity. And we signaled that to folks, and that is what played out. The good news is we're starting to see that thaw out. We're seeing that within our pipeline.

We've also seen that just within our payoff activity. We had a couple of names pay off in Q2. One was an M&A activity, the other was refinancing. We've already had a couple of payoffs in Q3 shortly after Q2 close. Again, M&A activity, one was a refinancing. But -- so you're just seeing a better signs of life in M&A. What I would expect in the second half of the year is muted activity-based fees or activity from refinancings because I still believe it's a better spread environment. We're going to continue to see that persist. But M&A activity is going to pick up, and that will drive more payoffs.

Got it. Very helpful. And you actually then almost perfectly segued into the second part of my question. You guys kind of teed up everything I wanted to talk about. Last quarter, you spoke a little bit about the improving dynamics on the origination side in terms of structure, in terms of diligence, in terms of spread. As activity is picking up on the M&A side, have you been able to retain that ground? Have you gained a little more ground? Where do we stand at this point?

Yes. Look, Ross had some commentary in the prepared remarks, and I'll let him comment a bit as well. But we continue to see those trends. Spreads are generally wider. Maybe it's 25 to 50 basis points, but they're generally wider. Fees are better. But more importantly, processes are just better. I think your ability to actually have access to management to do a full underwriting process, get access to data, have better loan documentations, all the things that we think are important, not only for portfolio yields, but also to protect the portfolio and manage the credits are all better. Ross, is that fair to say?

I agree with that.

Our next question comes from Finian O'Shea with WFS.

I wanted to ask about the bump in the structured credit JV, seeing if this indicates a faster pace of ramp. Also sort of second part, the yield was elevated. Is that sort of a par flush or seeing what to expect there? And then tying those things together, if this does ramp in an expedited way, it looks like you'll be meaningfully above the dividend, let's say. So how you would address that?

Hi, Fin, it's Ross. I'll take those questions. I think on ramp pacing, so through June, the joint venture had called $154 million of equity. So we're a bit over 25% ramped through the first 6 months of the program. And when we look out in the back half of the year and beyond, I think the pacing is really in line with the pacing that we expected and communicated when we established the joint venture. So less to do with accelerated pacing, pacing really in line. I'd say from a quarter-to-quarter standpoint during the ramp phase, there's a couple of different dynamics that will impact the dividend yield from quarter-to-quarter, things like amortizing JV level expenses, what financing structures assets sit in between warehouses and securitizations.

I think as we look at the asset spreads that we're originating in the joint venture and the liability market, we continue to feel comfortable with the medium-run guidance that we had given for the joint venture's dividend contribution to its members in the low to mid-teens context.

Would you be able to give the dividend guide from the JV for the third quarter?

I don't think we're going to do that on this call, Fin. I think generally, the -- it will depend on specific timing of securitization closes and overall loan market dynamics over the next several weeks. Obviously, we adjust pacing of ramp to asset market conditions as well. So I think we're really more focused on planning the business using more medium-run guidance.

Okay. That's helpful. And just, I guess, a final one on that, like not -- I think most of us here aren't much of CLO experts, but from what I gather, it's not the best time, the arb isn't great and all that, but there are opportunities, deeper discounts in the software sector per se. Are you more aggressive on that end? Or is this more of a clean, just sort of arb play right now and maybe in the future as you ramp?

Yes. I think on the asset side, the investment strategy is consistent with Sixth Street and Carlyle's broader CLO investing strategy. So our 10-Q includes a number of portfolio metrics, including industry composition of the pool. It's diversified. It's not concentrated in a particular industry. We also break out weighted average spread on investments held within the joint venture financing subsidiaries, which is a bit under 280 basis points.

So we view this as a high-quality portfolio, not one that's focused on excess risk on the asset side. And I think as we highlighted in the initial comments around the joint venture, really a big part of the power is the fee-free nature versus the fee-bearing nature of market CLOs that you may reference. And so this program has a 400 to 500 basis point equity return advantage, which allows it to ramp attractively even in tighter arb environments.

Our next question comes from the line of Arren Cyganovich with Truist Securities.

Investment activity, obviously, it's good news. You're seeing some increase and you highlighted your pipelines getting more active, seeing some potential for the second half. Do you think that this is picking up soon enough that you'll actually see some closings in 3Q? Or will it likely be more of a 4Q story?

So pipelines are fickle and general processes run anywhere from 2 weeks on the extreme end to 12 weeks plus. And as we focus on larger deals that maybe have more complex regulatory approval, those can even be more prolonged. The good news is the pipeline includes a lot of late-stage deals that we have decent visibility into. So we do believe you'll start to see that in Q3, but then a marked pickup in Q4. So it's going to be mix. We do see -- we have some things already committed to subject to regulatory approval that should close. We don't have control over that. But I would expect to see some activity in fundings in Q3 and then spilling over certainly into Q4.

Got it. And then maybe you could provide a little update on how your software portfolio company exposures are performing relative to the overall portfolio in terms of either revenue growth or EBITDA growth? And what's the latest update in terms of your software loan exposure is.

Yes, I'll take that. So our technology portfolio continues to perform in line with the general rest of the portfolio. We saw, as we mentioned, about 8% portfolio revenue growth. That was in line with last quarter. We saw a step-up in earnings growth to 11% from, I believe, 9% last quarter-ish. So we're seeing better earnings power, but a continued healthy portfolio. That is true of the technology. It's almost on top of it. It's actually a little bit better from a growth rate standpoint and a little bit better from an earnings standpoint.

We're seeing no trends related to particular end markets within technology. Retention rates continue to be stable. So it continues to be healthy. That said, we do believe there will be continued tails. And what I've seen generally, not just in our portfolio, but across the sector is a dispersion of outcomes for businesses. So the businesses that have been performing poorly over the past couple of years continue to perform poorly. But for the most part, the bulk of technology and software names are -- have healthy bookings and are not seeing disruption from any AI initiatives to date.

Our next question comes from the line of Ken Lee with RBC Capital Markets.

Just one on the prepared remarks, you mentioned that you've been seeing consistent spreads on new investments, consistent -- on the new investments with the existing portfolio on a trailing 12-month basis. Just curious, has there been a mix shift towards more complex, more differentiated investments over the last several quarters to be able to support that kind of spread. Just wanted to dig in a little bit more and see where some of that differentiation is coming from.

I'll take that, and Ross can add anything if he'd like. So the power of our platform allows us to be very thematic in our approach to go-to-market and find things that are in the scenes, frankly, away from where a lot of our competitors are sourcing. And that has been a big driver of our originations over the past six quarters of last year, we were very vocal about doing more sort of nonsponsor-related activity than we had seen in historic periods.

We've seen a continuation of that trend. And I think last quarter, we mentioned our -- the restructuring initiatives and good company, bad balance sheet type situations, we expect to see more of. We probably had one of those originations this quarter that Ross can talk about. But it's really just the power of the platform and that thematic originations that allowed us to be very consistent with our spreads on what we've originated.

Yes. I think, Ken, this is Ross. Shutterfly is maybe a good example of an investment that fits within our kind of complex balance sheet but high-quality underlying company theme that we've invested in since inception. So that's a dollar one first-lien term loan that we put in place alongside a secured bond issuance in 2Q to refinance the company's capital structure.

It's a name that our platform had been invested in over several years. So we had real differentiated insights and views on the company that allowed us to drive a very detailed underwriting and as a SOFR plus 700 basis point spread on that investment consistent with the overall portfolio, one that we think is consistent with the ROEs we're targeting for the SLX business.

Got you. Very helpful there. And one follow-up, if I may, just in terms of the ROE outlook, any other key factors or drivers that we should be mindful of besides the activity-based fee income just for the near term there?

Hi, ken, it's Ian. I think we really think about the upside in our business being tied to elevated activity levels. And so that's why we chose to guide the -- reframe the guidance towards that as the metric. If you think about our portfolio turnover year-to-date of about 18% and our year-to-date ROEs being in that 10% to 10.5% range, that's kind of where we're living today. Does that present upside? We would like to think so, but we can't control the portfolio turnover.

Our next question comes from the line of Chris Muller with Citizens Capital Markets.

Nice to be with you. Maybe starting with the interest rate environment. So given that there are 2 rate hikes priced in by midyear '27, do you guys feel that the tailwind, if that's realized, will put a floor on NII? Or could there be some spread compression and leverage moving lower to offset that? Just curious how you guys are thinking through those dynamics.

That's a really good question. If you look at the forward curve, it has certainly shifted from what we've seen as historical levels and would be supportive of better earnings if the spread environment remains. For the time being, what we're seeing on the origination side, we're seeing continued strength in the spread widening that we've seen in the past, as I just mentioned.

So I think we're hopeful that spreads will have reached a floor, and they're not going to be offset by risk-free rates being higher for longer and actually shifting up and to the right. So that would be supportive of better earnings in the future for the space. We're cautious with that because what we saw before was as risk-free rates came down, people offset that with spreads. It is a little bit different competitive environment, certainly with capital coming out of the space and the reallocation of capital away from direct lending. So we're hopeful that's supportive of better long-term earnings for the space and for us.

And I'd just add, Chris, it's Ian. Even if we just look at the data on movement in the forward curve since we last held an earnings call, we're seeing an uplift of 40 to 50 basis points through the end of 2026. So that supports your initial question about it being supportive of overall earnings. Hopefully, that's helpful, Chris.

That's very helpful. And then just a quick clarifying one on the Structured Credit Partners JV. Can you guys just remind me what the target leverage for that vehicle is and just how much of a contribution to earnings it will be once it's fully ramped?

Sure. I'm happy to take that one, Chris. So generally, we would expect that the financing subsidiaries of the joint venture will be something in the 85% to 90% debt to capitalization range, consistent with the way CLOs are structured, which is the final financing structure for the assets that we're ramping within that portfolio. And we haven't given specific contribution guidance at the TSLX level other than to say the target total investment size for TSLX is $200 million. And again, expect a medium-run dividend yield contribution in the low to mid-teens context on that amount.

Our next question comes from the line of Robert Dodd with Raymond James.

I want to reconcile something, if I can. Bo in your opening remarks, you said, obviously, you thought third quarter maybe through the rest of the year, you expected momentum on activity-based fees or we're increasingly optimistic on activity fees in the second half. When I look at the disclosures elsewhere in the portfolio, right, your core price to principal in the portfolio went up a little bit. That's to be expected.

I think Shutterfly maybe would have moved that. But your fair value to core price declined, which normally would imply to me that there's lower confidence embedded in the portfolio fair values that the core protection is going to be realized. So can you reconcile that into -- or is it a case of you're optimistic, but you don't have anything identifiable and so it's not factored into the portfolio, but you're hopeful.

Yes. Like I think we're optimistic because we're seeing an increase in the pipeline and M&A activity, which is an early indicator that there's a pickup in M&A, and there's going to be more transactions. That's also coupled with the fact that we've actually seen already a couple of payoffs related both to M&A and refinancings. As it relates to the call price, you're right, our price call price to book widened with a couple of our originations that had a strong call protection, but there's nothing embedded within that, that would suggest that we're not confident of activity-based fees in the future.

Well, I would just say, normally, when you have an imminent activity-based fee that you would expect rather than optimistic about, you tend to factor it into fair value for the asset, and that didn't appear to happen this quarter. But thank you for that. In terms of the -- on structures, do you think if the market remains more rational for lack of a better term, right, to your point, the credit quality matters more than speed. Do you think there will be more opportunities for your specialty, I mean, finding those slightly more complex things. Do you think complexity is going to grow as a share, if you can -- if I can, of the private credit market over the next several years, which obviously would play into your hands if it sort of -- if it did?

Yes. We're generally optimistic that we're entering a period of more complex capital needs. That's coupled with a very robust financing market over the last couple of years where you saw erosion of credit standards, et cetera, and probably a very robust M&A market where things may or may not have been over-levered. Now look, the backdrop also is supported by a generally decent economy. So you're seeing some earnings growth that maybe offset that. But we do believe -- the forward is going to be about managers that have the liquidity and the capabilities to navigate complexity. And I think that's what Sixth Street has been set up for.

Our next question comes from the line of Paul Johnson with KBW.

I'm just curious, like given everything that's occurred this year, like how has the dynamics, the competitive dynamics within the direct lending market, particularly kind of in the upper middle market area, how has that changed this year, I guess, if at all? And are you seeing, I guess, more opportunities to be leading deals, taking effective control of more deals just with some of your competitors that could be potentially a little more constrained?

I think that's definitely a trend that we're seeing. As capital has come out of the market, mainly the capital inflows reversing from the retail -- those that had exposure to the retail fundraising market, you've seen less competition in the upper middle market. That has afforded us the opportunity to be a solution provider in that market. And as you know, we generally like to play a lead role or at least have effective voting control in the majority of our transactions. That's no different than the opportunity set that we're seeing today.

I also would say this happens from time to time as market dynamics shift, but the relative value of what you're seeing in the upper middle market from an opportunity standpoint on a risk-adjusted basis is generally better than what you're seeing in the lower middle market right now. So that has been the focus of our originations that can change, but that has been a focus for us.

Got it. Appreciate that. I'm also just curious with some of the changes made at the Fed Reserve here recently and moving away from guidance towards some of these meetings, does that affect sponsor positioning at all or in any way kind of prolong, I guess, the exit path maybe here in the near term as we have less visibility over the forward Fed rate and any sort of potential action from the Fed Reserve? Or I mean, is there anything changed there at all?

I don't think it's specific to that. What I would say is whenever there's periods of uncertainty, it makes it harder for both private equity and corporations to transact. I don't -- I have -- in the conversations I've had with those managers, I haven't specifically heard anything called out around uncertainty with the Fed change in stance there. But I would generally say the less certainty, the harder it is to transact. That being said, we are seeing, as mentioned, a little bit better activity in the pipeline than we had seen earlier in Q2. Coming into Q2, it was very, very anemic.

Our next question comes from the line of Ethan Kaye with Lucid Capital Markets.

Just one quick one for me. Wondering whether you're seeing kind of any more opportunities to buy discounted assets in the secondary market. Is this something you're anticipating becoming a bigger share of new investment activity?

Yes. Thanks for the question. We get this a lot. We wish there were more opportunities to deploy in the secondary market. There really hasn't been. We haven't seen any real meaningful distressed trades because of liquidity, et cetera. There's been some one-off things that we have focused on. There's been some one-off portfolios that are for sale that ended up being quite competitive, but it hasn't been a meaningful opportunity for us to date.

And just to jump in, Ethan, this is Ross. I think where we've seen more opportunity is to pursue private financings of selected liquid loans, again, with Shutterfly being a good example of that actually doing a private loan alongside a liquid security but less so on the purchase of liquid debt.

Our next question comes from the line of Derek Hewett with Bank of America.

Maybe circling back to the forward curve discussion, which could potentially provide some core earnings tailwinds. What about from a credit perspective? Are you concerned that maybe 1, 2 potential rate hikes could either negatively impact credit or maybe even cause the potential recovery in M&A to stall?

Yes, it's a good question. The good news is, I think we mentioned in our prepared remarks, we're actually seeing interest coverage on the portfolio increase sequentially quarter-over-quarter from 2.3x to 2.4x, which is indicative of very healthy earnings growth and earnings power. So we do not actually have concerns at least to date about the forward shift given those strong metrics and the overall health of the portfolio. It may mute the M&A environment modestly. But I think as long as folks can even develop confidence in what they believe is that forward curve and model around that, there may be some activity that folks are comfortable with, and we're certainly seeing that within the portfolio -- I mean, within the pipeline.

Our next question comes from the line of Rick Shane with JPMorgan.

I apologize, I should have asked this earlier in the call. Look, your multiple remains a significant competitive advantage. There are any number of smaller BDCs trading at significant discounts to NAV. I am curious, and you've gotten the question about purchasing distressed assets, but what about just purchasing distressed companies or challenged companies at this point? Is there opportunity there? And when you think about those transactions, is it really an arb -- how important is underlying asset quality in the context of the arbitrage on the multiple of NAV?

Hi, Rick, it's Ian. I'll take this one. I think we're always interested in finding ways to generate shareholder value. So we care about price for asset purchases. We care about asset quality, but the guidance is really just focused on how do we create value for shareholders. So that's sort of the main perspective that we take into any opportunity.

I'm not sure that it's easy to take a step back and think about it in the context of the multiple. I think we've always taken the view that our job is to generate a return above our cost of equity. We feel like we have a really clear picture of what that is. And if you think about the guidance that we've given and the track record of generating ROEs that the outcome of that is what the market assigns the multiple to. But if we can find assets to purchase that satisfies that framework, then we're happy to pursue those.

And are you seeing anything in the market that would suggest that some of the -- there are more of those opportunities that exist? I mean, again, look, the history is Josh years ago wrote a piece suggesting that there was a disincentive for managers to sell. You've also seen historically the -- one of the largest players in the space scale their business through those types of acquisitions. I'm just curious sort of given sustained low valuations for some of the smaller peers, whether or not that is unfreezing a little bit.

We have not seen early signs of that unfreezing. We certainly would be happy to explore it when it did, but we are not seeing that as of yet.

I am showing no further questions at this time. I would now like to turn the call over to management for closing remarks.

Great. Thank you very much. Thanks, everybody, for the great questions. I hope everybody has a terrific end of the summer, and we'll speak to you in November. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s First Quarter ended March 31, 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, May 6, 2026.

I will now turn over to Ms. Cami Senatore, Head of Investor Relations. Please go ahead.

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 first quarter ended March 31, 2026, 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 first quarter ended March 31, 2026. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck, and our CFO, Ian Simmonds.

Before I begin, I'm pleased to announce that effective May 21, Mike Fishman will become Chairman of our Board of Directors, following our previous announcement regarding Josh Easterly's retirement from the role. Mike is a respected industry veteran with decades of experience in credit investing and asset management. As an early member of Sixth Street, and a Director of SLX since 2011, including tenure as CEO, he has been instrumental in building our business. His combination of deep industry expertise and platform understand him -- make him uniquely qualified for this position, and we look forward to his contributions as Chairman.

For our call, I'll review our first quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will review our financial performance in detail, and I will conclude with final remarks before opening the call to Q&A.

Yesterday, we reported first quarter net investment income of $0.42 per share or an annualized return on equity of 9.9%. Inclusive of our movement in fair value of our investments, we reported a net loss per share of $0.27. Our net loss per share this quarter was largely driven by unrealized losses on our investments as we incorporated the impact of wider market spreads and lower market multiples in our fair value determinations, more on that in a moment.

At quarter end, our net asset value per share declined by approximately 4.3% from $16.97, which includes the impact of the Q4 supplemental dividend to $16.24. Of this decline, $0.58 per share or nearly 80% was attributable to the movement in fair value from the market inputs, which are unrealized. That included $0.40 per share from unrealized losses in our debt portfolio tied to credit spread widening seen in the broader market and $0.18 per share from lower market valuations and in our limited equity portfolio. $0.08 per share of the decline is related to portfolio company-specific performance and the remainder from the payoffs and realized gains. Ian will walk through the NAV bridge in more detail.

These results reflect a period of market-driven volatility rather than a change in the underlying strength of our business. Our portfolio remains healthy. Our balance sheet is strong, and we are well positioned to capitalize on opportunities as the market continues to evolve.

Volatility in Q1 was driven by several factors, including market concerns around the impact of AI on software investments, increased redemption requests from shareholders of nontraded BDCs and heightened geopolitical uncertainty, the latter of which was not something we anticipated at the time of our last earnings call.

These dynamics contributed to spread -- credit spreads widening in a subdued transaction environment. LCD first-lien spreads widened by 48 basis points and second-lien spreads widened by 256 basis points during the quarter. I want to reiterate our approach to valuation, which incorporates changes in market-wide credit spreads when determining the fair value of our investments.

Our process is designed to reflect the price in an orderly transaction at the measurement date. That's not just our perspective. It's the regulatory requirement designed to maintain the integrity of the balance sheet. For additional detail regarding our valuation framework, we encourage you to read the -- our stakeholders' letter on the topic from August 2022 available on our website.

We have consistently applied this valuation framework since inception, including periods of volatility, such as Q1 2020 related to COVID and Q2 2022 related to the interest rate hiking cycle. During those quarters, net asset value per share declined by approximately 7.4% and 3.6%, respectively, driven primarily by the impact of wider credit spreads. These unrealized losses reflected in earnings and NAV, are noncash in nature and do not reflect our view of permanent credit losses.

As such, we expect these unrealized losses related to credit spread movement to reverse over time as market conditions change, and our investments approach realization or maturity. Our track record of long-term value creation is demonstrated by the 4.7% cumulative growth our net asset value per share since our 2014 IPO through March 31. This compares to an average NAV decline of 7.3% for our public BDC peer group from our IPO through the end of 2025, representing significant outperformance, irrespective of the volatility we experienced in any quarterly period.

Market volatility also impacted net investment income through lower activity-based fee income. In Q1, we earned $0.05 per share of activity-based fees, which is below our 3-year historical average of $0.09 per share. As we've discussed in prior periods, activity-based fees, which are primarily driven by early repayments, are inherently episodic. During periods of heightened market volatility our experience is that many borrowers and asset owners defer capital markets activity. As a result, both funding and repayment volumes typically contract as valuation gaps widen and transaction activity slows.

While we recognize that the current environment will take time to fully play out, as the market undergoes a period of price discovery, our experience has consistently shown that these periods of volatility create some of the most attractive investment opportunities. We believe we are well positioned to capitalize on that opportunity set.

In our earnings release yesterday, we announced a change in our base dividend level from $0.46 to $0.42 per share. This decision was informed by what we believe is a responsible and sustainable dividend policy. As we assess the current environment, we have always believed it is appropriate to align our base dividend with the forward earnings power of the business. That forward view reflects the level of uncertainty we see around near-term activity, including the rate and spread backdrop and also the market volatility caused by geopolitical uncertainty that has occurred since our last call.

Our perspective is also informed by historical periods of dislocation, which suggests that activity-based fee income can take several quarters to normalize following a market dislocation. While this segment may differ, history reinforces our decision to take a measured and prudent approach today. The pre-2022 environment provides a baseline for where our dividend level stood before rates began to increase. We had a base dividend of $0.41 per share. Our earnings power increased with higher base rates and wider spreads, we raised the base dividend to $0.42 in Q3 2022, $0.45 in Q4, and $0.46 in Q1 2023, representing a total increase of 12.2%.

While we see potential for an increase in transaction activities as the year progresses, the timing and magnitude of that pickup and the resulting impact on our activity-based fee income remains difficult to forecast with conviction. That said, our view on base rates through the forward curve and new issue spreads is more visible. This adjustment establishes a distribution level that is sustainable across a range of potential activity outcomes.

At quarter end, we had approximately $1.57 per share of potential activity-based fee income embedded in the portfolio, including unamortized OID and call protection. If activity accelerates, that embedded income provides meaningful upside. Our supplemental dividend framework captures and distributes that upside to shareholders as it's realized.

Yesterday, our Board approved a base quarterly dividend of $0.42 per share to shareholders of record as of June 15, payable on June 30. This corresponds to an annualized dividend yield of 10.3% on our March 31 net asset value per share, which we believe is aligned with the core earnings power of the portfolio and with our target return on equity for the year. Ian will speak more on that in a moment. With that, I'll pass it to Ross to discuss this quarter's investment activity.

Thanks, Bo. In Q1, we provided total commitments of $338 million and total fundings of $135 million across two new portfolio companies upsizes to four existing investments and an initial investment in our previously announced joint venture Structured Credit Partners, or SCP.

A key advantage for SLX is our deep integration with the broader Sixth Street platform, which manages over $130 billion in assets. This connectivity allows us to leverage the collective expertise of hundreds of investment professionals to conduct the deep proprietary diligence required for today's complex investment landscape. By combining this expertise, the firm's platform-wide sourcing engine, and our disciplined underwriting, we remain well positioned to execute on investments that we believe create long-term value for our shareholders.

Our recent investment in Mindbody is a good example of how the platform comes together in practice. Given our history with the business dating back to 2021, we had a differentiated understanding of the company, and we're well positioned to lead the new financing.

This was a cross-platform and cross-border effort with our direct lending teams working closely with our consumer team to deliver a bespoke solution. The business benefits from significant network effects with a scaled 2-sided ecosystem across consumers and wellness partners that we believe supports growth and strong underlying business quality, ultimately driving attractive risk-adjusted returns for our shareholders.

Our other new investment was Labrie, a leading North American manufacturer of premium refuse collection vehicles and related aftermarket parts. Labrie operates in a recession-resistant market with predictable demand and structural tailwinds. The company's sticky dealer and customer base, combined with a consistent high margin and capital life financial profile, make this a compelling investment aligned with our approach of lending to businesses with attractive unit economics.

On repayments, payoffs moderated versus levels seen throughout 2025. We experienced $113 million in repayments from 4 full and 4 partial investment realizations resulting in $22 million of net fundings for the quarter. Of the 4 full payoffs in Q1, 2 were refinancings and 2 were sales of liquid investments. Of the 2 refinancings, both were completed at lower spreads with one executed in the private credit market and the other in the broadly syndicated loan market. Our largest payoff was Galileo Parent, which refinanced its senior secured credit facility originally structured to support Advent's 2023 take-private transaction.

Sixth Street served as agent on the original deal and the company refinanced with a broadly syndicated loan priced at SOFR plus 450 basis points compared with SOFR plus 575 basis points on the existing facility. SLX was repaid with call protection generating an asset-level IRR and MOM of 15% and 1.4x, respectively. Our other refinancing was MadCap, a provider of authoring, publishing and content management solutions, which refinanced its existing credit facility in March.

Sixth Street originally provided capital in December 2023 to support an acquisition with an underwriting thesis centered on MadCap's robust product offering, granular blue-chip customer base and strong unit economics. Having executed on its business plan, the company was able to transition to the bank market for a lower cost of capital. SLX was repaid in full, generating an asset level IRR and MOM of 16% and 1.3x, respectively.

During the quarter, we had one addition and one removal from nonaccrual status, resulting in no change to the total number of investments on nonaccrual at 3 names representing approximately 1.4% of the portfolio at fair value and 1.9% at amortized cost. The addition was our investment in Bed, Bath & Beyond. While the path of this credit has not followed our original expectations, we have driven recoveries through secondary sources of repayment and have received approximately 85% of our cost basis through March 31.

While we believe we are well positioned to realize meaningful additional recoveries over time, uncertainty around the timing and ultimate resolution of remaining claims led us to place the investment on nonaccrual effective January 1. The removal was our investment in Astra Acquisition Corp., which was reorganized in Q1 following the company's Chapter 11 process. This had no impact on the quarter's NAV as the position was already fully marked down.

Moving on to portfolio yields. Our weighted average yield on debt and income producing securities at amortized costs decreased slightly quarter-over-quarter from 11.3% to 11.2%. The decline primarily reflects the decline of reference rates during the quarter. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.2x, respectively, down from 5.3x in the prior quarter with weighted average interest coverage of 2.3x.

As of Q1 '26, the weighted average revenue and EBITDA of our core portfolio companies was $425 million and $127 million, respectively. Median revenue and EBITDA were $174 million and $54 million. Before turning the call over to Ian, I'd like to provide an update on our existing portfolio companies highlighting key metrics. The performance rating of our portfolio continues to be strong with a weighted average rating of 1.19 on a scale of 1 to 5 with 1 being the strongest. We continue to see stable top line growth and earnings durability, which signal a healthy demand environment across our end markets.

Across our core portfolio companies, LTM revenue and EBITDA growth were both 9%. The overall stability in these metrics continues to reflect proactive actions by management and sponsor teams. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. For Q1, we generated net investment income per share of $0.42, and net loss per share of $0.27. Our reported and adjusted metrics converged this quarter as there was no impact related to capital gains incentive fees. Total investments were $3.3 billion, in line with prior quarter as a result of net funding activity offset by lower valuations.

Total principal debt outstanding at quarter end was $1.8 billion, and net assets were $1.5 billion, or $16.24 per share. Our average debt-to-equity ratio decreased slightly quarter-over-quarter from 1.17x to 1.14x, and our debt-to-equity ratio at March 31 was 1.18x. The increase in this ratio was largely due to the impact of widening spreads on fair value versus net funding activity. We continue to have ample liquidity with $1.1 billion of unfunded revolver capacity at quarter end against $249 million of unfunded portfolio company commitments eligible to be drawn.

Post quarter end, we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility, maintaining the pricing and key terms of the facility while extending the final maturity through May 2031.

All of the 19 banks in our syndicate were supported and participated in the amendment, an extension that closed on May 1. Adjusted for the revolver extension, our weighted average remaining life of debt funding is 3.9 years compared to a weighted average remaining life of investments funded by debt of only 2.5 years. At quarter end, our funding mix was represented by a 68% unsecured debt.

Moving on to upcoming maturities. As we mentioned on our last earnings call, we have reserved for the $300 million of 2026 notes due in August under our revolving credit facility, after adjusting our unfunded revolver capacity as of quarter end for the repayment of those notes, and our revolver amendment, we have liquidity of $649 million, representing 2.6x our unfunded commitments eligible to be drawn at quarter end.

Our balance sheet remains well positioned, allowing us to play offense in the current market environment. We believe the ability to invest capital opportunistically in what we're seeing as a wider spread environment today is a meaningful advantage for our shareholders.

Pivoting to our presentation materials, Slide 8 contains this quarter's NAV bridge. As Bo mentioned, the impact of credit spread widening and movement in market multiples on the valuation of our portfolio was by far the most significant driver of NAV movement this quarter, including $0.58 per share from fair value marks.

Again, absent permanent credit losses, we would expect to see a reversal of these unrealized losses related to credit spreads over time as our investments approach their respective maturities. The estimated impact of broad market credit spread tightening since quarter end represents approximately $0.12 per share, or 30% of the unwind of unrealized losses on our debt portfolio that we saw during Q1. Walking through the other drivers of NAV movement this quarter, we added $0.42 per share for net investment income against a base dividend of $0.46 per share.

There was a $0.07 per share decline in NAV from the reversal of net unrealized gains from paydowns and sales. Other changes included $0.04 per share increase in NAV from net realized gains on investments and an $0.08 per share reduction to NAV primarily from unrealized losses from portfolio company-specific events.

Moving on to our operating results detailed on Slide 9. We generated $93.4 million of total investment income for the quarter compared to $108.2 million in the prior quarter. Interest and dividend income was $87.8 million, down from prior quarter, primarily driven by the decline in interest rates.

Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $3.4 million compared to $10.9 million in Q4, driven by lower payoff activity in Q1 relative to the elevated level experienced in Q4.

Other income was $2.2 million, up from $1.9 million in the prior quarter. Net expenses were $52.4 million, down from $56.4 million in the prior quarter, primarily driven by the decline in base rates. This contributed to our weighted average interest rate on average debt outstanding decreasing approximately 50 basis points from 6% to 5.5%.

Lastly, on undistributed income, we estimate that to be approximately $1.15 per share at the end of Q1. Turning to our outlook for the year. Our original guidance was based on an assumption of 30% portfolio turnover in line with our long-term historical average. Given the moderated pace of repayments in Q1, we anticipate an ROE of 10% to 10.5% if turnover remains below 20% for the full year, and an ROE above 10.5% should we experience higher repayment activity.

While we are taking a more measured view on forward portfolio activity, our fundamental return hurdle remains unchanged. We will continue to prioritize investing capital into opportunities that generate returns in excess of our cost of equity, maintaining the same discipline that has characterized our platform since inception. We may prove to be moving early on the base dividend adjustment, but our supplemental dividend framework provides the flexibility to capture upside should activity accelerate.

With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. While the market environment remains dynamic, our conviction of the path forward is rooted in the platform we've built, over the last 15 years. Our historical outperformance through varying market conditions is underpinned by the depth and continuity of our people from this team sourcing and underwriting the risk to the professionals managing the portfolio and working through complex situations, this is a group with years of experience navigating every part of the credit cycle.

We've been through these environments before and remain fully committed to the same disciplined approach that has guided the firm since day 1. Looking ahead, we're excited about the investment opportunity set to come as the markets reset our thematic sourcing engine and the breadth of the Sixth Street platform provide us with a significant advantage in identifying and executed on high-quality transactions.

We believe the actions we are taking today position SLX to continue delivering strong risk-adjusted returns for our shareholders over the long term, and we are energized by the road ahead.

In closing, I'd like to encourage our shareholders to participate and vote for our upcoming Annual and Special Meeting on May 21. Consistent with previous years, we are seeking shareholder approval to issue shares below net asset value effective for the upcoming 12 months.

To be clear, to date, we have never issued shares below net asset value under prior shareholder authorization granted to us for each of the last 9 years, and we have no current plans to do so. We merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility.

As evidenced by the last 12 years since our initial public offering, our bar for raising equity is high. We've only raised equity when trading above net asset value on a very disciplined basis, so we would only exercise this authorization to issue shares below net asset value if there was a sufficiently high risk-adjusted return opportunities that would ultimately be accretive to our shareholders through overearning of our cost of capital and any associated dilution.

If anyone has questions on the topic, please don't hesitate to reach out to us. We have also provided a presentation which walks through this analysis in the Investor Resources section of our website. We hope you find the supplemental information helpful as a way of providing a clear rationale for providing the company with access to this important tool.

With that, thank you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Finian O'Shea from Wells Fargo.

To start with the dividend, I wanted to ask about why it's framed on activity-based fees where it feels like to us more good old-fashioned spread compression, credit loss which happens. You've kept a dividend for a very long time. But with that framing, is it a signal of some kind of shift in strategy, say, more toward flow lending, that's where the market is? Or is it more transient because, say, your software book won't refi for a long time and -- but you'll still focus on the same style and eventually recover in the sort of fee income line.

Fin, thanks. It's Bo. I appreciate the question. There's a lot to unpack there. I'll attempt to get through it all. So first of all, first principles for us is we want to set our dividend level at a sustainable and responsible level. I think that has been from day 1, we've talked about that. We framed I want to take a step back, first of all, and talk about what we have signaled to the market, both for the space and for Sixth Street over the past 12 months and even before that.

But I think we wrote a letter in April of last year, outlining what we believed were the path forward for ROEs in the sector, given the interest rate curve and spread compression that we've seen both in the market and at Sixth Street and SLX during that -- in that letter, we laid out what we believed was the path for ROEs for the sector and for Sixth Street. I think we had the forward curve at that day. So 12 months forward, ROEs of 10.3% for Sixth Street in SLX, which is coincidentally where we've set the base dividend level on a yield basis today. So just starting there.

The framing of activity-based fees is exactly that for -- as we thought about forecasting ROEs last quarter, we forecasted normalized levels of activity-based fees, which have been generally around $0.08 to $0.09 per share since inception. Last year, on an LTM basis, that was closer to $0.12 per quarter. And this quarter, it was $0.04 because there was muted activity levels -- this is very consistent with what we've seen in the past when spread levels increase. And when you think about it intuitively, Fin, as spreads increase, you're going to have less repayments because people are not going to refinance you into higher-yielding loans.

So your activity-based fees are really going to be focused on M&A activity, which was also muted in the quarter. Here's the good news, and what we feel good about is it's a better spread environment. We said last quarter that we believe ROEs for the sector were troughing and for Sixth Street, we still believe that. We think it's a better spread environment. That's going to slowly work through the book.

We also are ramping SEP, which should continue to add support, but that's going to take time as well. And eventually, we will return to normalized activity-based fee levels. Historically, that has taken several quarters. Post rate-hiking cycle, it took 6 quarters to get back to normalized activities. I'm not sure it's going to take that long, we shall see. But just as we thought about setting a responsible dividend policy, we took all of those factors into consideration.

Also, the great news is, and we commented this in the script, there continues to be high levels of activity-base fees embedded in the portfolio, should that activity return, and we believe it will eventually. So hopefully, that answered your question and it was a comprehensive answer.

Yes. No, it's definitely helpful. Like it will be a bit of a drought maybe sooner, maybe later, they hopefully come back in, I guess, sort of in the meanwhile, like that sort of call pro, correct me if I'm wrong, that's been pretty instrumental to NAV preservation, right? Like that's your sort of formula for gains, which is obviously a very critical input over time. Do you have any like backup plan or approach to solve for that issue in the meanwhile? Or do you think it's sort of also a NAV headwind?

Yes. So, Fin, the great news is, I think our call protection as a percentage of book today is at 94%. Is that right?

94.1%.

It's 94.1%, that is -- that's versus a historical level of 94.7% since inception. So there continues to be a lot of embedded economics within the book. I would also note that, and I think you've heard from others that we're seeing a better investing environment and that includes higher spreads, but also it's better fees. We're seeing better both upfront fees and call protection. And I think that makes us happy about investing in the future. And then lastly, I would say we have seen a pickup of what I would call special situation type deals that have always been a hallmark of our platform and consistent historically, probably of 30% to 35% of what we've done. That had been muted activity. We're seeing a handful of opportunities in the current pipeline that excite me. All of that would support strong activity-based fees in the future when they begin to return.

Again, the 2 biggest components that drive that are M&A activity, which we are seeing early signs of stabilization there. I think geopolitical concerns will really be the determinant if that returns, and then repayment activity, which we do believe will be muted for some time because, again, it's a better spread environment and it's just natural if you're -- if new loans are getting created at better spreads than historic, you're not going to have a lot of payoffs.

Our next question comes from Brian McKenna from Citizens.

Okay. Great. So I'm curious, when did the Board make the final decision on the dividend? Was it in and around the end of the first quarter because if it was, I'm curious if the decision was made, call it, this week or today versus roughly a month ago, would that have changed the outcome on the dividend given the broad-based recovery in sentiment and risk assets over the past 5 weeks, similar related to the sharp recovery we saw post Liberation Day last April.

Well, the formal decision was made yesterday at the Board meeting. We, as a team, have been working through this over the past months, given that we saw the muted levels of activity-based fees and have some forward visibility, albeit it's usually no more than 4 to 5 weeks on those activity-based fees. So I would -- so the answer is we've been working on it for some time. Again, we had talked about ROEs for the sector and for Sixth Street in a couple of letters, both in April and November. So this is something we've been thinking about for some time but didn't come to a final conclusion until the final weeks.

You're right, there has been a stabilization generally in the credit markets. But again, the spread environment is a more attractive environment and that is going to mute activity levels, at least from refinancings in the meantime. And what we did is really did a thorough analysis of the data, we always when we have questions that are hard to answer turn to the data, and look at periods of historical spread widening in the past, and it always has taken several quarters to return to those activity-based fee normalization levels.

And maybe if I add to that, Brian, just to color up some of the data that Bo was referencing. That means that we went back and looked at every quarter back to 2014 to understand the characteristics of our earnings profile, what was generated from interest income and dividend income alone, what was generated from activity-based fees. We looked at that on a quarterly basis. We looked at that on an annual basis. We overlaid periods of credit spread widening and/or dislocation. So we looked at what was the behavior of our earnings profile during and post COVID, during and post the rate rise cycle in '22, and what are we seeing today?

And all of those inputs into a determination about what is our level of conviction about the right level for our base dividend. And so as Bo said, it was data intensive as part of the framework for the discussion with the Board.

Okay. That's helpful. And then just looking at spreads on new deals in the quarter, I think these totaled around 600 basis points versus the recent pace of around 700 basis points. So is the 600-plus basis points going to be the new run rate for spreads on new deals? Was it just a one-off quarter? Like I'm just trying to think through where things settle in on the spread front.

Yes, it's a good question. It was very idiosyncrat. There are only really 2 new originations. Both of those were -- we had been working on free the spread widening environment. Activity in general was muted. So it's -- we've had volatility from quarter-to-quarter given volumes come and go. And by the way, Q1 is always a low volume quarter. What I would tell you is, what we're seeing on the forward is a much better investing environment, wider spreads, more importantly, lower leverage, better documentation standards, better fees and call protection.

So the whole package seems to be a better investing environment. I also mentioned with Fin, we're seeing more special situations than we had seen in the past. That's always been a driver of over earning relative to the space. So all of that would point to increasing spreads over time, which we're excited about.

Our next question comes from Robert Dodd from Raymond James.

Thanks for the color on the quarter. I wanted to like the $1.57 that you said was kind of embedded call protection in the portfolio right now. I mean, what's the half-life on that? Obviously, it ages out over time. I mean, if we look at low levels of activity, say, for 12 months, and I don't know, half of that $1.57 ages out over those 12 months, then even if activity rebounds a year from now, you still got structurally lower activity-based fees for a period after that as well, right?

So I mean, the deals you're onboarding right now, are those sufficient to kind of maintain that total embedded core protection in the portfolio over kind of a prolonged period? Or is the aging phenomenon kind of going to drag it out even further if you have, say, 12 months, maybe it's not 12 months, but 12-month period of?

I think that's a great question. Again, just turning that $1.57 into a metric that I think that we've talked about before, just to contextualize as a percentage of fair value on the call price is 94% today. That's versus a historical means of 97%. What we're seeing in new activity today, we'll have better call protection than what we've seen in the last couple of years, especially as it relates to some of the special situation deals, which generally have non-call features. What I would tell you is as far as half-life generally speaking, call protection is between 2 to 3 years when you see a number like 94%, which is above historical means, it means it's closer to the earlier vintages where we have that embedded that makes sense given portfolio turnover has been elevated over the last couple of years. So there's a long runway for that half-life. And what we're replacing, and what we're putting in a new deals will continue to actually add to that.

When -- I actually don't have these in front of me, Cami, but when we returned after 2022, to the post kind of normalized fees, which took us 6 quarters, about 1.5 years, we started at a slightly less, if you look at 3 years, it was 94.5%. And what we're -- once we returned, I think those embedded numbers were well above historical means of $0.08 per share. We'll get you that data. So there is a shelf life kind of early into those vintages. What we're seeing from new deals, it's better call protection. I think all of that protects what we think should be normalized activity into the future.

Got it. And a kind of tied follow-up. I mean, obviously, one of the issues here is spread widening, maybe that slows down refinancing to the point who wants to refinance that higher spread. Where spread widening has been greatest so far, anecdotally, at least, is in the software segment, which is obviously your biggest single sector, so to speak. How much of this expectation of low activity is tied to software given that spreads have widened more in that sector than elsewhere in the market right now?

It really didn't go into the calculation. We think there's actually for names that are not deeply AI-impacted, and that's a very small percentage of the portfolio. As we've said before and also in our letter about a month ago, there continues to be what we think is a refinancing market for software names, albeit at wider spreads. Again, just looking back at the data historically, whenever there's been spread widening regardless if it was sector-based, it's just you've had muted levels of activity, and that's why we thought it was prudent to set the dividend level where it's at.

I would also note that the portfolio continues to be very healthy earnings growth close to 10% in software and technology names are in line with that. In fact, I think the earnings power of those businesses continues to increase as EBITDA margins are expanding as growth slows a bit. Those also would point you to deleveraging over time and being able to refinance.

We had, as we mentioned, MadCap was a software name that we had refinanced this quarter by a bank. It had executed well. It had delevered. You could argue whether it was going to be AI affected or not, but it was refinanced into a much cheaper paper. So that did not go into our calculus.

Our next question comes from Arren Cyganovich from Truist Securities.

The amend and extend of the credit facility with no increase in pricing was a positive sign given what we've seen in some press articles about banks looking to increase pricing on these types of -- or I guess more specifically, it was bilateral facilities, but were there any pressure from the banks in terms of that process to raise the pricing? And maybe you just talk a little bit about that process and how the banks have been supportive?

Yes, I'll take that, Arren. It's Ian. I would say there was no pressure, but that's really a factor of continued delivery on what we tell the banks that we're going to do. We view those banks as our capital partners, and so they're pretty in tune with our business. But I'd also point out that these syndicated BDC facilities are pretty well structured to protect the banks that actual LTVs are very low. And given the development of the unsecured market as another form of financing, it's actually a very supportive way to build the capital structure. So I would characterize this as really just ordinary course discussions collaborative in nature and the outcome was the supportive renewal that we achieved.

That's good to hear. In terms of the investment activity slowing down, and I know that you don't have a crystal ball and you don't know when things might pick up. But in terms of whether or not it's discussions with sponsors or what have you, are there any kind of green shoots of activity in areas other than software that are showing some signs that you might see some stronger deal activity, maybe in the second half of the year?

I'll start and then pass it over to Ross. Look, I think the pipeline has rebounded, and there's some -- definitely some green shoots I mentioned, more special situations than we had seen in the past, and that's across a lot of our core thematic areas, whether it's retail ABL, ABL, Energy ABL, some technology, special situations. So that is encouraging. As we speak with sponsors, there seems to be a renewed focus on platform activity and finding new deals.

I think a lot of that M&A activity is really going to -- what's going to matter is the geopolitical concerns and where energy prices go over the next quarter. I think that's going to be the big determination. But the reality is, if you think about the robustness of our originations platform, especially the thematic platform across industries and specialties. I think that piece is really picking up here from what we can see. Ross, you should add anything to that.

Yes. I think in addition to either platform acquisitions or full platform refinancings, our portfolio continues to be active on the M&A front. Our management teams, and our sponsors are looking to continue to drive growth and a large portion of our activity on the amendment side, this quarter was to support that growth or support acquisitions, which creates options for us to reprice existing facilities, provide new capital into credits that we know well or catalyze exits where the risk-return doesn't make sense any longer at what's being offered. So there continues to be a fair amount of activity within the portfolio itself.

Very helpful. And just one quick one. The software exposure, I think last quarter, you said it was 40% in the portfolio. You had a refi. What's the exposure as of 3/31?

Yes. Look, as you know, we don't think of software as an industry. We gave that number as a proxy to what we believe others in the space, including enterprise software. That has not meaningfully changed. In fact, we had one payoff. So if anything, it's down a bit, but it's not meaningfully changed quarter-over-quarter.

Our next question comes from Rick Shane from JPMorgan.

Look, and you talked about this a bit in your response to Fin's question, but there's a lot of conversation about how terms and structures have changed since December. If you can help us understand sort of specifically what types of changes you're seeing, not only in terms of spreads, but in terms of structure, in terms of covenants that would be great. And more importantly, if you can put where we are today in the context of the historical continuum, because I don't think we're in sort of this dislocated market. I think, we're probably more in the middle, but I'd like to understand how you guys see things and also valuations on the underlying equity positions.

Yes. I'll take a first swing at that, and then I'll pass it to Ross. So I think that's the right characterization, which is the pendulum is starting to swing back towards the middle from where it was to historic tights, both in pricing fees, and structures. The encouraging thing is all of those are actually improving. We're seeing anywhere from 50 to 75 basis points of spread widening across all industries. I think more encouragingly for us and 1 of the reasons that we were not participating in the market as robustly as others over the past 2 years is that underwriting standards are getting better.

You're getting more access to management teams, you're getting better data. Your ability to underwrite and prove your core thesis is better. That is what was keeping us from being able as much as pricing from being able to participate in the market. Those dynamics are better. I would say leverage on average is probably down 0.5 turn to 1 turn in total from what we were seeing at the historic tights. Documentation standards are getting better. So all of those things are contributing to a much better environment, but to your point, I think that pendulum is swinging more to the middle than to look, what would be a deeply distressed environment where you've seen us grow by leaps and bounds in times of past. But that's how I characterize it. Ross, do you have anything you'd add?

I don't have a lot to add. The other thing I'd say that we're seeing is better preservation of the headline economics. So things like carve-outs to call protection, we're seeing pared back where step-downs are set versus headline spread. Those are all things that have been important to us and that we've selectively decided not to participate in transactions where we're not getting the terms to preserve the bargain for economics, and I think we're seeing it come back our way a bit.

Got it. Okay. That's helpful. I mean, is it -- should we think of it that last year you would get sort of an RFT and the request would be, okay, here's the docs, or here's the valuation pack and you have 2 weeks to respond and this is all the information you're going to get now the due diligence time frames are extended to 4 weeks? Like I'd love to anecdotally sort of think about how this has changed from your perspective.

Yes. I'll take that because I've been pretty vocal about this. And actually, in my letter to the team starting the year, this is one of the headlines, which is we will not be velvet roped in processes if we're not getting access to management and the data to underwrite our credit thesis, we don't participate in those deals, literally is almost verbatim what I said to the team. There was this velvet roping by issuers, both private equity and corporates because of the tight markets that, at least in our view, we're contributing to looser underwriting standards and very, very intense time lines, very little access to management, if at all, no real Q&A. And as a result, not only did we shrink the portfolio last year, but if you look at our originations that we did do, they were predominantly nonsponsor away from kind of the traditional channels.

We lean very heavily on the thematic originations platform that we've built for -- to be robust through all environments. What we're seeing so far, and this could change is just better access all around. Access to management teams, actual management meetings. I actually think our team is -- this is -- our team is at a management -- all day management meeting today on a special situation deal. It's an 8-hour session. Those are the types of environments that contribute to the full understanding of the businesses, the ability to underwrite your credit thesis, and we do believe that is returning to the broader market and the credit environment as well. Hopefully, that's helpful.

It's very helpful. I appreciate it. And it will be interesting to see how things continue to evolve.

Our next question comes from Kenneth Lee from RBC Capital Markets.

One more on the ROE outlook there. Wondering whether you've been embedding any assumptions or benefit from potentially wider spreads on new investments or at least less spread compression for any kind of prepayments and refis. Just wondering whether there's any impact on the assumptions there.

Yes. From where we set our base dividend, it did not have an impact. But as we think about the future, we do believe that's going to slowly roll through and spreads will increase over time. We do think we are nearing trough levels just based on what we're seeing in the pipeline and in the markets in general. Ian, you're closer to kind of the projections, anything to add to that?

Yes, we did not update our new issue spreads for the purposes of this exercise. I think if you think about the volume of new deals relative to the size of the portfolio, you need to have quite a significant amount of origination activity for that to move the needle. Our business from an ROE perspective in the near term is much more oriented towards repayment activity.

Yes. The one thing, because I think this is important as you think about the future, not only should you see spreads begin to increase over time through the book as you layer on new deals. There are opportunities, obviously, to -- with amendment fees, et cetera, as our portfolios come back to us as they're doing M&A, et cetera, to slowly reprice the book as well. That did not go into our numbers in the near term, but that should show up in -- after several quarters. So that's one of the things that leaves us pretty encouraged about the future earnings of the business.

Got you. Very helpful there. And it looks like you made some initial investments related to the SCP JV, just given the discussion around the geopolitical uncertainty and just the general backdrop there. What's sort of like the outlook in terms of how fast could you ramp up further in terms of that JV there?

Yes. Thanks for the question. This is Ross. So in Q1, SLX invested $14.7 million into SCP, so 0.4% of SLX investments at fair value. This was the first quarter of activity when we put the program in place. Our base case expectation was that it would take about 2 years to 2.5 years to get to fully ramped. That continues to be our expectation. We've continued to invest into the program over the course of 2Q. So there were two CLOs that were priced before the end of Q1 that closed in 2Q. And overall, we are pleased with the results that we think we're achieving in the program.

We were able to take advantage of some of the periods of dislocation in 1Q to build the portfolio at attractive prices. And despite the volatility, we're able to price the liability side of those two CLOs at levels that are consistent with the returns target for the program.

Our next question comes from Paul Johnson from KBW.

Yes. I was wondering if you could provide just kind of a very general update in terms of roughly what percent of the portfolio was sort of originated pre-2022. I think last quarter, you said roughly about 20% of it was kind of pre-2022 originated. I was just curious if that's changed at all since last quarter.

No. It's very similar percentage. It has not changed. So pre-2022 is now 8% of the portfolio. No, no, I'm sorry, 18% of the portfolio. I missed the bar, but yes, about 18% of the portfolio.

Okay. And then I was just curious, Mindbody that refinanced during the quarter. So there's some evidence obviously that the market is still there in terms of software companies. But I'm curious, in the last quarter, you also kind of talked about a little bit of slowing economics just within the software space in terms of the lending within that space. But I'm just curious, kind of based on some of the recent transactions, if there's anything that could be deduced from that in terms of what the common thread is of companies within the software space that are able to transact like that, refinance loans, and those that might have a much tougher time doing so.

Yes. I think the trends that we're seeing within our software portfolio is consistent with the commentary that we gave in the prior quarter. So while top line continues to grow at a high single-digit rate on a broad basis, there has been a bit of deceleration in that number. But our portfolio companies are expanding margins and improving leverage profiles, which we think is ultimately supportive of refinancing activity. We talked about MadCap as an example of that transitioning from the private credit market into the bank market, given the deleveraging that the company had been able to achieve. And overall, as we look at our portfolio, we view management teams and sponsors generally as being forward-footed in finding ways to continue to drive organic growth as well as selective inorganic opportunities in order to sustain the deleveraging that we see within our credit book.

Yes. And the only thing I would add to that because I think one of your questions was what we're seeing as far as spreads and leverage for new deals, there was muted activity of new deals in the technology space. In general, there were a couple of proof points. There's one in particular that was a U.K.-based software provider that priced maybe 50 bps wider than it would have been -- would have a year ago, but it was -- it's still a pretty robust package. I think it was 7.5x leverage so for 5 to 5.25.

We did not participate in that. We were lower in leverage and wider on pricing, but there seems to still be a pretty robust market for anything other than what people perceive as having immediate AI disruptive risk.

Our next question comes from Derek Hewett from BofA Securities.

Since this is generally a better spread environment and really maybe even just more of a lender friendly environment, how should we think about capital issuance, assuming the shares continue to trade above book, which could potentially help pare back a little bit of the software exposure? And then to the extent that capital issuance makes sense, would you be leaning more towards just ATM issuance at this point? Or would you be willing to do overnight transactions?

Derek, it's Ian. Thanks for the question. I think there's no change to the framework that we've talked about in the past about the conditions that we want to see for considering new issuance. And so we want to have high conviction about the pipeline. We want to have high conviction about the ability to drive earnings as a result of accessing growth capital. So that's a really important piece for us.

As to the tool we use, the way we communicated it 12 months ago when we put in place the ATM is it's an efficient tool. So I think our mindset is always how can we be efficient with our shareholders' capital and how can we generate the best outcome if there is an opportunity to raise capital? So without specifically answering which methodology, it's really going to come back to our view on the pipeline before we think about the tool that we apply.

Okay. And then maybe a quick follow-up. Just in terms of circling back to the software portfolio. What is the -- like either the median or average EBITDA of the software portfolio? Or like how would you characterize it relative to the overall weighted average EBITDA?

Do you want to go, Ross?

Sure. Overall, we see margins in the software portfolio as broadly consistent with the overall portfolio, but also expanding at a quicker pace in the overall portfolio. So hopefully, that helps give a little bit of context.

EBITDA margins are a bit higher, and they're expanding. I think quarter-over-quarter, they're up from 20% on average to 22% margins. That's been the historical trend, right? You've seen businesses continue to have slowing growth, which was maybe 2 years ago in the low to mid-teens on an average basis to high single-digit revenue growth, earnings growth continues to trend above that as companies move more to profitability.

That has really been the trend post COVID when it was really a growth at all cost environment. And when we believed both public and private markets were kind of missed reading the signals from unit economics and the valuations were not in line with those declining unit economics, but it continues to be healthy, broadly in line on a growth basis, but probably more on the margin, just more profitable businesses in general.

But what about on the absolute level? Is it -- are the software companies, are they similar in terms of the top line with the overall portfolio in terms of EBITDA? So the weighted average EBITDA for the overall portfolio was a little under $130 million for software.

Yes, I would -- I don't know that we have that number in front of us. I would guess they're broadly in line, but we'll have to get back to you.

Our next question comes from Ethan Kaye from Lucid Capital Markets.

Most of mine have been asked and answered, but maybe just a quick one. It looks like commitment activity was relatively kind of in line with historical average was really the funding activity that was maybe a bit lower. I'm curious whether perhaps that suggests, maybe there are some deals like towards the end of the quarter that were closed but not funded? Or if you can just help us kind of reconcile that delta between the commitments and fundings for the quarter?

Yes, Ethan, it's Ian. That's a good observation. Just to be clear, that commitment figure includes the full commitment to the structured credit partners JV. So Ross made the comment earlier that we funded about over $14 million in the quarter, but the commitment was $200 million that was previously disclosed. So that's in the commitment number.

The full -- okay, the full SCP, $200 million.

Yes. I point you don't read too much the gap. It's sort of very specific given we commenced operations of the JV in this -- in Q1.

I'm showing no further questions at this time. I would now like to turn it back to Bo Stanley for closing remarks.

Great. Well, thank you, everyone, for the thoughtful questions. Thanks to the team for the preparation here. And I just want to wish everybody Happy Mother's Day weekend.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s Fourth Quarter and Fiscal Year ended December 31, 2025, Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 13, 2026.

I will now turn the call over to Ms. Cami [indiscernible], 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, 2025, 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, 2025. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. This marks my first earnings call as CEO, and I'm energized by the continued strength of our platform and the discipline our team has maintained through a dynamic 2025, and into 2026.

Before we dive into the financial results, I'm pleased to introduce [ Ross Brook ], who is joining us on this call today for the first time in his capacity as Managing Director and Head of Investment Strategy. Ross was one of our first members of our direct lending investment team, having joined Sixth Street more than a decade ago. He has had roles across the Sixth Street platform in both the U.S. and Europe, applying his deep underwriting expertise to various credit investment strategies. Ross brings a unique perspective that bridges complex asset level underwriting with a strategic lens on market opportunity. This appointment reflects our commitment to elevating our internal talent to drive disciplined investment decisions, and we are excited to have his voice on these calls.

For our prepared remarks, I will review full year and fourth quarter highlights and pass it over to Ross to discuss investment activity in the portfolio. Our CFO, Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A.

After the market closed yesterday, we reported fourth quarter results with adjusted net investment income of $0.52 per share, or an annualized operating return on equity of 12%. And adjusted net income of $0.30 per share, or an annualized return on equity of 7%. Adjusted net investment income of $0.52 per share exceeded our base dividend of $0.46 per share, providing base dividend coverage of 113%.

As presented in our financial statements, our Q4 net investment income and our net income per share, inclusive of the unwind of the noncash accrued capital gains incentive fee expense were $0.53 and $0.32, respectively. The difference between adjusted net investment income and adjusted net income of $0.22 per share in Q4 was primarily driven by $0.12 per share of unrealized losses from idiosyncratic credit impacts, and $0.10 per share of prior period unrealized gains that reversed this period and moved into this quarter's net investment income related to investment realizations.

For the full year 2025, we generated adjusted net investment income per share of $2.18, representing an operating return on equity of 12.7%, which exceeded the top end of our guidance range we communicated throughout the course of 2025. Adjusted net income per share was $1.76, corresponding to a return on equity of 10.3%. From an economic return perspective, which is calculated using movement in net asset value plus dividends paid in the year, we delivered a return of 10.9%, representing our tenth consecutive year of double-digit economic returns, highlighting the durability of our business across different credit and interest rate environments.

Consistent with our ongoing messaging regarding the importance of earnings one's cost of capital, our 2025 net income ROE and economic return both exceeded our estimated cost of equity of 9%. It's hard to have a thoughtful conversation about the market today without spending real time on enterprise software and the impact of AI. So we're going to address this directly in our prepared remarks.

We've been thinking deeply about these issues for quite some time. And consistent with our investment framework. We have taken a forward-looking approach in how we underwrite and manage risk. Longtime followers will know that our team has been investing in technology-related businesses for more than 2 decades, and we've navigated multiple periods of significant change. In each case, there were predictions of the demise of incumbents or the erosion of margins. With hindsight, [ those shifts ] tend to expand addressable markets, and create opportunities for those who could distinguish between durable and fragile business models. That insight is where we will focus our commentary today.

What we're not going to do is resort to [indiscernible] about the portfolio or describe our performance with words like impeccable. We generally find that kind of language not particularly credible because credit outcomes are always idiosyncratic. More importantly, this is not about congratulating ourselves on the historical performance, which has been good from a credit lens, and is [ crudely ] reflected in the cumulative net realized gain and loss metrics in our financial statements. Our job is, and has always been, about the forward. It's about how business models evolve from here under a new cost curve in a different competitive landscape.

Throughout cycles, we have maintained an intensive focus on the durability of business models grounded in deep understanding of specific business unit economics, sector-specific ecosystems, valuation discipline, in the resulting margin of safety embedded in our investments. The reality is that capital is never a long-term moat for our business. It's merely a tool. At its core, AI levels [indiscernible] for additional competition because the cost curve is shifting down. Capital in tenency was never the primary barrier to entry for a business and replacement cost is not a concept we have ever felt was applicable in assessing the intrinsic value of a software company.

So rather than AI bridging a moat that protected businesses in their margins, we see AI is leveling the playing field on development costs that does not fundamentally change the intrinsic moat that protects a business. Existing enterprise software companies should benefit from this shift in the cost curve if they are well managed and have limited technical debt. They can use these tools to accelerate product development and enhance their value proposition.

The moats and software are what the customer is actually purchasing as a product. A single source of truth, ongoing maintenance and customer service, security, governance and compliance, and often transaction enablement. In many ways, these customers are also effectively purchasing an insurance policy. A guarantee these tools will work reliably for mission-critical applications where the cost of failure is far higher than the cost of the software. The vast majority of our portfolio companies today have a massive incumbency advantage. They own the distribution, they own the customer relationship, and they possess deep domain expertise. These moats, data integration, network effects and regulatory complexity are incredibly difficult for a new entrant to come in and displace, even in a world where it is faster and cheaper to write code.

If we did our job correctly, we ignored purchase prices and market valuations, and looked at how durable the business model was to support the credit thesis. This has always been our lens. As credit investors, we don't participate in the growth or the upside of equity valuations. We are focused on the durability of an asset in its cash flows. We are not saying that tails might not be wider on the margin for field prepared business models and management teams. But generally, we think this is an equity valuation problem.

We believe many software businesses will likely have less pricing power given the change in the cost curve, and therefore, may see less revenue growth. Less growth means fundamental valuations of these assets is lower, but that doesn't mean they aren't generally credit worthy. If you look at the credit spreads since the beginning of the year of public enterprise software companies, and how little they have widened about 10 to 20 basis points on average, compared to the compression in the TEV multiples about 2 to 3 turns, or about 15% on average, it illustrates this point. For more levered private software companies, we see broadly syndicated loan spreads about 50 to 100 basis points wider versus the beginning of the year. The market is rerating the equity risk, but the credit remains resilient.

By focusing on the most that drive durability, we assess not just where the business stands today, but how well it is positioned to withstand even the benefits from AI-driven change. With some credit investors focused on historical results, our underwriting has been forward-looking from day 1. This emphasis on future durability, rather than tax performance, is a core differentiator in our investment process and underpins our confidence in the resilience of the businesses within our portfolio today and in the future.

Turning to our portfolio in aggregate. Our borrowers continue to demonstrate strong credit statistics, characterized by consistent revenue growth and expanding EBITDA margins. As of year-end, the weighted average LTV within our portfolio company was approximately 41%, remaining broadly stable year-over-year as steady earnings growth offset lower equity valuations in the broader market. Our view of LTV is based on our own fundamental valuation of these companies which incorporates the rerating of enterprise values to reflect current market conditions. We believe the resilience of our portfolio reflected in LTM revenue and earnings growth rates of approximately 9% and 12%, respectively, for our core portfolio companies is a testament to our disciplined allocation of capital and our ability to apply a [indiscernible] asset selection across market environments.

We understand many of our peers map the industry exposure differently from us with a specific software classification, which is intended to illustrate enterprise software exposure. We do not view software as a stand-alone industry, but instead, we view it as a mission-critical tool that enables a broad range of end user markets. For that reason, our industry disclosure is organized by end market, such as health care, business services and financial services, rather than by specific products or delivery mechanisms used to serve those markets.

We believe this is a better approach to risk management. As the primary driver of credit performance is a health and demand of the end markets being served rather than the technology used to deliver the service. At this moment in time, however, we felt it beneficial to our stakeholders providing a more comparable figure to our peers. We have mapped our portfolio to enterprise software exposure, which comprises approximately 40% of our total portfolio by fair value. The credit statistics of this portfolio are largely consistent with the overall portfolio, including a weighted average LTV of 40%, LTM top line growth of approximately 9%, and LTM earnings growth of approximately 15%.

As we've said for several quarters, we've remained disciplined in our credit selection in what has been a tighter spread environment. Periods of market volatility and uncertainty [indiscernible] to our strength, and we would love to see an environment where we can put more capital to work. We ended the year at 1.10x debt to equity, positioning us with $246 million of investment capacity before we reach the top end of our target leverage range. This compares to ending leverage of our peers in Q3 of 1.22x near the upper end of the target range for BDCs.

Our liquidity represented approximately 3% of our total assets. And we had nearly 6x coverage on our unfunded commitments available to be drawn by our borrowers based on contractual requirements in the underlying loan agreements. This compares to a peer median of approximately 2x as of September 30. Our robust liquidity, combined with our capital available, means that we have substantial investment capacity and flexibility during these uncertain times. Further, our capital base is permanent in nature. As noted in our November shareholder letter, unlike other structures of BDCs, we are not subject to redemptions or outflows and believe as a result, we are able to take advantage of opportunities created by market dislocations.

These times of market volatility have been the environments where we have shown that the Sixth Street platform excels and create shareholder value. There is significant change happening in our ecosystem, and we have always performed better on a relative basis in changing in dynamic environments. Our expertise spans [ affirm ], from our investing teams across direct lending, growth, digital strategies and infrastructure, to our technical leadership of our engineering team and Chief Information Officer, alongside our Vice Chairman and pioneering AI Strategist, [ Martin Chaves ]. Ultimately, we believe that as the market enters a more complex era, we remain uniquely positioned to lean into volatility and extend our track record of outperformance.

Moving back to our financial results. Reported net asset value per share at year-end was $16.98, compared to $17.11 in Q3, and $17.09 at year-end 2024. The latter two, after giving effect to the supplemental dividends declared for those periods. Factors contributing to net asset value movement during Q4 includes the over-earning of our base dividend through net investment income, which was offset primarily by the reversal of net unrealized gains from investment realizations during the quarter. The impact of winding credit spreads on the valuation of our portfolio [ and ] portfolio specific events. Ian will discuss movements in net asset value in further detail.

Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of March 16, payable on March 31. Our Board also declared a supplemental dividend of $0.01 per share relating to our Q4 earnings to shareholders of record as of February 27, payable on March 20. The supplemental dividend was capped at $0.01 per share this quarter in accordance with our distribution framework. As a reminder, we limit the payment of supplemental dividends such that any decline in net asset value over the preceding 2 quarters, inclusive of any supplemental payment, does not exceed $0.15 per share. We have maintained this framework since we declared our first supplemental dividend in 2017 to prudently retain capital and stabilize net asset value in periods of market volatility.

With that, I'll now pass it over to Ross to discuss our market outlook and summarize this quarter's investment activity.

Thanks, Bo. I'd like to start by layering on some additional thoughts on the direct lending environment and more specifically, how we are positioned for the opportunity set we are anticipating this year. Our base case is that the investment environment for 2026 will be characterized by the continued imbalance between the supply of private capital and the demand for financing, resulting in sustained levels of competition and tight spreads for regular way on the run transactions.

In contrast to what is implied by terms across our market, we believe that asset selection today remains complex. Fluctuating macroeconomic conditions, geopolitical paradigm changes and rapid technological advancements create significant cross currents. With this backdrop, we remain focused on driving investment activity through our differentiated and thematically oriented originations engine, and our deep underwriting capabilities, in each case, leveraging unique capabilities from across the Six Street platform.

Our asset selection prioritizes businesses with positions in their value chain and resulting unit economics that are robust in the face of potential headwinds. Additionally, we remain focused on thoughtful structuring and deal documentation, providing us with the tools to actively manage credits during our investment period to preserve capital and generate incremental economics for shareholders.

While we remain highly selective in investing capital, we see two potential upside nodes for accelerated originations. The first is capitalizing on generalized market volatility to finance businesses in which we have high conviction at attractive risk-adjusted returns. By maintaining a strong balance sheet through the cycle, we are well positioned to be a capital solutions provider in times of uncertainty.

The second is an acceleration in the market correcting rebalancing of capital. As noted in our November shareholder letter, we anticipated higher redemptions from non-traded BDCs, which began to materialize at the end of 2025, and view this capital reallocation as a healthy development for the ecosystem. While we expect this rebalancing to extend over a prolonged period, we recognize that this trend may accelerate given less predictable retail capital flows.

We are pleased with our level of originations to close out a strong year for funding activity. In Q4, we provided total commitments of $242 million and total fundings of $197 million across 5 new portfolio companies and upsizes to 4 existing investments. For full year 2025, we provided $1.1 billion of commitments and closed on $894 million of fundings. To characterize our funding activity in Q4, 97% of our investments were in first lien loans, underscoring our commitment to investing at the top of the capital structure. All 5 new investments were cross-platform transactions where we leveraged the expertise of Sixth Street's investment teams to execute on opportunities that offer compelling risk-adjusted returns.

During the quarter, we further diversified our end market exposure with 5 new investments spanning 4 distinct industries. On funding trends for the year, nearly half of fundings were off the run in what we consider Lane 2 challenged businesses with good asset bases, and Lane 3, good businesses with challenged capital structures. We also had an approximately even split in 2025 between sponsor and nonsponsor investments, highlighting the importance of our thematic investment approach in sourcing across both of these channels.

From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost decreased quarter-over-quarter from 11.7% to 11.3%, with the majority of this decline, or 33 basis points, attributable to lower underlying base rates. Despite market credit spreads remaining tight from a historical perspective, we continue to maintain discipline and focus on transactions with economics that over earn our cost of capital. This is evidenced by weighted average spreads on new investments that were abandoned within a 30 basis points range across all 4 quarters of the year. In Q4, our weighted average spread on new investments was 691 basis points, which compares favorably to the 551 basis points reported by our public BDC peers in Q3.

Moving on to repayment activity. We experienced a moderate slowdown in payoffs during the fourth quarter to finish off a record year. Total repayments in Q4 were $235 million across 8 full and 2 partial investment realizations. Total repayments were $1.2 billion for the year, representing the highest annual repayment activity since inception. In 2025, portfolio turnover was 34%, well above our 3-year average of 22%. This significant volume of repayment activity contributed to $0.64 per share of activity-based fee income in 2025, representing the highest level of fee income since 2020.

Refinancings were the dominant theme during the fourth quarter, driving 6 of 8 repayments in our portfolio. Four of these six were refinanced at lower spreads, including one in the BSL market, and 3 in the private credit market, highlighting the realization of our investment [ thesis ] as these credits improved during our hold period. The other two resulted in the repayment of our existing investment, followed by the opportunity to continue lending to the business through a new money term loan. As evidenced by this quarter's activity, we will continue to selectively participate in refinancings where we believe the investment represents an appropriate use of capital for our business, and where we can leverage our expertise into uniquely insightful underwritings.

Moving on to credit statistics. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.3x, respectively, with weighted average interest coverage of 2.1x. As of Q4 2025, the weighted average revenue and EBITDA of our core portfolio companies was $449 million and $127 million, respectively. Median revenue and EBITDA were $159 million and $48 million.

Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.13, on a scale of 1 to 5, with 1 being the strongest, compared to last quarter's rating of 1.12. Our very limited exposure to a second lien term loan in [ Alkagen ], which we acquired as a de minimis position was added to nonaccrual status during the quarter, representing 0.01% of our total portfolio by fair value. Total nonaccruals remained unchanged at 0.6% by fair value as of December 31.

With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. In Q4, we generated net investment income per share of $0.53, resulting in full year net investment income per share of $2.23. Our Q4 net income per share was $0.32, resulting in full year net income per share of $1.81. We experienced an unwind of $0.05 per share of capital gains incentive fees in 2025 and resulting in adjusted net investment income, and adjusted net income per share for the year of $2.18 and $1.76, respectively. At year-end, we had total investments of $3.3 billion total principal debt outstanding of $1.8 billion, and net assets of $1.6 billion, or $16.98 per share, which is prior to the impact of the supplemental dividend that was declared yesterday.

Our ending debt-to-equity ratio was 1.1x, down from 1.15x in the prior quarter. Our average debt-to-equity ratio increased from 1.1x to 1.17x quarter-over-quarter. Ending leverage was lower than average leverage during Q4, driven by the timing of repayments occurring near quarter end. For full year 2025, our average debt-to-equity ratio was 1.17x, down slightly from 1.19x in 2024. We continue to have ample liquidity with approximately $1.1 billion of unfunded revolver capacity at year-end against $199 million of unfunded portfolio company commitments eligible to be drawn.

In terms of upcoming maturities, we have reserved for the $300 million of 2026 notes due in August under our revolving credit facility. After adjusting our unfunded revolver capacity as of year-end for the repayment of the 2026 notes, we continue to have significant liquidity that exceeds our unfunded commitments by 4.2x. We remain focused on our established cadence in accessing that market annually to maintain our funding mix.

Pivoting to our presentation materials, Slide 10 contains this quarter's NAV bridge. Walking through the main drivers of the change in net asset value, we added $0.52 per share from adjusted net investment income against our base dividend of $0.46 per share. There was a $0.10 per share decline in NAV from the reversal of net unrealized gains from paydowns and sales, the impact of widening credit spreads on the valuation of our portfolio had a negative $0.03 per share impact to net asset value. Other changes included $0.04 per share increase in NAV from net realized gains on investments, and a $0.12 per share reduction to NAV primarily from unrealized losses from portfolio company-specific events.

Moving to our operating results detail on Slide 12. We generated total investment income of $108.2 million, down slightly compared to $109.4 million in the prior quarter. Walking through the components of income, interest and dividend income was $95.5 million, up from $95.2 million in the prior quarter. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were also higher at $10.9 million compared to $6.8 million in Q3, driven primarily by prepayment fees earned on our investments in [ Merit ] and Arrowhead. Other income was $1.9 million, down from $7.4 million in the prior quarter.

Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees were $58.2 million, down from $58.4 million in the prior quarter. Our weighted average interest rate on average debt outstanding decreased from 6.1% to 6.0%. This was the result of a decline in base rates quarter-over-quarter. As a reminder, our liability structure is entirely floating rate, which means our cost of debt will move in the same direction as interest rates.

Included in our earnings release yesterday, was the announcement of the formation of Structured Credit Partners, or SCP, a joint venture between both BDCs managed by Sixth Street, and two BDCs managed by the [ Carlyle Group ]. The investment objective of the JV is to invest equity into newly issued broadly syndicated loan CLOs managed by Sixth Street or [indiscernible]. By combining the investment capabilities of both platforms, this partnership enhances diversification and expand investment flexibility for SLX. We believe the unique structure will be highly accretive for earnings providing access to a core Sixth Street competency in a fee-free format, as SCP will not charge any management or incentive fees on the underlying CLOs or at the joint venture level. We believe SCP will generate returns in the mid-teens on capital invested, which will be accretive to our overall asset level yields. SLX's total commitment to the joint venture is $200 million.

Looking ahead to 2026. We continue to focus on the evolution of the interest rate environment and new issue investment spreads, and their combined impact on normalized earnings. As a core tenant of our dividend framework, we established our base dividend level using the forward interest rate curve to assess durability through cycles. As it relates to new issue investment spreads, our disciplined capital allocation and focus on asset selection can alleviate pressure from compression under various competitive environments. Based on that assessment, we believe the earnings power of our portfolio remains well aligned with our existing base dividend. We believe the anticipated returns from our newly established JV will also provide support to our earnings profile.

Based on our model, which incorporates the forward curve, reflects leverage in the middle of our target range and assume spreads on new investments remain broadly stable, we expect to target a return on equity on net investment income for 2026 of 11% to 11.5%. The lower end of this range reflects normalized activity-based fees, while the upper end reflects activity-based fees above our 3-year historical average. Using our year-end book value per share of $16.97, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $1.87 to $1.95 for full year 2026 adjusted net investment income per share. At year-end, we had $1.21 per share of spillover income. We will continue to monitor this figure closely as part of our ongoing review of our distribution strategy.

With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. I'll close by tying together a set of themes we've been consistently communicating in our shareholder letters and on recent earnings calls.

For several quarters now, we've been very vocal that the sector has been over allocating capital into a tighter spread environment. We've also been clear that as reinvestment spreads compressed and the forward curve rolled over, rate curve rolled [ over, our ] sector ROEs would come down. While net investment income may decline slightly further based on the current shape of the forward curve, we believe we are [indiscernible] trough earnings for the space, absent any care losses. As anticipated, the natural outcome of this misallocation is a reallocation of capital. We believe that the market is in the early innings of a gradual market cracking rebalancing.

As Ross mentioned, this began to materialize in December with a meaningful increase in redemptions from the perpetually offered nontraded BDC vehicles. Over time, we expect capital to migrate towards managers in structures that can consistently earn their cost of capital and away from those that cannot. Should we see capital continue to pull back, whether due to generalized AI fears, or broader macro uncertainty, we are very well positioned with significant liquidity and a robust balance sheet to capitalize on the opportunity set. These periods of market retreat and heightened volatility represent the greatest environment for SLX to fully leverage the breadth and depth of the broader Six Street platform. Our firm's extensive sector expertise, flexible and diverse capital base and integrated investment capabilities enable us to provide differentiated bespoke capital solutions.

Coupled with our technical underwriting and thematic investment approach, this unique combination has historically allowed us to outperform during periods of market instability or uncertainty. Our average net income ROE during years of heightened volatility has been nearly 14%, outperforming the average net income ROE of our peers during that period by over 600 basis points, and our own average ROE in more benign periods by 200 basis points. Should the investment environment present a similar opportunity, we have the necessary resources and structural advantages to generate differentiated risk-adjusted returns and create lasting value for our shareholders.

With that, thank you for your time today. Operator, please open the line for questions.[Operator Instructions] Our first question comes from Brian McKenna with Citizens.

So just my first question, how much of the portfolio has turned over since 2022? And then if you look at the mix of loans today, what year or 2 where the majority of these assets originated in?

Sure. Thanks for the question, Brian. So as we've stated before, we have less exposure to pre-2022 vintages than our peers. I think today, we sit at about 20% to 25% of NAV. The vast majority of our portfolio, we originated post the rate hiking cycle in 2023 and 2024. We've been less active of late as the markets have gotten tighter. But yes, so about 20% of NAV before 2022, which is much different than our peers.

Okay. That's helpful. And then, I guess, somewhat of a related question. I appreciate all the detail on software and how Sixth Street is thinking about the sector and really where we go from here. But I think what the market might be missing is that there's going to be a very large new set of deployment opportunities, really across a number of sectors over time in and around what's happening with AIs.

So thinking through how you invest and why, and I know you're thoughtful about that. But I would just love to get your thoughts on how you see the deployment environment evolving here over the next few years? And really what this ultimately means for the evolution of your portfolio?

Yes, sure. It's a great question. Look, I think, first of all, we did try to provide a framework of how we're thinking about the sector given a lot of the noise related to enterprise software and its effect on direct lending, and its effects on portfolio. Hopefully, people found that helpful. It sounds like [ you ] did.

What I would tell you is we're thematic investors here at Sixth Street and have always been. And the great thing about being thematic investors, themes rotate often. 18 to 24 months is a general gestation period of a theme, and we're constantly rotating across the platform on a relative -- looking at things on a relative value basis to find the best risk-adjusted return and define those durable moat businesses that we talked about in the earnings script.

We've never thought of software as a sector. And as such, we've always had rotating themes in and out of the sector. And I think that's really important because over the past 2 to 3 years, our team has been focused on the impact that AI have on the ecosystem and where businesses are going. And we've been rotating our capital to those businesses that we think are going to be the beneficiaries in the future. Those are the ones that I talked about that have the strong moats that are able to invest in product and what we ultimately think will expand the TAM of the market. So we're pretty excited about that.

On top of what we think is going to be a misunderstanding generally, and we're seeing that already of the threats and the opportunities. I want to be clear, we think there's going to be winners and losers here. There's going to be businesses that are fragile that will, over time, be disintermediated by AI. But there's going to be businesses that are systems of record that have strong data moats, most importantly, own their customers that are going to be able to invest in product and drive TAM. And we're looking forward to being providers of capital to that -- to those winners.

Our next question comes from Finian O'Shea with Wells Fargo Securities.

I'll move over to the JV. Will these look like more BSL, CLOs, just sort of true third party that you and [ Carlyle ] already have big platforms in? Or is this something like more of a typical JV where it's a little more senior-type direct lending, or you're selling stuff down to it from the book as it matures?

Good question, Fin. I'm going to address at the -- just what the criteria it was for us to invest in this JV, and then pass it over to Ross and Ian, who actually were very instrumental in working through this for that question. I think it's a very good question.

But the two important criteria is it has to be clearly accretive to our shareholders on a returns basis and on a relative value basis to other options that we see. That's one. And then two, it has to overlay with the core competencies of our platform and what we do well here at Six Street. And this hits both of those.

Ross, do you want to address Fin's question directly?

Sure. Thanks, Fin. So in terms of the underlying collateral, these will be broadly on CLOs. We don't anticipate the CLOs holding private credit either originated by us, or third parties. And we'd expect that on the liability side, they be financed like traditional PSL CLOs, as you mentioned, that ourselves and Carlyle already have large platforms originating and managing. The main exception to third-party CLOs will be there'll be no management fees at either the CLO or the joint venture level, a typical third-party CLO fees are 40 to 50 basis points of assets, or about 400 to 500 basis points to the equity. So that's the real differentiator in driving accretion for shareholders of the BDCs that are participating in the joint ventures.

Great. Thanks, Ross.

Okay that's helpful. Sorry, Ian, where you're going to...

Nope.

Okay. What about like -- you already -- I missed the number. I'm sure you said it on spillover, but it's something reasonably high. How do you address the spillover problem that sort of true BSL, CLO equity brings?

So it's a good question, Fin. I think we've made the comment multiple times about monitoring spillover income. And it's something that we think about deeply about how we can generate the best return on shareholder value, taking that into account. There's not one factor that matters the most, but we take them all into account, including where we're trading, how much of that still over needs to be distributed in the near term, what our prospects for over earning are?

Your point is a really good one on the BSL side. I think just to address that more directly. It's going to take us some time to ramp the JV. So we talked about a commitment of $200 million. That's not investing $200 million today. So this is not going to create an impact on spillover income in the next quarter, the next 2 quarters. This is going to be something that happens over time.

And as you saw, spillover income can move quarter-to-quarter. Our supplemental dividend framework was really designed to help us manage that without sacrificing stability in NAV. So it will be something that we will develop, and we'll be monitoring that as we go. But I don't have a specific answer on whether that changes our approach. I think it just goes into another factor that we included in our assessment.

Why will it take a lot of time for operational reasons, or because you want to -- the [indiscernible] is a really tight kind of thing and you want to manage it to that?

Well, just think about the general sequence and cadence of CLO creation, we're not looking to create a CLO with, in our case, $200 million equity commitment today. That's going to allow us to create multiple CLOs.

Our next question comes from Arren Cyganovich with Truist Securities.

I was wondering if you could talk a little bit about the investment pipeline and some of the disruption that we've seen from the public software space, and if that's impacting any of your deals? I know it's quite early thus far, but just curious if you've had any conversations with sponsors?

Well, actually, we've had a lot of conversations over the last few weeks as you'd imagine, with sponsors. I think sponsors are trying to understand the landscape of who's going to be providers of capital in this market and who is not.

I would say it's too early to see if there's going to be a pickup in pipeline from this disruption. I think we're well suited, as I mentioned, in the script to take advantage of any dislocation. These dislocations are really what our platform is built for. So we stand ready and able to take advantage of that.

As far as the generalized pipeline, I think the pipeline is decent. We have good activity in Q4 as you saw a pickup in M&A activity, particularly on the sponsor side. Last year, our nonsponsor to sponsor origination was around 50-50, so 50% nonsponsor versus sponsor. We were certainly focused on origination away from the regular channel as allocation to -- we were allocating our capital to transactions that we believe earned our cost of equity.

But we're encouraged by the pipeline. Certainly encouraged if this dislocation continues whenever there's a lot of uncertainty, that's the period that we generally step in and take advantage of.

And then the unrealized losses were -- they weren't too high, 1% impact to NAV. What was driving some of those impacts to your portfolio companies?

Yes, sure. So this is Ian, Arren. There was about $0.03 per share was attributable to spreads. And then on the credit side, there were some specific reversals of [ carats ], which is a public equity name that we hold, the market price at [ 9.30 ] was higher than what it was at [ 12.31 ]. So that creates a reversal of previously unrealized gains. And then there was an impact from a restructuring at [ IRD ] and a couple of other portfolio companies that were less impactful individually.

Our next question comes from Ken Lee with RBC Capital Markets.

Just one on the SCP JV again. I wonder if you could just talk a little bit more about some of the motivations here. Are you seeing particular opportunities within the BSL markets? Just wanted to flesh that out a little bit more.

Yes. Ken, this is Ross. So I mean, to echo Bob's comments, we are constantly on the lookout of how we can leverage core competencies of the Six Street platform for shareholders. As you know, we've leveraged the expertise of our structured credit platform for some time now, investing in CLO debt with a very strong track record in that asset class. And so we've been thinking about ways to do more beyond CLO debt and we developed this structure, which [ Carlyle ] happened to be kind of considering on their end simultaneously.

And so the motivations are we think the risk return generated by fee-free CLO equity is really attractive within a portfolio context for SLX. It's not so much picking a specific market environment in which we think the [ RF ] is more attractive or less attractive. The idea as Ian alluded to, is that we're going to deploy this equity capital sequentially in CLOs over time, creating very high diversification across borrowers and across vintages. And so those are some of the key motivations.

Got you. Very helpful there. And just one follow-up, if I may. I wonder if you could talk a little bit more about what you're seeing in terms of spreads on new investments. There's a little bit of a delta [indiscernible] but just wondering whether is driven more by mix rather than any kind of spread compression widening.

Yes. Generally speaking, we've seen spreads pretty stable throughout the course of 2025 and expect that in 2026. We took maybe a bit of a pickup given the broader markets recently. But [ any ] -- I think we were within a 50 basis point band, across the 4 quarters last year. Again, speaking to the breadth of our platform and our ability to find things off the run thematically. But broadly, we see stability. We don't -- we're not anticipating any real change in that going forward. Our hope is capital continues to reallocate in the sector, that spreads will continue to widen a bit, but we haven't seen that as of yet.

Our next question comes from Sean-Paul Adams with B. Riley Securities.

Could you provide just a little bit more color on the restructuring for IRG Sports?

Yes, I'll take that one really quickly. IRG Sports is a business that we've been investor in for 8 or 9 years now, I believe. We concluded the sale of one of the operating assets during the quarter. That was actually above our NAV. We have been in process of marketing and selling the other operating asset. We have marked that to what we believe is the midrange of the bids that we have today and feel good about that. Hopefully, may actually do a little bit better than that.

Our next question comes from Paul Johnson with KBW.

Most of mine has been asked. But I am curious, though, on the 40% software exposure, where has that gone over time? Has that come down? Or has that been pretty consistent over time? And just based on current market conditions, I guess, where would you expect that to trend to just with your pipeline and your selectivity, I guess, currently?

Yes. So I'll take that, given that we've always mapped to the end market, and I think we've provided a framework why we think that's the right way to think about risk because that is ultimately what you're underwriting. We don't have historical statistics. We actually took a look at the portfolio and wanted to provide some clarity given the market context and mapped the portfolio to broadly what we believe people -- how people in the space are defining enterprise software.

What I would say anecdotally, I would believe that has come down marginally over the past couple of years, in part because we were seeing a decline in unit economics across the software space post the COVID pull-through of demand. And I think that's one of the things that's really important to note that people are losing sight of is that valuations of software companies are coming down in part because unit economics are slowing.

There's a little bit of cannibalization of AI budgets in enterprise software budgets that are costing some of that. There's not disruption and dislocation from AI taking market share yet though. But as we saw unit economics coming down and frankly, more capital in the private markets, which are over-indexing probably to software and certainly private credit to software. We were just less competitive in the regular way [indiscernible] financing for software companies.

A lot of the businesses that we did invest in, in the software space over the last couple of years, we're off the run direct to company or very thematic in some of the areas that we were rotating to. So I don't have the exact numbers because we've never tracked it that way. What I would tell you is, anecdotally, it has come down marginally over time because we were less competitive.

As far as future, we're going to we're going to invest where we feel we can invest in defensible businesses that meet our criteria. I'm hopeful on the margin that we're more competitive in the regular way financings for the winners in the future, but that will remain to be seen.

Our next question comes from Rick Shane with JPMorgan.

Look, I'm going to start with a strange comment. [ Jill Morgan ] used to say that the difference between a 5 run lead and a 4 run lead is more than 1 run. I would argue in the BDC space trading at a 15% premium to NAV and trading in the 5% discount to NAV is more than a 20% differential. You guys are one of the few BDCs that enjoys this advantage. You're not in a position right now where you need additional capital, but that advantage is [indiscernible]. You do have a maturity, a bond maturity, or no maturity coming up this year. Can BDC's issue converts, and is that a way for you guys to sort of lock in that advantage, and also get ahead of your maturity?

Rick, it's Ian. And first of all, welcome back to this forum. You're probably familiar with from your previous [indiscernible], we have issued converts in the past. We did it at a time where the unsecured market was not well developed. And since we've experienced those maturities of the converts that we previously issued, that market has become a lot more supportive of the space, providing cost of debt that's pretty competitive.

To answer your question directly, we do consider converts. We get pitched by the bankers that cover us quite regularly with new ideas, converts being one of those ideas. And we consider that on a quantitative basis against the cost of debt that we see in the regularly unsecured market. So we just view that as another alternative financing tool available to us, and we assess it on its merits.

Got it, Ian. And yes, I have to admit. I was kind of trying to rack my brain whether the BDCs can issue converts. So thank you for that. Again, sort of getting back to this competitive advantage that you enjoy in terms of your multiple and cost of capital. We all know how this works, which is that there will be a time where you guys want to put capital to work. You have that opportunity, but there is no way to ensure that, that advantage will persist. How do you think about locking that in right now when most of your peers can't take advantage of that multiple?

I think the way we think about it is on a broader liquidity perspective, but we have to marry that with the opportunity set in front of us. So we're not going to run with so much excess liquidity that it becomes a drag on earnings. We actually think that we have a very strong liquidity position today. Bo mentioned in his earlier remarks that one of the levers that we have is that we can take leverage up. We're only at 1.1x. So we have capacity on leverage today before we get to the upper end of our target range.

I know your question is focused on how do you lock it into that today? I think we're focused on providing a more durable business model. And if you look at our history as a public company, since we went public 12 years ago, we've traded at a premium for 98% of the trading [indiscernible]. So we've had that opportunity to lock it in. As you say, but we've always in mind on just being efficient with capital.

Yes. I mean, the only thing that I'll add is by focusing on the shareholder experience and allocating capital to credits that earn our cost of equity and really focusing deeply on the quality of our underwriting and our loan management. Ultimately, that has allowed us to trade above NAV in periods of dislocation and always be able to take advantage of of markets. And that's our North Star. It will continue to be our North Star, and I think we'll be rewarded with that when we need it.

No. It's interesting looking back through our model that goes back all that way. It's clearly true. The asset selection focus has not changed here. It is interesting, I think -- also 2025 was the first year where you actually had -- where paydowns exceeded fundings. At what point -- I mean how long are you willing to let the runoff continue? Do you see an inflection point approaching, or given where spreads are and liquidity, even though private credit is paying down a little bit, the liquidity that's in the market, how big an impediment is that in the first half of '26?

Look, we're always going to size the portfolio to the opportunity set in the market. We can't control payoffs when markets tighten up. That's why we structure things with call protection and capture fees. Those fees drive income in periods of heightened repayment activity. The great news is we have a very strong originations engine that can originate things away from regular [ weight ] deals. We proved that last year. We had a great origination in the year. But again, we're always going to allocate capital to the opportunity set. And we just don't think of the world in terms of how do we control repayments, we don't control repayments. We have call protection in our names most generally. But if markets tighten and irrational, we don't control that.

Our next question comes from Robert Dodd with Raymond James.

I've got some questions about the JV, but I think I'll follow up with you on those. On the spread question going forward, if I can. I mean in your guidance, and you kind of -- prepared remarks, you're saying you expect [indiscernible] spreads to remain tight. So does that mean that you think that the market AI software concerns are going to blow over rapidly? Because, obviously, right now, software spreads in the liquid market. Obviously, we don't want to see them in the private credit market yet. But those are 150 basis points wide give or take.

And that's not just the explicit software [indiscernible] healthcare IT, anything where software is the product spreads are materially wider, but you expect them to, maybe, tight for the year. So can you reconcile [indiscernible]? Do you expect it to blow over? Or how do those two things align?

Thanks for the question, Robert. Look, our base case coming into the year is that the credit spreads are going to be stable and not increasing. What I would tell you is it's too early to tell if the dislocation recently in software and in the BSL market. And I think for performing BSL for software names that we said in our script, is closer to 50 to 100 basis points. I think you're quoting more broadly software and some of the more challenged names that [indiscernible] out to 150.

Like, overall, that should be support for the ability to find -- to find risk with better spread environment in the past. But I don't think that's our base case now. I think we -- I think the markets are still generally a loss with liquidity and capital, that could reverse, right? We saw redemptions and nontraded BDC sector pick up in Q4. I can't imagine that they're going to slow down any in Q1. I think -- we think that's a gradual reallocation of capital in the sector, which is healthy. Over the long arc, we believe this space needs to earn its cost of equity, spreads need to widen, that's going to take time. Our base case isn't that they're going to, in the near term, but that could change very quickly. I do think over the long term, they have to.

Got it. One more again. I mean software technology has been a core part of the platform for a considerable period of time. And the personnel background even before that. How long has there been, say, I don't know, an AI risk section in an investment committee memo, or an investment committee meeting? I mean, it's not like I think AI risk suddenly appeared over the last 3 months. So how long has that been a core part of your underwriting for the software as a product, rather than software as an end market kind of businesses?

We've been thinking about how AI impacts the ecosystem, both positively and negatively, really over the past 3 years. And as I mentioned, working thematically to reposition our portfolio and our new activity to the areas that we think are both most protected and can benefit from those.

The other great thing about Sixth Street in our platform is we have a purview of what is going on in the ecosystem. It's not just in direct lending. We have a growth franchise that -- it starts to see businesses just post kind of venture. And then we have folks that are looking at things in the broadly syndicated market, and also on the distressed market. So we have this perfect current view of what's going on across the ecosystem, and that allows us some early signals of where we should be focusing our capital and where thematically we should be thinking about positioning our portfolio.

So it's been for quite some time. Our team has been working on this and thinking through it. And, so.

Our next question is a follow-up from Brian McKenna with Citizens.

Just two more unrelated questions, if I may. So how much of your software and related exposure is sponsor versus non-sponsor? And then one for you, Ian. When you look back at the last decade as a public BDC, what's been the low end of the initial target range for ROE? What do the operating environment look like during that period, specifically as it relates to base rates and spreads, et cetera? And then where did the ROE actually come in for that period?

Might be easy if I answer your question to me first. We've provided guidance excluding this year for 2026. We've done it on 11 prior occasions. Our actual operating ROEs have ended up above our guidance range in 8 of those years, and the other 3 years we've met the midpoint of those ranges. And so that's across a period from 2015 to 2025. You had different periods where base rates were elevated in 2018, you had some dislocation from energy markets on the broader market in 2015 -- 2014, 2015. You had [indiscernible]. I'm not as familiar with what our peers do on the guidance side that we have been providing guidance now for -- this is our 12th year of providing guidance.

And then just going back quickly to your question on sponsor versus nonsponsor in the software space. We don't have it broken down for the software space, but I would [indiscernible] say that it would mirror the broader portfolio that has traditionally been close to 35% nonsponsor versus sponsor, of course, of late over the last 18 months. That activity has been closer to 50-50.

I'm showing no further questions at this time. I'd like to turn the call back over to Bo Stanley for closing remarks.

Well, thank you, everybody. Thanks for the great questions today and for listening to us. I also want to thank everybody in this room for the tremendous amount of work for -- preparing for this in every quarter, and wish everybody a great long weekend. Thank you.

Thank you for your participation. You may now disconnect. Good day.

Good day, and thank you for standing by. Welcome to the Sixth Street Specialty Lending, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Cami VanHorn, Head of Investor Relations. Please go ahead.

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, 2025, 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, 2025. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Joshua Easterly, Co-Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Good morning, everyone, and thank you for joining us. I assume everybody has seen my most recent letter and the 8-K posted last night with our earnings. I'm joined by our newly announced Co-CEO, Bo Stanley; and our CFO, Ian Simmonds. Before covering our Q3 2025 results, I wanted to discuss the leadership changes that were announced yesterday. We are excited to announce that Bo has been named Co-CEO, effective immediately. Bo and I have been working together for the better part of the past 25 years.

As an early member of the Sixth Street team, Bo possesses an unparalleled understanding of our industry is a tremendous leader and investor. As a key member of the management team, Bo has also been a driving force in preserving and strengthening the investor first mentality that defines the Sixth Street culture. After 15 years of leading the business and what is now my 47th public earnings call, I'll be stepping down from the CEO seat at the end of the year.

This decision is made with considerable optimism for the future of the company. Bo has been integral in the investment leadership of the business for several years, and this transition formalizes our existing collaborative structure. Going forward, I'll continue to serve as Chairman of SLX and Co-President and Co-Chief Investment Officer of the broader Sixth Street platform. As part of this evolution, Bo has joined SLX's Board of Directors. It has been a privilege of a lifetime to lead the company.

I'm incredibly proud of what we have accomplished together and even more excited about what lies ahead under Bo's leadership. With that, let's turn to this quarter's results. After the market closed yesterday, we reported third quarter adjusted net investment income of $0.53 per share or an annualized return on equity of 12.3% and adjusted net income of $0.46 per share or an annualized return on equity of 10.8%.

As presented in our financial statements, our Q3 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gain incentive fee expense were $0.01 per share higher than the adjusted figures. The difference between adjusted net investment income and adjusted net income of $0.07 per share was largely related to the reversal of net unrealized gains on the balance sheet related to investment realizations. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of December 15, payable on December 31.

Our Board also declared a supplemental dividend of $0.03 per share related to our Q3 earnings to shareholders of record as of November 28, payable on December 19. Net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is $17.11. Since the start of the interest rate hiking cycle in early 2022, our net asset value per share has grown by 1.9%, representing a significant outperformance compared to the average decline of 8.5% for our public BDC peers through Q2. Focusing specifically on the last 12 months, this outperformance has continued with SLS delivering NAV stability while other public BDC peers experienced an average decline of 2.8% through Q2.

While dividend policies vary across industry, SLX's outperformance remains largely consistent, whether measured by reported net asset value per share or net asset value adjusted for supplemental and special dividends. Before passing it to Bo, I wanted to touch on one topic addressed in our letter, which is the stock market performance of the BDC sector. We view the September sell-off as a net positive for our industry. Let me be clear, we do not believe the market move is credit related for us or the sector broadly. As we said in our last earnings call, we think credit issues are generally behind the industry.

Our view is that the market woke up to the reality that the sector has been allocating capital based on a backward-looking view of higher-yielding back books in an elevated interest rate environment. This was the premise of our letter to shareholders in April, which illustrated forward ROEs falling below the industry's cost of equity capital. While we believe this capital misallocation will have both near- and long-term effects in the short term, we expect to see dividend cuts across the industry as net investment income falls below dividend levels. For SLX, we continue to overearn our base dividend with 114% coverage in Q3, allowing us to pay another supplemental dividend based on this quarter's over earning.

Long term, we believe downward pressure on BDC stocks will constrain further capital raising, specifically in the nontraded perpetually offered vehicles. For a number of managers, investors can simply buy the same or very similar product in a listed format at a discount to net asset value with daily liquidity. While this will take time to play out, we see this as an effective market correcting mechanism to address the imbalance between supply and demand of capital that we have been talking about for several quarters. Ultimately, we believe this will create net negative flows for direct lending, similar to the experience in the listed and non-traded REIT products that occurred following the rate hiking cycle beginning in late 2022.

There is more on this in my letter, but to wrap it up, we are optimistic that this environment will underscore the critical importance of manager selection and driving long-term shareholder value.

With that, I'll now pass it over to Bo to discuss this quarter's investment activity.

Thank you, Josh. It's a pleasure to be your long-term partner in our business, and I'm energized by the opportunity to serve as co-CEO. My focus is simple to continue executing the same disciplined strategy and uphold an investor-first culture that has defined our success from day 1. Turning now to the operating environment during the quarter. Competition in direct lending markets remained elevated, fueled by persistent oversupply of capital and historically tight spreads in the liquid credit markets.

With broadly syndicated loan spreads reaching their lowest level since the great financial crisis, borrowers have been active refinancing into public markets to capture lower funding costs. Heightened BSL competition and muted M&A activity have led to sustained spread compression across the private credit landscape. Against that backdrop, we provided total commitments of $388 million and total fundings of $352 million across 4 new investments, 5 upsizes to existing portfolio companies and through selective deployment into structured credit investments. A key differentiator for SLX is that all 4 of our new investments were thematic off-the-run transactions, which we define as uniquely sourced opportunities that require a combination of deep sector expertise, a differentiated capital solution and the ability to commit in size to drive the transaction.

These investments, which are driven by our thematic sourcing engine, create a unique portfolio for SLX shareholders relative to the sector, which largely focuses on conventional sponsor-backed direct lending transactions. An example of a thematic nontraditional transaction in Q3, which was also our largest funding for the quarter was our investment in Walgreens. Sixth Street acted as an administrative agent and joint lead arranger on a $2.5 billion term loan to support the financing of Walgreens U.S. retail business as part of Sycamore Partners' broader $23.7 billion take private of Walgreens Boots Alliance.

Our decades-long relationship with the sponsor built on a track record of successful retail ABL deals was instrumental in us leading the transaction. Our expertise in retail ABL space made us a credible partner to deliver a successful execution for what we believe was the largest nonbank ABL deal ever and also the largest retail buyout of all time. This transaction exemplifies our ability to create value for shareholders through differentiated investment opportunities. Our second largest investment during the quarter was a thematic investment in Velocity Clinical Research.

Velocity is the world's largest fully integrated site management organization, which provides clinical trial facilities and site-based trial management services. The opportunity was driven by cross-platform effort across Sixth Street and our long-standing relationship with the company's sponsor. It aligns with our pharma services sub theme and followed an extended engagement in which we iterated on multiple structures to deliver a bespoke capital solution for the business. Our dedicated health care sector team continues to differentiate our ability to source and underwrite these off-the-run transactions.

This investment extends a track record that has been a key contributor to SLX's returns, including prior investments in Arrowhead Pharmaceuticals and Biohaven that have generated alpha for shareholders. During the quarter, we opportunistically invested $100 million in BB-rated CLO liabilities. These investments, while representing a compelling use of capital at the time given the return profile are not reflective of a change in the core investment approach or long-term strategy. We view these investments as an effective way to deploy capital, particularly given that in the current tighter spread environment, we can purchase BB CLO liabilities at wider spreads than regular way direct lending loans, which are also subject to refinancing risk.

Our Q3 CLO investments reflect a weighted average spread of 554 basis points. To the extent we see a shift in the relative value, the liquid nature of these investments allows us to rotate out of the positions. Our expertise in the structured credit market is underscored by our track record of investing in CLO liabilities, which has generated a weighted average IRR and MOM of 27.1% and 1.24x, respectively, for SLX shareholders. This track record is driven by Sixth Street's deep expertise in liquid credit markets, demonstrated by having deployed approximately $16 billion in structured credit investments with an additional $13 billion in 30 CLOs managed by a team of 27 investment and research professionals.

We believe this capability further highlights the benefits of the broader Sixth Street platform in terms of providing SLX with differentiated deployment opportunities. Looking ahead, we do not foresee a broad-based recovery in M&A activity in the near term. We expect spreads to remain tight as the supply of capital continues to outpace demand. In this environment, our thematic sourcing continues to drive origination and the breadth of Sixth Street's platform helps mitigate the effect of market tightening. This is evidenced by our weighted average spread on new floating rate investments, excluding structured credit investments of 700 basis points in Q3.

While we do not have Q3 peer data available, this compares to a spread of 549 basis points on new issue first lien loans for public BDC peers in Q2. Moving on to repayment activity. We continue to experience elevated payoffs during the third quarter. Total repayments in Q3 were $303 million across 9 full and 1 partial investment realization. This repayment activity was the main driver of the $0.14 per share of gross activity-based fee income earned during the quarter, which compares to our 3-year historical average of $0.08 per share. To characterize this quarter's repayment activity, 75% of repayments were driven by refinancings at lower spreads in the private credit or broadly syndicated loan markets.

The spread on refinance deals range from 325 to 525 basis points. We continue to adhere to our ongoing message of disciplined capital allocation, demonstrated by only 12% of our investments by fair value as of quarter end, having a contractual spread below 550 basis points. To put this into perspective, as of Q2, 59% of BDC portfolios by count had spreads below 550 basis points, and we anticipate this percentage will increase further this quarter. As it relates to portfolio metrics and yields, at September 30, the weighted average total yield on debt and income-producing securities at amortized cost was 11.7% compared to 12% as of June 30. The decline primarily reflects the impact of change in the base rates from lower reference rates resets and from payoffs of higher-yielding assets, excluding the yields on new investments funded during the quarter.

From a vintage mix perspective, our exposure to pre-2022 vintage assets is less than half of the BDC sector. 22% of our portfolio is represented by these investments compared to 56% for the public BDC sector. We believe this is a positive differentiator for our business as the vast majority of our portfolio was originated at the start of the interest rate hiking cycle, positioning us well for the current environment. Moving on to portfolio composition and key credit stats.

Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.3x and 5.2x, respectively. And our weighted average interest coverage increased to 2.3x. As of Q3 2025, the weighted average revenue and EBITDA of our core portfolio companies was $376 million and $113 million, respectively. Median revenue and EBITDA were $150 million and $46 million, respectively. Finally, overall portfolio performance is strong with weighted average rating of 1.12 on a scale of 1 to 5, with 1 being the strongest. We have 2 portfolio companies on nonaccrual status, representing 0.6% of the portfolio by fair value, reflecting no change from the prior quarter. Both of these investments included in the 5 rated category.

With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.

Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.53 and adjusted net income per share of $0.46. Total investments were $3.4 billion, up slightly from $3.3 billion in the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was $1.9 billion and net assets were $1.6 billion or $17.14 per share prior to the impact of the supplemental dividend that was declared yesterday. Our average debt-to-equity ratio was 1.1x, down from 1.2x in the prior quarter.

Our ending debt-to-equity ratio increased from 1.09x to 1.15x quarter-over-quarter. We continue to have significant liquidity for the size of our balance sheet with nearly $1.1 billion of unfunded revolver capacity at quarter end against $174 million of unfunded portfolio company commitments eligible to be drawn. As of September 30, our funding mix was represented by 67% unsecured debt, and we have no near-term maturities with our nearest obligation being $300 million of unsecured notes not occurring until August 2026. Consistent with previous quarters, we did not issue any shares through our ATM program during Q3.

While SLX trades at a meaningful premium to net asset value, which presents the opportunity to grow our asset base by issuing equity, we remain steadfast in our commitment to disciplined capital allocation. We will only seek to access the ATM program when we identify compelling near-term investment opportunities that allow us to maintain our target leverage and when issuance is accretive to both NAV and earnings per share. Our guiding principle is to do what we should do rather than simply what we can do. We believe this disciplined approach as it relates to capital management has earned the trust of our investors and delivered consistent performance. We are committed to upholding that trust by prioritizing accretive growth and responsible capital management.

Pivoting to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.53 per share from adjusted net investment income against our base dividend of $0.46 per share. There was an $0.08 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income. The reversal of unrealized gains this quarter was primarily driven by early payoffs resulting in accelerated OID and call protection. There was a small $0.01 per share positive impact to NAV primarily from the effect of tightening credit market spreads on the fair value of our portfolio.

And finally, there was $0.01 per share of net realized gains, mainly from our equity realization in Clarience Technologies. Moving on to our operating results detail on Slide 9. We generated $109.4 million of total investment income for the quarter compared to $115 million in the prior quarter. Interest and dividend income was $95.2 million, down slightly from prior quarter, primarily driven by the decline in interest income from lower base rates. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $6.8 million compared to $10.2 million in the prior quarter, driven by the elevated prepayment fees, including Arrowhead in Q2. Other income was $7.4 million, down slightly from $7.6 million in the prior quarter.

Net expenses, excluding the impact of the noncash reversal related to unwind of capital gains incentive fees were $58.4 million, down from $61.4 million in the prior quarter, primarily driven by lower interest expense. Our weighted average interest rate on average debt outstanding decreased from 6.3% to 6.1%. This was the result of a slight decline in base rates quarter-over-quarter and lower average debt outstanding in Q3. While liability sensitivity is limited for BDCs, we believe SLX is best positioned to benefit in a falling interest rate environment given our liability structure is entirely floating rate in nature. We estimate undistributed income of approximately $1.30 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 comply with the RIC distribution requirements, minimize potential return on equity drag from the excise taxes and prioritize returns to our shareholders. We believe there is a misconception that spillover income protects the dividend. However, using spillover to cover the dividend simply reduces net asset value. This is a return of capital, not a return on capital and ultimately diminishes shareholder value if earnings don't support the payout. Philosophically, if we can generate a return on that retained capital that is in excess of the cost of that capital, our shareholders will benefit through greater economic return.

If we were below our leverage target, which we are not, and the cost to fund the distribution was lower than the excise tax rate, which it is not, we could theoretically create more value for shareholders by distributing that spillover income. Given these conditions are not present today, and we continue to meet our distribution obligations through our existing dividend framework, we believe retaining this capital remains the most appropriate way to generate value for our shareholders.

Before turning it back to Josh, I'd like to briefly provide an update on our ROEs. At the beginning of this year, we communicated an annualized ROE target range of 11.5% to 12.5% based on our expectations over the intermediate term for our net asset level yields, cost of funds and financial leverage. Based on our performance this year through Q3, we expect adjusted NII per share for the full year to be at the top end of our previously stated range of $1.97 to $2.14 per share for the full year. The potential to exceed the top end of that range will be driven by activity-based fees.

With that, I'll turn it back to Josh for concluding remarks.

Thank you, Ian. That's pretty long-winded in my letter, but I still encourage all of you to read it. And as a result, I'll keep my conclusion brief and pass the baton to vote. As a proud shareholder, we're in the right hands to drive our platform forward. Our heartfelt thank you to all of our stakeholders has been an honor. The greatest pleasure of the seat was learning from all of you. It made me and SLX better.

A special thanks to my co-founding partners who trusted me with our public vehicle, our pre-IPO shareholders and all of our shareholders over the last 11-plus years. I wanted to say thank you to Mike Fishman. I've worked with Mike for the better part of 25 years. Mike has been a mentor, a partner and most importantly, a friend.

Thanks, Mike. With that, over to Bo.

Thanks again, Josh. I'll close where we started. Today's leadership update doesn't change how we run the business or our capital priorities. We remain focused on disciplined underwriting, proactive portfolio management and delivering consistent investor-first results. We have great continuity with Ian and Craig Hamrah and of course, the next generation of talent. I have immense confidence in our team and the platform we've built, and I look forward to driving the next chapter of value creation for our shareholders. Thank you for your continued support.

With that, thank you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question will be coming from Brian Mckenna of Citizens.

First off, Bo, congrats on the new role. And Josh, I just want to say thank you for all the genuine perspectives and insights on these calls over the years. So my first question is on the theme of evolving businesses over time. I wasn't totally shocked by the announcement last night, although it also wasn't on my bingle card for third quarter results. But Josh, it would just be helpful to get your perspective on why it's so important to have a deep bench to always be thinking about the next generation of leaders, why it's critical to have such a strong culture and really how all this has played into the natural evolution of Sixth Street over the past 15-plus years.

Yes. Brian, it's a great question. Look, these things might seem kind of abrupt shocking or a surprise to the outsiders, but the reality is I think Bo has been -- this process started 8 years ago. Bo was named President in 2016, so 9 years ago, whatever that math is. Ian has been here 10 years, but we started this transition 8 to 9 years ago or at the beginning part of this transition. And when I look at -- and it was only fair to Bo and the team to continue on that path and give them space to run. Ultimately, this is a people business and culture matters.

And I think what we've done is build a very, very strong culture around our franchise and around our shareholder orientation and Bo embodies that and he's going to continue that. So I'm super pumped as a shareholder, super pumped as Bo's partner to see Bo and then quite frankly, the generation behind that because at some point, Bo will have to make that choice on who the generation is. I'm sure he'll do that in a collaborative way with me and my other partners, but he's going to have to make that choice. And this is -- our shareholders have given us permanent capital.

With that permanent capital comes the responsibility of building a culture that allows for these generational changes in leadership, unlike an LPGP relationship, which those are relatively short dated 5 to 10 years, and it doesn't depend on having the next generation of leadership. So that is a responsibility for leaders of these permanent capital vehicles and make sure you have succession planning and make sure you build a culture where people can step up, and we've done it. But I think it's different than the typical limited partnership relationship because these are permanent capital vehicles that belong to our shareholder and the shareholder trust that we do this.

Got it. That's really helpful. And then just a question on private wealth. I know this is extremely topical. But how is Sixth Street thinking about expanding into this channel? I'm assuming this is something you and your partners are thinking about a lot. And I know if you ultimately roll out a dedicated strategy, it will be in typical Sixth Street fashion. But what could this look like? I'm assuming you'll have to figure out a way to solve and really be able to prudently raise and deploy capital. But is there a way to create a strategy that caps quarterly or annual inflows and then you're also able to invest across asset classes depending on the current risk rewards in the market. Any thoughts here would be helpful.

Yes. I mean, look, I think it's obviously -- I talked about this in my letter in depth. It's probably not -- I would say we think about it, we debate it. There's not a conclusion today. But if we did something, it would have to be in a different way that I like the idea, and I said this on our last earnings call, the thought of the democratization of alts allowing that the small investor access to great management and those stream of returns. I'm not sure the market has figured out how to actually give them -- give that investor the institutional experience. And if we ever did something in the space, it would have to be to give them the institutional experience. And quite frankly, we haven't figured out exactly how to do that yet.

And our next question will be coming from Finian O'Shea of Wells Fargo Securities.

Congrats again on the promotions, leadership changes and so forth. Just a small follow-up on that. Can you talk about how the focus may change, Josh, you'll remain CIO or co-CIO of the platform? Are you still focused on direct lending? Or will it be something else? And then, Bo, I think you were -- correct me if I'm wrong, split between the growth business and this. Will it be full on this or anything else in there interesting on what you'll -- your day-to-day will be like?

I don't expect like either one of our day-to-day changes, and I'll let Bo answer it for himself. I am -- what I love personally is investing. I'm going to continue to be an active member and voice on the direct lending investment committees. And so I don't expect anything to change. I think it's also -- again, it's hard to see from the outside, but this -- day-to-day, this is pretty consistent with how we operate today. And so again, if I've made one mistake, and if I can be self-critical for a second, I've probably been more of a voice and an outsized voice compared to how we operate. And the reality is how we operate the business is how it's going to operate going forward, which is I spend my time trying to invest and be helpful on the investing side and think about risk return. And so I don't think anything is massively changing. And on Bo, Bo can talk about how his responsibilities on growth changes, but I don't see that massively changing either.

Thanks, Josh, and thanks for the question, Fin. As Josh mentioned, I don't see a big change in my day-to-day responsibilities. The framework for this transition has been in place for quite some time. And as Josh mentioned, started 9 years ago. I'll continue to split my time with growth. The great news there is Fin, I think you and I have talked -- spoke about this before, there's a lot of synergies across those portfolios and a lot to learn by being across both of those businesses. I'll be spending more time with you all. I look forward to that. I look forward to driving the business forward and continuing on the journey that we've been on for quite some time. But day-to-day activities, I don't expect a vast change.

Yes. I mean this is a little bit of a joke, and it's surely not going to show up well in the transcript, but both getting the worst part of the transition, which is public earnings calls and talking with you all, which makes us better ultimately. But I'm glad Bo is taking that off my plate, and I'm sure he'll do a better job than I have.

But we'll keep leaving on him here for these calls.

And we'll see who will do the shareholder letters as well. I mean I'd be happy to go about. Just a follow-up on the -- I think, Bo, you gave color on the CLO liabilities. Is that something you're continuing to do given it doesn't seem like direct lending spreads are bouncing back imminently. And these are in the -- I think it was somewhere in the 50s you said. It's not like that's out of the park. So if you tie that to the spillover math you gave, does the sort of marginal dollar of the CLO debt investment make sense to support through the marginal sort of source of capital that is spillover income. And yes, I'll leave it at that.

Yes. I'll take -- first of all, let me take a step back because I think it's helpful. We have a huge dedicated structured credit team and broadly syndicated loan team. And if you look at the performance of both those teams, it's how this park topped us out. We're very good in those markets. And when -- and so we have a structural edge where you see we've invested in this asset class and over time in the BDC. I think our average return is in the 20s when we've done it.

Obviously, it's not going to be a 20% return. But when you look at -- and so you start there and our choices were just to put it out there, the marginal economics are a lot better than the spread because it would have filled an investment income hole and was accretive to earnings this quarter by probably $0.01 or so. And so is this a -- and I don't expect it to grow. We're at, what, $100 million today, which is a very small part of, a, our balance sheet, our balance sheet is $3.5 billion and a very small part of our capital. So I don't expect it to grow. But is it a nice placeholder and a relative value trade? The answer is 100%.

And so what we don't want to do is tie up capital in long-dated illiquid 450 things that won't give us the opportunity to drive value and create that antifragility that we have over time. And the great thing about this is, a, they're higher spread; and b, they're liquid. And so there -- it works on a marginal basis. It surely works on a risk-adjusted return basis, and it's liquid.

And so we get to change our mind when there's other opportunities. And Fin, personally, I want to say to you and Wells Fargo and your predecessor, banks, and this is not calling out anybody else, but you guys have been at this for a long time covering the sector and the work you've done has, I think, been extremely additive to the sector where the sector needs transparency. And so thanks. You've made us better. You made the sector better, you and the institution and your predecessor. So thank you for that.

And our next question will be coming from Melissa Wedel of JPMorgan.

Congrats again to both Bo and Josh on your -- maybe just formalizing the roles that have sort of been evolving that way for a long time. I wanted to follow up on credit. Obviously, there have been a lot of concerns about credit quality across the industry. And I think especially those have picked up -- those fears have picked up in the last month or so. I think -- and we heard a lot from investors about concerns around -- is there a pocket of weakness around auto in particular. We saw a couple of headlines there. It sounds like you're not especially concerned about any particular pockets of weakness, but it's more an issue of pricing and supply of capital in the market. Is that a fair characterization?

Yes. I think that is fair. I think generally, credit issues are behind. The idiosyncratic stuff will pop up. I do think who I love and respect a lot, your boss had made a comment about -- ultimate boss made a comment about credit. I think he was referring to generally credit and not private credit. So I think one of my contemporaries took the bit on that and the story kind of got wild.

But what I would say is when you look at those instances that have been reported in the news, that was not private credit. That was a broadly syndicated loan market that's been around for 30 or 40 years and then was the other, I think, banks balance sheets. And so I think private credit generally does a good job because the model is different where they -- we do private equity. I can't speak for everybody, but I think the industry generally lends its way. It's slightly more concentrated. It's not fractional. They don't manage it as fractional risk.

They manage it as idiosyncratic risk. They do private equity style due diligence. And I think the -- where people have got burned is they think about not about idiosyncratic and they lose focus on the individual credit underwriting and diligence and they lean into the fractional nature of their portfolios and then bad things can happen. So I actually think this is a good checkmark for private credit, at least in those 2 names that were public.

You just mentioned transparency, and that's also something you talked about in your shareholder letter. You didn't -- I'm curious what you think that looks like. You think there's room for additional transparency across the industry. So what does that mean? And is that something TSLX could be taking the lead on?

I actually think there's -- look, when you look at the ecosystem of public BDCs, there's a decent amount of transparency, right? You have rating agencies, equity research analysts, you have this process that provides tension and transparency. And what I was talking about was really transparency in the nontraded perpetually offered space or private space or those products, you don't have the equity research analysts with buy/sells. You don't have Morningstar yet with ratings on fund managers like you do in mutual funds. And so there is -- I think my hope is that transparency comes through that space. And that space evolves from being -- what's being sold today to a space that's being actively bought.

You can't have something actively bought without transparency. And so I think that evolution will take time. But I think I had heard and it's going to be slightly unpopular. I think I had heard that my economics were wrong on -- or somebody said it came back to me through a reporter that my economics were wrong on the nontraded space. And I -- and that isn't exactly right because what -- it might -- that space might have lower management fees at the entity level, but they have other fees that the investor eat, a trailer on a dividend, et cetera.

And so my math is exactly right in that space, too, but it's market is different. And so I think there needs to be just -- time will happen. It will happen. It will happen slowly. It won't happen as fast as we want. But transparency is going to be the key to what economics ultimately eat what investors ultimately eat and risk reward. And so I think that it already is in our space because you're on the phone asking questions and hard questions. The investors don't have that process or that content on the nontraded space.

Our next question will be coming from Arren Cyganovich of Truist Securities.

Maybe we could talk a little bit about the balance of, I guess, seeking yield. You have a few kind of unique investments this quarter in CLOs and ABL with the traditional part of your business. And I don't know, historically, when I think about spreads getting tight and loan yields getting tight, as folks are looking to maintain that yield, you take on more credit risk. Maybe you could just talk a little bit about the balance of kind of the types of deals you're doing and what the risk profiles are relative to doing your kind of more plain vanilla.

I'll hit it, then I'll turn it over to Bo. We're doing nothing different. ABL has always been part of our portfolio, like realized returns. It's been an alpha-generating part of our portfolio. It literally provides only alpha, no additional credit risk. That's the historical math. We're navigating complexity. That has been our story. The great thing about the middle market and about investment is that it's still pretty inefficient, which is you can have like SLX has higher asset level returns and lower losses.

We have losses that are a fraction of the industry. We have had unlevered returns that are somewhere between 100 and 300 basis points higher than the industry. And so I would argue with the premise that we're taking -- that we've taken more risk on the structured credit piece, that's BB that probably has a wharf score, so weighted average rating factor that is somewhere between 3 and 7x less than the average idiosyncratic credit, which is probably somewhere between CCC and B- in the middle market. And so it is -- I think the premise is wrong. We actually have been risk-adjusted seeking versus risk seeking. And we've probably -- we most definitely, as it relates to structured credit investments have reduced risk, not increased risk.

I don't know, Bo, do you have anything to add?

Like Arren, thanks for the question. The only thing I would add is we have not changed anything. I highlighted our 2 of our larger thematic originations during the quarter. Those are both themes that we've been pursuing for quite some time, 5 years plus on each of these themes. Our other 2 originations were deeply thematic. We continue to be very disciplined in this environment. It's with supply-demand imbalance, but we're not changing how we underwrite credit, how we think through credit and how we structure credit.

And our next question will be coming from Kenneth Lee of RBC Capital Markets.

Echo the congrats Bo on the new role. And Josh, it's been great working with you. And I hope you'll continue to be an outsized voice and continue to share your industry insights going forward. One question I had and what's really interesting from the letter here, you highlight that TSLX has a much lower beta than the BDC peers. Wondering if you have any thoughts on what could have been contributors historically for that lower beta, especially given the outsized returns TSLX has been generating.

Yes. I think it's a function of credit losses. The beta on stock price, my guess comes with blow-ups on credit. And we've had 20% less beta in the space, 20% less beta than the public equities and beta comes from surprises. Those surprises are asymmetrical in credit. And we've done a good job of not having surprises.

Got you. Very helpful there. And one follow-up, if I may. Wondering if you could just give us any kind of updated thoughts around expectations for prepayments, especially given your expectations for M&A activity.

Sure. I'll take that one. Thanks for the question. As I mentioned in my prepared remarks, last quarter, we had elevated repayment activity, which has been the trend over the last couple of quarters. I think we generated $0.14 per share in activity-based fee income versus a historical average of $0.08 per share. It's a little early in the quarter to have the clearest picture, but what I would expect is that activity-based fee income to be closer to the norm this quarter.

But as I mentioned, it's a little early. We usually have 30 to 60 days visibility on the forward of repayment activity. The great news, I think, as you've looked at our earnings historically, in quarters that there is less activity-based income, less repayment activity, we're able to grow interest -- we're able to grow -- drive leverage and drive interest income through the P&L.

And our next question will be coming from Robert Dodd of Raymond James.

Congratulations on the title though and condolences on inheriting the earnings calls. And Josh, congratulations to you to getting off the treadmill. And hopefully, your coach's advice on making up continues to pay you. On -- not related to the largest deal this quarter, as you said, was Walgreens, it was ABL.

So if there is credit concern in the market right now, it seems more around collateral monitor -- in my opinion, the collateral monitoring and collateral quality when is a vehicle asset double pledged, is a receivable real or not? So when you look at an asset-based structure, how do you make sure, right? And it's kind of a softball question for both. How do you make sure that the -- your collateral is real because that has been a fall down in a couple of these credit -- idiosyncratic credit instances that we've seen over the last couple of months.

Yes, sure. I'll take that one and then Josh or even Mike can add in. First of all, I would say this is a core competency of the platform. We've been doing this for over 20-plus years, monitoring ABL collateral, understanding ABL collateral, understanding how it would liquidate. Our team is very focused on inventory counts, inventory appraisals, having those in a timely fashion, monitoring that borrowing base on a monthly, if not more frequent basis to understand where we're at in the collateral picture.

We have an excellent track record in the sector I believe we have over 20% IRRs historically in the retail ABL. You don't do that by happenstance, you do it by understanding who your borrowers are, what that collateral picture is and monitoring that on a day-to-day basis. But it is a core competency. We have a whole team that this is what they're focused on, and we have a lot of confidence in them.

Josh, Mike, anything to add?

Look, obviously, we're one and part of those names. So that tells you something about this core competency for us. The second thing I would say is Bo is exactly right, which is it is -- this is -- this ABL loan, the predominant collateral is inventory in the stores where you're doing collateral audits to match inventory accounts and with GL and you're making sure that there is no discrepancy.

And so these are physical things. I would suspect if on both those 2 instances, if people were reconciling cash to receivables, which we would have done, they would have picked up on it pretty quickly because the way that a fraud exists is that people create receivables. And by definition, those receivables have no cash collections against them. And so if you would have been doing your work, you would have saw that no cash collections or high dilution and you would have sniffed it out.

On your kind of your optimum pipeline, I mean, over time, how fast do you think that kind of segment of the market can grow? Obviously, I mean, people put to your point, the perpetuals, the market opportunity, people put big growth numbers on it, but that comes at the expense of a lot of spread compression. For your more off-the-run type deals where you are getting these higher spreads and you're getting more unique assets and offered more fee income. How fast is that -- how -- maybe not how fast, but how penetrated are you in that market? And how -- what's the opportunity there for TSLX to continue to grow in a very controlled manner?

Yes. Look, I mean, a, we're not focused on growth. We're focused on shareholder returns. So I just want to put that out there is like we're focused on shareholder returns and having the right architecture, which is managing the right amount of capital for the opportunity set. So what people are wrong now is that there's the same amount of those opportunities and because we don't need to grow.

And I think the one thing that people keep missing over and over again because -- and part of it is how they frame their business, which is growth. The only thing that really matters for our industry is a growth or earnings or growth in earnings as it relates to a unit of economic interest, so a share. like if you grow revenues by 20% or grow earnings by 20% and share count by 20% or 25%, you haven't created shareholder value. And so we're focused on creating shareholder value, which means that we might not grow.

And our next question will be coming from Paul Johnson of KBW.

Not to sound redundant on any of the management changes, I think they've been pretty well covered. But I just wanted to ask, as a part of those changes, were there any changes to the overall credit committee, investment committee and any of the processes around that?

No.

Got it. And I'd be curious to get your thoughts. I mean, just you guys have obviously made a lot of thematic investments in the software space and been very active there. Maybe it would be just good to hear kind of your thoughts on just the overall AI risk and concern and whether that's kind of the risk or opportunity that you see within the portfolio.

Yes, I'll take that one. I'm going to start off by saying the portfolio continues to perform very well, both software and non-software names. We have not seen any impact today as it relates to AI to any of the software names. With that, I think the impact of AI is nuanced and still evolving. There's going to be a lot of more questions than answers right now in the sector. I personally believe it will be a net positive for the sector overall, but it will be deeply nuanced.

There's going to be winners and losers just like there were winners and losers from the transition from on-prem to cloud-native businesses. I think what's important is this is a sector that we've been active in for 2-plus decades, dating all the way back to Mike Fishman, who I think was one of the original folks that had a thesis around their credit quality. We focus then and now on businesses that have high switching costs, durable data moats and provide meaningful downside protection in that they own their customer base. They have a very -- they own the distribution, if you will, of the customers, which is still a high barrier to entry.

But as I mentioned, it is going to be evolving. I think the important thing is you think about the forward and not the historic, and that's where we're focused not only on portfolio management, but also in new opportunities. But that's my thoughts on the space.

Mike, you should add anything or Josh?

No, I think Bo hit it, which is AI will level the playing field on developer costs. And -- but the reality is there's other moats and capital is never a real long-term moat of a business. And so it reduced the capital intensity of creating software, but that wasn't the moat. The moat was data integration, workflow. And so I think that is -- capital is never a moat around or a competitive advantage or a barrier to entry. And what AI has done is just reduced the capital intensity, but that's never a moat, and we've always focused on the moats.

It was -- and I appreciate the answer there. And last one for me. I would just be curious to hear just recognizing spreads didn't change all that much during the month of October, but kind of around the time of just the negative credit headlines and the bankruptcy announcements in the month, I'd just be curious to hear if there were any sort of bad balance sheet opportunities exposed or anything that was able to create kind of unique deal flow for the fourth quarter.

Yes. I mean I think there are things in our pipeline that are like very unique and that are thematic and complicated. We committed to a large financing for a company that's coming out of a bankruptcy that is in the energy infrastructure sector that like in that at some point, will fund in Q4, Q1 of next year. And so there's some unique stuff that we continue to find that is consistent with our model, which is find things that is less traffic, which requires industry knowledge, where we have an edge or where we have a theme. And so you'll see some of that stuff in the next quarter or 2.

And our next question will be coming from Mickey Schleien of Clear Street LLC.

And like everyone else, congrats to Bo and Josh, I miss talking to you regularly.

I'm always around. You have my number.

Yes. I appreciate that. Josh, touching on spreads, I think there was a question recently about that. But my understanding is they actually did widen a little bit in October, which sort of makes sense given what we've seen in the market in terms of the macro and political backdrop. Do you foresee that to be sustainable? Or is the large amount of capital available still just going to overwhelm the market and keep this equilibrium in place?

Yes. I mean spreads will be a function of flows both ways. And so I don't think we saw a material change in spreads. I mean we found some really interesting stuff to do. So we had a higher spread. But syndicated loan spreads are tight in October, I think they're tighter by 5 basis points. Maybe in the private credit market came out 5 basis points, but not anything. It's going to be a function of flows. So -- but we've tried to platform where we're a little insulated.

Sorry, that broke up a little bit, but I think I got most of it. I apologize, but I had to jump on late into the call. Did you mention anything about the impact of the government shutdown on the portfolio?

We did not. It's a good question. There was no material impact on our business.

Okay. Good to hear. And lastly, has Sixth Street discussed or considered listing SSLP to give those investors some liquidity?

It is kind of not on the table. We're still investing in that fund. We're halfway through the fund. We're focused on making great investments and driving returns for those investors.

Those are my questions this morning. Again, congratulations.

This will be my last earnings call that I'm active on. So thank you so much for everybody. I'm super excited about Bo and the leadership. I want to -- thinking about on this earnings call, we spent a lot of time on management changes in the industry. What I do want to highlight is we had an awesome quarter. We've had an awesome year. And we found higher spread investments.

We drove NII. The teamm has done an excellent job. And so hopefully, I understand that people are focused on the headlines, but the reality is the business is in great shape, and we keep on driving returns for our shareholders and so excited about that. Bo, congratulations. It's well overdue. I stayed in the seat too long. And I'm excited for you. I'm excited for the platform. And againn, this is how we've operated together, and I'm around. So thank you, Bo, for being so patient with me. And I hope everybody has a great Thanksgiving with their family.

Thanks, everybody.

This concludes today's program. Thank you for participating. You may now disconnect. Goodbye.