Q4 2023 Blue Owl Capital Corp Earnings Call

Participants

Dana Sclafani; Head of Investor Relations; Blue Owl Capital Corp

Craig Packer; Co-President; Blue Owl Capital Corporation

Jonathan Lamm; CFO & COO; Blue Owl Capital Corporation

Brian McKenna; Analyst; JMP Securities LLC

Casey Alexander; Analyst; Compass Point

Erik Zwick; Analyst; Hovde Group

Paul Johnson; Analyst; Keefe, Bruyette & Woods

Mickey Schleien; Analyst; Ladenburg Thalmann

Kenneth Lee; Analyst; RBC Capital Markets

Presentation

Operator

Hello, and welcome to the Blue Owl Capital Corporation Q4 and fiscal year 2023 earnings call and webcast. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Dana Sclafani, Head of BDC Investor Relations for Blue Owl. Please go ahead, Dana.

Dana Sclafani

Thank you, operator. Good morning, everyone, and welcome to Blue our Capital Corporation's fourth quarter earnings call. Joining me this morning are Chief Executive Officer, Craig Packer; and our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, as well as Alexis Maged, our Chief Credit Officer; and Logan Nicholson portfolio manager for OBDC.
I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the Company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC.'s filings with the SEC.
The Company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our earnings materials, including information related to portfolio companies was derived from third-party sources and has not been independently verified. The Company makes no such representations or warranties. With respect to this information, Amedisys earnings release, 10 K and supplemental earnings presentation are available on the Investor Relations section of our website at Blue Owl Capital Corp.com. With that, I'll turn the call over to Craig.

Craig Packer

Good morning, everyone. And thank you all for joining us today. We're very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio. Net investment income was $0.51 per share, up $0.02 from last quarter. Our NII increased in each quarter of 2023. We generated new record NII for the fourth consecutive quarter. In total, we earned $1.93 of NII in 2023, up $0.52 or 37% year over year.
Our strong results throughout the year or the outcome of our emphasis on great credit selection and a proactive approach to liability management. Results also benefited from the higher rate environment and continued strong economic conditions. Based on these results, our Board has approved another $0.02 increase in our base dividend to $0.37 per share. This is our third to cent increase since the fourth quarter of 2022. This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings even in a more normalized rate environment.
In addition, for the fourth quarter, our Board declared a supplemental dividend of $0.08. We instituted a supplemental dividend framework in the third quarter of 2022 to allow shareholders to participate in our earnings upside in a predictable manner. And we are pleased to have paid $0.36 per share of supplemental dividends over these last six quarters, while also meaningfully growing net asset value. Going forward, we believe shareholders will continue to benefit from the supplemental dividend framework.
Net asset value per share increased to $15.45, up $0.05 from the third quarter. This represents the highest NAV per share since our inception in the second quarter in a row of record net asset value as a result of strong earnings and continued NAV growth. We earned a record 13.2% return on equity in the fourth quarter, resulting in an annual ROE of 12.7% for the full year. This is right in line with the expectations we set at our Investor Day in May.
Looking at our borrowers' results, we saw continued resilience across our portfolio companies throughout 2023, we came into the year appropriately cautious and prepared for a more challenging economic environment. Over the last 12 months, our borrowers on average deliver low to mid-single digit growth in both revenue and EBITDA each quarter, they were proactive in cutting costs and raising prices where appropriate to combat inflationary pressure and supply chain challenges. These initiatives contributed to the solid performance we saw this year further, we believe our borrowers are well positioned coming into 2024.
Our largest sectors continue to be software, insurance, brokerage, food and beverage and health care, all of which serve diversified and durable end markets. The weighted average EBITDA of our portfolio companies is over $200 million, and we believe this scale provides strategic benefits and operational stability as many of our borrowers remain market leaders within their sectors. Looking forward, all markets are expecting rates to decline.
Short-term rates remain elevated, and as a result, we remain focused on potential portfolio company challenges. We believe coverage levels will trough in the first half of 2024 and around 1.5 to 1.6 times interest coverage. We continue to have a small list of borrowers who we believe may see challenges in the months ahead.
Our underwriting and portfolio management teams are closely monitoring these situations and we believe any challenges ultimately will be manageable across our portfolio as a whole. I would note we had a few borrowers migrate lower in our rating scale, but overall, the names on our watch list remains consistent based on the visibility we have today and the strong positioning of our borrowers.
We expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period. While we added one very small position to nonaccrual in the quarter for a total of four names, our non-accrual rate remains low the 1.1% of the fair value of the debt portfolio. Overall, our record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Jonathan Lamm

Thanks, Craig. We ended the quarter with total portfolio investments of $12.7 billion, outstanding debt of $7.1 billion and total net assets of $6 billion. Our fourth quarter NAV per share was $15.45, a $0.05 increase from our third quarter NAV loss per share of $15.40, attributable to the continued over earning of our total dividends.
In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio. Repayments increased this quarter to $1.1 billion, which was matched by $1 billion of new investment funds. This was a sizable increase compared to the roughly $390 million of repayments we saw in the third quarter, and it's consistent with our belief that we will see an increase in repayments as the market environment continues to be more favorable for refinancings.
We ended the quarter with net leverage at 1.09 times down slightly from the prior quarter. This is largely reflective of the timing of repayments versus new originations in the quarter.
Turning to the income statement, we earned a record $0.51 per share in the fourth quarter, up from $0.49 per share in the prior quarter. The increase in NII was driven by roughly $0.015 quarter over quarter increase of accelerated income driven by a pickup in repayments as well as modest increases in our dividend and interest income.
For the fourth quarter, the $0.08 per share supplemental dividend will be paid on March 15 to shareholders of record on March 1. Reflecting the supplemental and the previously declared $0.35 regular dividend, shareholders will receive total dividends of $0.43, which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter.
For the full year 2023, we paid a total of $1.59 per share in dividends, an increase of $0.3 or roughly 25% from the prior year. The Board also declared a first quarter regular dividend of $0.37, which will be paid on April 15 to shareholders of record as of March 29. Pro forma for our new increased regular dividend coverage remains robust at 138%. We finished the year with $0.3 of spillover income as a result of meaningful over earning of our dividends, inclusive of our supplemental dividends throughout 2023.
Turning to the balance sheet. We continue to proactively manage our liability structure to maximize returns to our shareholders. In the fourth quarter, we increased our revolver capacity to $1.9 billion and continue to maintain a robust liquidity position, which increased to 2.1 billion. This is well in excess of our unfunded commitments to our portfolio companies.
In January, we opportunistically raised $600 million in new 5-year unsecured notes. A portion of the proceeds will be used to repay our $400 million unsecured notes that mature in April 2024. Taken together, these actions will modestly improve our overall cost of unsecured financing and increased our increase. Our total unsecured debt as a percentage of total debt to 61%.
We continue to be very focused on maintaining a well laddered liability structure and lowering our financing costs. Spread on this new issuance represents one of our tightest spreads to trade. Further, we were able to swap this new issuance at a rate of [S-plus] 212 basis points, which when taken together with the maturity of the April 2024 notes is accretive to ROE for our shareholders and attractively priced relative to our current secured financing costs.
The BDC bond market continues to deepen and expand with new investors. We are pleased to see investors' recognition of OBDC's high-quality portfolio and continued performance, which allowed us to drive improved pricing for this issuance even in a higher rate environment as we have since inception, we continue to be proactive at addressing our financing needs and continuing to deepen our investor base and improve our liability costs. With that, I'll turn it back, Craig, for closing.

Craig Packer

Thanks, Jonathan. To close, I wanted to spend a minute on what we're seeing in the market today and what we expect for 2024, we continued to see deal activity pick up in the fourth quarter. As Jonathan noted, we had over 1 billion in both originations and repayments in OBDC. This nearly equates to the total activity we saw in the first three quarters combined.
Across our broader blue, our direct lending platform, we deployed over $8 billion in the quarter the highest quarterly level since 2021. We continue to believe the scale of our platform is an advantage for OBDC as our large origination effort allows us to efficiently match our repayment and deployment activity each quarter in order to maintain a fully invested portfolio and to scale up deployments in quarters for repayment activities higher.
We closed on several attractive new deals in the fourth quarter, including $1 billion plus financings for pets at New Relic and IFS envelopes, all three of which Blue Owl serves as lead arranger and administrative agent on. We believe our role as administrative agent on these large deals demonstrates the private equity firms confidence in our platform and as importantly, positions us to maintain frequent dialogue and to have the greatest influence on credit documentation and terms.
Further, we continue to benefit from incumbency across our portfolio with significant add-on activity for our current borrowers in the quarter. As noted earlier, repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits. We expect repayment activity to continue to revert to these higher more normalized levels, which could generate meaningful repayment income for OBDC.
Looking forward, we expect to see increased market market activity throughout 2024. We believe there is substantial pent-up desire for private equity firms to return capital to LPs by exiting companies and increased clarity on the rate environment could it drive more activity. As said to date, activity in the first quarter has been lighter, which is consistent with the typical seasonality we see after many issuers seek to transact before year-end, reflecting this dynamic and with strength in the public and private markets.
We are seeing some pressure on spreads across new investment opportunities. However, we continue to see larger and larger companies doing direct deals. The credit quality of some of the highest we've seen in our history and the structures and terms on new deals remain attractive.
Finally, on behalf of the entire OBDC management team, I want to reiterate how pleased we are to have delivered another quarter of impressive results. We are grateful to the investment and portfolio management teams who continue to assess new opportunities carefully monitor our portfolio companies' financing team who continues to optimize our liability structure and the entire corporate solutions group who support the company's complex operations.
As a result of these efforts, we delivered a total return of more than 40% to shareholders in 2023. We once again delivered record NII and a record high NAV per share, ultimately providing a 12.7% ROE for the year to our shareholders. We are also pleased to be able to raise our regular dividend, which we believe reflects our continued confidence in the portfolio we are entering 2024 on strong footing and believe we are well positioned for the year to come. With that, thank you for your time today, and we'll now open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Brian McKenna furnaces and JMP.

Brian McKenna

So mainly just a question on credit quality to start. Portfolio is clearly a very strong position today. But could you just provide any details on the one company you added to nonaccrual during the quarter? And then is there any update on the other three companies just in terms of resolving these?
And then more broadly, can you talk about the size of your portfolio management team today? How much is related headcount grown over the last couple of years? And then where's the team spending a lot of their time today, just given that the low level of nonaccruals today?

Craig Packer

Well, good morning, Brian, that you showed like for us in that area. And I have to remind me because I think it was very helpful. Look, overall, the opportunity really pleased with the credit quality of the portfolio. I think it is pretty striking. And I think back a year ago, rates rates as high as they were across the space.
I think there was a lot of concern about how direct lending credit quality was hold up. And here we are more than a year into this higher rate cycle. And we're really happy with credit quality across the board knows his space as our overall has also been really strong. It really is a testimony to the quality of the companies that are coming in the direct lending space, which is as high as is higher than it's ever been.
And we have a really de minimus position on a company on Ideal Image that was less than the [$50 million] exposure in OBDC, we had some really small exposures in several other funds and it was a business backed by private equity firms that we do a lot of business with and had on some operational challenges. And just system is in a position where we felt it was appropriate to put it on nonaccrual.
And we're working through with our arm and the sponsors on a plan going forward on. So it's some it's a credit specific issue on that. That business is not reflective of any greater credit issues on we are beyond that. The other three names on nothing to report on in the case of on two of them because one of them we've taken over the business, the other two to work with the existing sponsors.
And I'll just call out one of the names of the two that I think is interesting is that business that Sonangol thruster for several years now was significantly impacted by COVID as a travel oriented business. And the sponsors that work really diligently over the last for years trying to rehabilitate the company in light of changing travel patterns and the like and continue to own the business and support the business. And we and the other lenders in the capital structure are working with them.
We'll continue to have that particular position marks a very low price of, but we know we'll see we're hoping to do better just have to see. But it really is a testimony to how hard the private equity firms were to avoid giving up the companies. And that's very much central to our model on.
Yes, I think you asked about resources. We have added significantly to our core portfolio management and workout resources. Our investment team, overalls, Apogent, 15 people. There's probably about 15 of those 113 that are on doing the whole time portfolio management and workout. Our approach to work out here is some somehow the same or some are different. We have our existing underwriting team that stays involved in the credits on even if they go into workout, they know the company is the best. And we think that activity and consistency is very valuable to maximizing recovery and so beyond.
Our workout team, which is which is more than the size, we really use our whole team and other firms out there in our process, a little more receptive pushing in the workout group, if you will, on time, feel very comfortable that we have the capacity on.
There was a business PLI that we took over during COVID. It's been restructured. We own that business say if I don't go anymore, but if you if you walk through the marks, are they debt equity position, what you will see is acquisition, although we took a realized loss way back in 2020. If you take the combined value of our debt and equity in that company today, it's pretty much on top of what our original basis was in the business when we first made the loan on, we haven't realized yet.
So I'm not declaring victory, but I think it's headed in a direction where we all report at some point that we already regarding battery. And I think it is, again a testimony to our ability to have a very long time horizon and to take over a business the work of the existing management team or supplement our new management team on N2 play for long-term value creation. And I think that's that core to being scale direct lending business that we are part of our value proposition is maximizing recovery for the PLO. Hopefully, a great case study when we roll out our ability to do that. So Brian, I think I got most of it. I missed any I'll give you one more shot.

Brian McKenna

Yes. No, that's great. And I appreciate all that color, and I'll hop back into the queue. And congrats on another great quarter.

Operator

Casey Alexander, Compass Point.

Casey Alexander

Yes, hi, good morning and thank you for taking my questions. Just again, everything you know, I understand that Brian's question sounded like for because everything is sort of interconnected at your discussion about somewhat tighter spreads, private equity boom of refinancings up private equity want to return money back on the fact that you guys work in the Upper Middle Market home. Does that all combine to, you know, what seems like a little bit of a rejuvenation of the broadly syndicated loan market, is that contributing to some of the tighter spreads that you see in the upper middle market?

Craig Packer

Good morning. Casey. And I think that's I think that's great word for rejuvenation on the sort of. The banks' willingness to commit to leveraged finance deals is completely a function of there being a bit from virus loan, primarily CLOs and CLO creation rebound towards the end of last year and has been quite healthy this year. And the strengthening of the syndicated markets as giving the bank's confidence on you have to commit to deals and the market is quite good. And so the banks will only commit distribute and pricing in that market can be attractive for certain companies.
And so you're seeing, I would say, more normalization of the mix of flows on the normal market environment is a is a fully functioning public market and fully functioning. Our private market on the trends has been decidedly towards private market execution and direct lending execution. And that on that trend has been going on or.
Yes, and certainly since the history of our business and our growth has tracked that trend. And but most normal market environments and most of our business pulp markets that have been open and has the banks that want to finance deals and the sponsors have been increasingly picking direct on. But in this environment, they've got choices and they're making those choices. And I think that's a healthy market environment.
It does contribute to some of the spread compression in the first half of last year. The following markets were shot. There's no natural direct lender such as ourselves on to chart four and today, pulp markets are open. And so there is a price chart there and that can contribute to spread compression. Our job to be to be forthright, I think spread compression also a function of a really good economy expect to see that ratio come down as the general health of the markets.
All leads are up by the private credit has raised capital. We have capital other direct lenders, our capital, and so there's competition. And so we're on a tight end of the range of spreads that we see in direct lending. And I think it's Tetra probably where it is now that is on the tighter end of where where things are. And so I think that's tangible it will swing back and forth. I like talking about this, the secular and cyclical, the secular trends continue to be direct lending. It will be several periods of time where it skewed a little more to the public markets, a little more to private markets right now. I think that's a pretty healthy balance and so you're seeing some spread tightening.

Casey Alexander

Okay. Thank you. That's very helpful. But my follow-on question is last two quarters, you've raised the base dividend a couple of times in the face of what is generally a consensus that as you mentioned that rates are going to normalize some. So you got rates going one way and your base dividend going the other way on what gives you the confidence that that you're going to be able to, you know, maintain and cover that adequately as rates come down? Is it potential growth at the JV or the specialty finance verticals? Or is it expanding the leverage ratio somewhat kind of a modest ratio right now. But I'm I'm curious in holistically how you mix all of those things together to make sure that the Board has confidence to raise the base dividend again?

Craig Packer

Sure. So I think the zone we've tried to be really thoughtful about about some better dividends. And so Poland's back to no more than about a year and a half ago was where rates have gone up. And we felt really confident that the portfolio has not only perform but generate a really much higher step function, higher level of income. And we thought about how to how do we what's the right way to share that with shareholders.
And we introduced this notion of supplemental dividend and so shareholders will have a very predictable understanding of how on our earnings and hiring hurdle rates that flows through to them. And we thought that and got a lot of great feedback on. I think that mechanism has worked really well. And so we had our base our base dividend at that time on duration 31 to 33 in the supplemental on. And what has happened since then is rates stay higher longer, portfolios went extremely well.
And once again, we generated record earnings, record earnings for orders are up and so what our shareholders have enjoyed is growing supplemental and a base that was more than adequate adequately covered. And so we why so things are we don't want us complacent with that success. We wanted to think hard about we have the balance right?
And we looked at it on our peers and our payout ratios. And we did a lot of work around our portfolio and sensitize, as you would expect us to own as rates drop on and making some thoughtful assumptions about credit performance and do we have cushion to to raise the dividend further. And we felt really comfortable that even in a low rate environment and making some appropriate assumptions around credit quality. So we have more than enough cushion to raise the dividends on an additional $0.02 a share. And so we did that.
Naturally, it's not this isn't complicated. We invest in employee rate assets, every fund down. Are you going to go out raise well, earnings were a minority shareholders to understand that some fundamentals investing and it will be easier, soybeans, daylight hours. But what we would expect over time is if rates come down, we tend to look at the forward curve.
We feel very comfortable continuing to earn our base dividend, but as we're putting more it in the base and the supplemental will be lower rates come down. And I think that's of that cushion in that supplemental, we just put up $0.51 a share. We raised the base $0.47 a share. There's plenty of cushion there. And so we felt really comfortable.
So fundamentally, as your question, we looked at it holistically, we're going to just keep doing exactly what we're doing, we feel really confident in our portfolio. We don't need to change any levers on. We will continue to do what we have said of, say, our target leverage range. So I would like to tweak that higher, continue to invest in some of our specialty finance verticals. Those are those are accretive, especially in a low rate environment fundamentally to continue to deliver great credit performance on and we feel what about the new dividend.

Operator

Erik Zwick, Hovde Group

Erik Zwick

Good morning, everyone. I wanted to start first with a question on the pipeline and I know the prepared comments. You mentioned that activity has been kind of seasonally slow to start, but not out of the range of normal.
And just curious, as you look at the pipeline today, what it looks like in terms of the mix of new versus add-on opportunities and whether it also you're seeing any commonalities in the kind of themes in terms of industries or type of companies that are in the pipeline look attractive today offshore is a mix of new opportunities at Owens refinancings.

Craig Packer

It's a mix on. I would tell you that I it's my hope of place expectation at some point and this year we'll see a significant pickup in new buyouts or the new buyout activity. It remains moderate. And I think that that zone that that should pick up given generally a more stable rate environment, good economy, cost of capital to deploy and there really and could it have a comparative return capital to their LPs and that should reflect itself in selling companies that will result in new financings.
So I am hopeful we might see that starting the first quarter see some, but I wouldn't say it's a real resurgence, but some point this year I think we will. So it's a it's a healthy mix. At some point. I think it will be more skewed to new buyout activity and there are some of those, but it's not it's not I wouldn't call it robust. I would say it's sort of a reasonable environment and we expect to increase over time.

Erik Zwick

Next, just looking at the your common equity portfolio continues to grow in both dollar terms and as a percentage of total assets. How are you thinking about these investments in terms of the overall concentration and what is your inclination to realize some of the embedded gains and over what potential timeframe?

Craig Packer

Sure. So I think that on for shareholders that are less familiar with our Company on while technically, all those investments are referring to are common equity investments. The vast majority of them are equity investments, our in specialty finance verticals where essentially their portfolio companies, both etc, where the underlying assets are pools of typically first-lien senior secured loans. And so the credit characteristic of the vast majority of our common equity more than more than half of it, it is an income stream to dividend strength of a diversified portfolio of loans underwritten by management teams and companies with deep expertise in the domain that we are investing in.
So again, for those of you who are newer examples, we are through our asset-based lending business bid season, which is our life insurance settlements business averages, which are rail, rail and aircraft on a business. These are all essentially portfolio companies that have very diverse pools of assets that generate income and we are an equity owner, but we are getting an economic very consistent predictable and growing income stream that we think will generate and they are generally low double-digit ROEs. And we are building each of these a very nice location about way.
In addition, to that income stream if our teams do a good job, we also have an asset in equity investment and asset is valuable. Valuable to us. Valuable to others is crave our enterprise value through our ownership stake and those businesses. And we've grown that part of our portfolio continue to do so. But it would be it would be sort of off of some key of it. Think of that as a common equity investments, it from account standpoint, it certainly is. But from our standpoint, that's really support of assets that generate income to us and that as we invest more, we will do what we will earn and no plans to realize on on on any that we do have a much smaller number of either equity co-investments on.
We have a couple of positions. I mentioned try Amerigo where we took over a business, but the combination of like what I'll call pure equity is like two or 3%, it's really de minimus. So I think this has been a powerful return generator on about long-term income and long-term gain for OBDC and we'll continue to do so. But I would urge shareholders to send in it, understanding it and become a way of really happy with it. And with our Investor Day last year, we did a whole section on this. I think all that's still available on our website. So again, if they're newer on, please still please take a listen, we're happy. You know, if you're not sure how to get hold of it. Obviously, as you go come way for now, we're really excited about what we're building in some of the specialty verticals.

Erik Zwick

That's a helpful explanation. And last one for me on just looking at slide 13, there was about a $100 million increase in the on portfolio companies rated either four or five So wondering if you could just talk a little bit about the recent developments at those companies that drove the downgrades of during the quarter yet we own you.

Craig Packer

I alluded to this on. And Paul. Our overall rank percentage rated 3%, 4%, 5%, which crosses underperformance on stayed the same. But I mean, I made a point a point on the call that we did have an increase amidst those record highs in the 3%, 4%, 5% category. We don't put out individual ratings disclosure on each name, but you all know, we certainly know we certainly have companies on nonaccrual. And so some of those one of the movers within ARC only, yes, there was one of our more significant marks down this quarter.
So what I would offer you is at this point in the cycle, given how low rates are we have had we had expected and we mentioned in gallons caller mentioned it pretty consistently earnings calls that we would expect to have a few credit issues on the scale and the magnitude of the rate move on. And so couple of downgrades were reflective of credits that have been performing well below expectations combined with a higher debt burden on certain hats off to them.
But what I would say is factors are 3%, 4%, 5% as a grouping, it stayed stable. Essentially, that's our watch list because our losses have stayed stable. We're not adding new needs are concerned. There's really less than a handful of names that have been a concern for a year and are there concerns growing as the their credit problems could see a faster and higher rate environment.
So that's what that is I don't want to minimize that. These are the areas customers on those time on with our workout team. And I hope that we can reverse course on a couple of these other, they are of a concern. But again, you're talking about the overall portfolio, 1.7% of the portfolio in aggregate. So it's a very small pool, have a few names that we're going to continue to sell off.

Erik Zwick

Appreciate the answers. Greg, thanks for taking my questions.

Operator

(Operator Instructions) Paul Johnson, KBW.

Paul Johnson

Yes, good morning. Thanks for taking my questions. Kind of looking just at on fee income going forward, obviously was a very active quarter for you guys on, but a slower year overall, $16 million or so. Fee income money, our $13 billion portfolio, I mean, do you think you'll be in the relatively near term maybe over this year and there's potential to generate some fairly meaningful fee income there to offset some of the potential it declined from rates.

Jonathan Lamm

Again, this quarter we had we had $1 billion in sales and repayments and some a fair amount of prepayment related income. As we said, that was some of the driver of the earnings. And I think that you can certainly expect relative to last year where there was very muted activity, an increase and for some of that fee income to represent an offset to, you know, to the to the rates, depending on where those rate moves slow, if the dollar for dollar and certainly we could we could say, depending on the magnitude of those rate moves. But certainly a pickup in activity will in overall activity will. Will you or dampen the decline in income from real-time battle.

Craig Packer

At some point I talked about roll where there's relative up in M&A activity and act in that role, it would stand to reason that we see meaningful pickup in fees as well as accretion and so it kind of expected to happen this summer. So a little better this quarter has been sort of frustratingly low on expected to happen at some point. I don't want to I'm not necessarily saying will happen first quarter either, but at some point in a much more robust M&A environment, it should pick up nicely.

Paul Johnson

Thanks. And I guess you know, as the leveraged loan market starts to come back on that there's more syndicated activity. Do you expect to potentially see on some of those deals that are in the pipeline today? Potentially flip over to the liquid markets and we expect to see.

Craig Packer

But again, the public markets are wide open to them, but it's not something we have to wait to see if it's already happened, it's happening now. Our pipeline of deals we're looking at the sponsors are actively making choices about how to finance them today. Despite a while, both markets continue to choose direct money for certain deals in the public market for certain deals as it has been and as it will be an ordinary course decision making and we would expect in this environment that we'll get prepaid from some companies that choose to refinance in the public markets.
We've seen a little bit of that, and I expect we'll continue to see some of that, particularly really high-quality companies or portfolios. And therefore, while it has to perform delever and they can get a good execution so that we can generate some income from us sort of the normal normal circle lane, if you will. And I expect us to continue to do that.
So I think it is a normal, a normalized market. I think on kind of environment a year ago when looking at all our everything was going direct, we will pull back. We would caution you not to assume that stay that way forever. That was that was not a normal state of affairs. This is normal state of affairs and a healthy one and one that we can continue to have ROEs, good success originating deals and getting payments keep our portfolio invested.

Paul Johnson

Thanks. Appreciate that, Tom. And then public valuations have been surprisingly strong last year and into this year in the growth market tech sector I mean, really the broader but market, the public markets as a whole. I feel like that's maybe been a little bit contrary to the kind of what's going on in the private markets last year with the adjustment to higher peak rates. I'm just curious how does that affect the companies in the upper middle market that you're looking at today?
I mean, have you seeing this kind of multiple expansion that we've had in the public markets? Or I'm just curious to how that affects the market you guys plan.

Craig Packer

We continue to see private with private equity firms on house, tremendous amount of capital trend, tremendous amount of expertise and really tremendous track record of finding opportunities to deploy that capital generate great returns for their LPs in private equity is he's a very, very young. It's a market that the institutional piece, like likewise did have significant exposure to and generated and really extraordinary returns in excess of the public markets.
Often on over many, many years. That market is used to back. We work really closely with private equity firms on and and yes, there are there were active last year wasn't quite as robust as they were all like at some point that will take up in Brazil on, but I just want to make a point, which is an obvious one, but I'll make it anyway. We are at on average lending at 40% loan-to-value for lenders on. We want to have a lot of equity cushion.
We want to have of the commitment from a private equity firms, important capital form of resources. And their role is that it's around valuation and whether they get a great return. Our goal is to acquire a loan that we feel really confident in the downside scenario we can get we can get repaid. And I think that part of the reason why you haven't seen as much private M&A resuming sponsored?
I think we're being patient bases on what you're saying. They see the market value is high and they're not going to us sell companies once they go road, confident they can get the valuation that they deserve. And these are really six months a year. They're doing that.
I think that's partly why M&A it has slowed down on I I don't want to sound glib or trying to value by flooding. Our all our problem is making sure we're back in good companies with significant equity beneath us. And that even evaluation comes down meaningfully, we're going to be hard, and I think that's central to our underwriting thesis and we don't get distracted by a public market valuations that idea barrel or or even private market valuations, some idea that's too high. We'd just go for a downside analysis assume no operational results are all value multiples are lower when we get our money back on. That's how we look.

Paul Johnson

Got it. Thanks for that, Craig, because those are all my questions today. Congrats on a good quarter.
Thank you.

Operator

Mickey Schleien from Ladenburg Thalmann.

Mickey Schleien

Yes, good morning, and I apologize if my question's already been asked, but I'm juggling multiple calls. Craig, you mentioned that the BSL market is normalizing and I'm interested in understanding how you see that impacting the spreads that you may be able to capture as the year progresses and going into next year?
Sure.

Craig Packer

Mickey, we did talk about this bit on we in my prepared remarks, I mentioned that you don't see spreads tighten because the public markets have been open, they are open. They're normalized, not normalized and normalized on. And so that's a that's a price gap that the private equity firms to look at. And generally it's a moderate yield environment. And the public markets have a lot of capital biomarker like capital to seed, some spread compression.
And I think almost all of that has already taken effect in how we look at new deals. And I don't think you can go much higher than we are now with some of the tight end of historical ranges. Absolute returns on our lending remain very high. Current forecast rates remain very high. And so we do have unitranche at five of the over on current base rates, no sole earning 11 plus percent. And but we all recognize that there's a good likelihood that in two years that basically it will be meaningfully lower and so or less over time, by the way, I the market.
Sure, coming to grips with exactly how far how fast rates will come down and what that will look like. And Asia is a bit of a reconsideration, but we're assuming we look at the forward curve. So spreads are tighter level and they're more on the joint category than in the. So the returns were for us to totally great returns on and it's more just a factual work.
Chemical market was sponsored companies, Peyton, between private and public markets. We continue to get a premium for private solutions and that premium is not only higher spread on, but that's essentially the ONE. that you guys underwrite at. We continue to offer a premium, but I always like to remind clients and shareholders is if you got to think about on a relative basis where we may not be earning as much, but all the markets tightened, and we're still running a nice premium and we aren't playing in all market environments and we'll blow the road premiums stay same, but the absolute return will move around based on market conditions. So hopefully that gives it a little bit of context.

Mickey Schleien

It does. I appreciate it. Thank you very much. Thank you.

Operator

Your next question today is coming from Kenneth Lee from RBC Capital Markets. Your line is now live.

Kenneth Lee

Hey, good morning. Thanks for taking my question. Just to piggyback on the broadly syndicated loan questions, if do you anticipate any kind of shift in either the sectors you're focusing on or underwriting or perhaps the types of investments you could be making either within the capital structure or the size, just given the normalization of the leveraged loan market?

Craig Packer

We are really boring on this on. I am not sure if I would have thought. We we really like recession resistant sectors with very predictable earnings in non-cyclical parts of the market. We're not trying to time economic cycle and we track private equity activity and so consistently where we find the best opportunities, software, insurance brokerage, some parts of health care, food and beverage, a lot of services businesses, distribution is that's our sweet spot.
Those have been our most significant factors for years and to see a lot of activity our software continues to be best sector is that we have of the assets ever. Some of that is software space, but the biggest single industry sector for many of our bonds you know, I like that a lot and we're not going to deviate from that. And so I think that should be reassuring to investors make seven year loans even if we thought the economy might be really good for cyclicals for a year or two.
We're not not willing to underwrite no sale economic conditions for seven years. And so we think that that's the right approach. So no change. We lend to a lot of businesses that can meet the underlying our economic future is a very predictable and recurring revenue stream. That's the single defining factor of our underwriting process. And you can find those types of businesses that serve right end markets depending what they do and that that's really what we seek.

Kenneth Lee

Yes, you very helpful there. And wanted to one follow-up, if I may. In terms of the new investments, I wonder if you just give a little bit more color in terms of what you've been seeing in terms of terms and documentation on your investments and whether there's been any change just given the current landscape?

Craig Packer

Our overall turns and protections remain very strong for direct lending. And that no sort of underscore this the protections that we get are significantly better than in the public markets. And that's fundamental to what we do we we care not only a business and returns, but the credit protections, given our all significant exposure to the companies, given that illiquidity that we have, we need to be in a position to protect ourselves and the CLOs by all of our loans. I've said we don't have the real estate credit protections. It's really pretty dramatically different in particular in areas around protecting our cloud role on a cash flow leakage of analyte.
So we just need to get met most of our territories fundamental. You won't sacrifice that have not gone up is there on the edge. There are a few things that can creep in when markets are as strong as they are now on, which we will do selectively the rest of our credit protections and economics or are appropriate. But I see by fundamentally on leverage on the deal on the value of the deals, the credit agreements are fundamentally consistent what we've been doing the last several years, no change.
We about portability, take a couple of features that are crafted. We do those in very, very small number of circumstances for Roadway, high-quality credits and a very reason why it's not reflective of overall market conditions. But you will see a couple of deals done in that matter. And I think for the right price. We're willing to consider those markets willing to do it, but nothing that would sacrifice our credit quality is fundamental and to us. And I feel real good about that for every loan that we do. If not, we won't do it.

Kenneth Lee

Got, Jeff. Very helpful there. Thanks again.

Operator

(inaudible) from Truist Securities.

Good morning. Income Conan from Mark Hughes. In the prepared remarks, you mentioned that the net leverage ratio ticked down, which we've seen for the last several quarters. Is there a specific range you had in mind for '24, '25 as investment activity presumably starts ramping up?

Craig Packer

Our ratings are the same range that we said at our high point on our quarter. You know, this quarter we are not going originations and repayments on. We can't manage that leverage ratio with a scalpel. It would follow a bunch of deal flow. I will on the margin, I prefer to be particular to higher, but but there's not a deliberate and balanced price.
We could have that lower. I think it's just a function of your follow on, and we'll trying to optimize a little bit how returns are true. We're putting up record returns record already record-high record now. And so I think it should be reassuring that we can do all that and have leverage now be our peak. We're not stretching to do deals, not stretching the mass lowers detract lined out returns, we can do it very comfortably. And that gives us a little bit of Arrow where I'm over time onto. So there's a little bit of a break.
Yes, that's helpful.

And so you mentioned the industry that you find attractive. But are there any particular industries in your portfolio that are having more credit issues than others?

Craig Packer

We have very new Radisys So there's other factors that having more pages and others the animals not on, I would say overall, really consistent across the board, low-single digit revenue and EBITDA growth of there's a couple of consumer facing businesses that are having a bit of struggle. There's coal industrial businesses that were benefiting when supply chains were up. We're loosening up and maybe they're facing some commodity price pressures or some supply chain challenges. I would say every company is doing perfectly well to have a watch list. But I say there's no thematic comments. I would make about areas of great weakness, and I think that speaks to the broad strength of our portfolio.

Okay, got it. Thank you.
Yes, thank you.

Operator

We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Craig Packer

Thank you so much for everyone for joining. We're really pleased with the quarter yet if you have any other questions, please reach out to engage with you and look forward to seeing you and speaking with you again soon.

Operator

Thank you. That does conclude today's teleconference. And webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.