Barings BDC, Inc.

At this time, I'd like to welcome everyone to the Barings BDC conference call for the quarter ended June 30th, 2019. All participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the investor relations section. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results, and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks. including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the company's annual report on Form 10-K for the fiscal year ended December 31, 2018, and quarterly report on Form 10-Q for the quarter ended June 30, 2019, each as filed with Securities and Exchange Commission. Barry's BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I'll turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us for today's call, and please note that throughout this call, we'll be referring to our second quarter 2019 earnings presentation that is posted on the investor relations section of our website. On the call today, I'm joined by Barings BDC's President and Co-Head of North America Private Finance, Ian Fowler. Tom McDonald, Managing Director and Portfolio Manager in our global high-yield team, and the BDC's Chief Financial Officer, Jonathan Bach. Before going through the second quarter results, I'd like to take a moment to reflect on the last four quarters. It has been approximately one year since Barings was voted by shareholders to have the opportunity to serve as the investment advisor to the BDC. In our first quarterly earnings call last November, I said that long-term success in sponsored lending is a marathon. that requires strong credit discipline, a diligent focus on asset liability management, a broad and deep investment platform and team, and a deep commitment to long-term investor alignment. While it's only been four quarters, I believe we have made strong progress toward these objectives in the last year. Our investment portfolio has grown from zero to approximately $1.2 billion in one year, including over $350 million of funded private middle market loans, with no non-accrual assets and strong underlying performance across the portfolio. These investments have been financed in part with three sources of debt, including two new credit lines and a static CLO issuance. Our recently announced joint venture with the state of South Carolina retirement system will help drive shareholder returns through effective use of our non-qualified asset bucket with a respected institutional partner. Finally, we have continued to demonstrate our commitment to long-term investor alignment through programs such as the BDC's ongoing share repurchase program and the $50 million Barings LLC share purchase plan that was completed in February, with Barings LLC now owning over 27% of Barings BDC. While we believe that this is a strong start for the BDC, we know that continuing to deliver steady and stable operating results is vital for investor trust, and we will remain focused on this mission going forward. Switching gears to the second quarter, please turn to slide five of the presentation, which shows the volatility in liquid credit spreads and their correlation to VDC stock prices. Compared to the previous two quarters, spreads were relatively flat from March 31st to June 30th. On our May earnings call, we indicated that liquid credit spreads had tightened in the early part of the quarter, but subsequent widening in June led to a flat overall spread, resulting in a relatively consistent value for our liquid Burleigh-Sneekay loan portfolio quarter over quarter. As we would expect, the second quarter saw generally flat BDC stock prices, consistent with liquid credit spreads. Turn now to slide six for our second quarter highlights. Overall, I would characterize it as a steady quarter, as our NAB increased from $11.52 per share at March 31st to $11.59 per share on June 30th. Our net investment income was down slightly, coming in at $0.15 per share for the second quarter versus $0.16 for the first quarter. We indicated on last quarter's call that we would experience the first full quarter of unused fees on our new $800 million corporate credit facility during the second quarter, which coupled with a full quarter of fee amortization was approximately two cents a share. As our middle market portfolio grows, we expect to continue to leverage this credit line and view the near-term earnings impact as secondary to the long-term benefits of the liquidity provided by this facility. Our net investment income of 15 cents per share more than covered our second quarter dividend of 13 cents per share. The ramp of our middle market portfolio continued with seven new middle market debt investments totaling $67 million during the quarter and total investments of $80 million, including our add-on investments and our joint venture equity investment. We also saw the first repayments in our middle market debt portfolio with two investments made in 2018 that were repaid at par. After a relatively rapid start, the latter half of the second quarter was slower in terms of overall deal activity. As always, our focus continues to be on quality investments, and while we will not target a specific amount for new investments each quarter, we continue to believe that a reasonable expectation is for average quarterly deployments of around $100 million, although any given quarter could be above or below that amount. Ian will discuss our portfolio activity in more detail shortly. Slide 7 shows some additional financial highlights for our first four quarters as the investment manager. Note that our leverage remained relatively consistent in the quarter at 1.09 times, and our net asset value grew in part by net unrealized appreciation on our portfolio of $1.9 million. Our middle market portfolio continues to be marked right around our cost basis, as performance across the portfolio has been consistent with expectations since close. Additionally, we continue to be comfortable with the underlying operational performance of our broadly syndicated loan portfolio as a whole and the liquidity provided by our diversified liability structure. Finally, slide eight provides an update on our share repurchase program. As you're probably aware, the share repurchase program was announced for 2019, aims to repurchase up to 2.5% of the outstanding shares when Barings BDC stock trades at prices below NAV. and repurchase up to 5% of the outstanding shares in the event the stock trades at prices below 0.9 times NAV, subject to liquidity and regulatory constraints. If you look at where our stock has traded since we announced the program, the current 2019 repurchase target would be approximately 4%. Since the beginning of this program, the company has repurchased approximately 1.9% of its outstanding shares, so we are well on our way to meeting our commitment under this repurchase program and continuing to enhance our alignment with shareholders. I'll now turn the call over to Ian to provide an update on our investment portfolio and middle market investment trends. Thanks, Eric.

Good morning, everyone. On slide 10, we show details of our investment activity for the second quarter, as well as net funding trends for the last year. Our gross middle market debt fundings for the quarter of $72 million included seven new platform debt investments and five follow-on investments. While up from the seasonally slow first quarter, I would characterize the second quarter as a little slower than normal, as investment activity tailed off a bit in late May and early June. This trend has continued into July, but we have seen signs of increased deal flow and would expect more activity as we get through the summer months. Two middle market debt investments, Global Trans and Lindstrom, were fully repaid in the quarter, resulting in net middle market fundings of $66 million, when you also take into account our $5 million equity contribution to the joint venture. For our broadly syndicated loan portfolio, we had net sales and repayments of $28 million. Jumping to slide 11, at the end of the second quarter, we were invested in approximately $809 million of liquid broadly syndicated loans and $388 million in private middle market loans and equity, including $36 million delayed draw term loans. We continue to focus on senior secured, first lien assets, and these investments comprise 99% of our portfolio. Average spreads and yields for our broadly syndicated loan portfolio were down slightly since March, ending the quarter at 327 basis points and 5.8% respectively. Senior leverage for this portfolio remained relatively consistent with last quarter, with a weighted average of five times senior debt to EBITDA. Our middle market portfolio with a funded value of $352 million was primarily comprised of 28 first lien debt investments and two second lien term loans. The underlying credit statistics for this portfolio were consistent with the first quarter with weighted average senior leverage of 4.5 times and weighted average interest coverage of 2.9 times. Average spreads were also consistent with the first quarter at 500 basis points. while average yields were down slightly from 7.8% to 7.5%. All of our debt investments are variable rate instruments, many with LIBOR floors, which we believe is a better strategy than fixed rate investments in this environment. That said, our focus continues to be on the credit spread, as that is ultimately our compensation for risk. From a valuation perspective, no middle market debt investments valued below 98% of costs. Overall, our portfolio remains well diversified with 142 investments spread across 28 industries and with no investment exceeding 2.1% of the total value of our portfolio. Our top 10 investments are shown on slide 12. Turning to slide 14, here you will see the start of three slides that outline middle market spread and leverage trends with third-party data from Rotinitiv. I'll start with a global slide that outlines current yields earned in the large corporate market compared to middle market syndicated and middle market direct lending transactions. In short, the spread premium enjoyed by middle market lenders relative to the large corporate market is at all-time lows. This is driven by a combination of spread widening and liquid loans as a result of capital outflows and continued competition in a less active middle market. When facing these market conditions, we believe it is critical for managers to one, keep a militant focus on the senior portion of the capital stack in high quality companies, and two, emphasize a high degree of portfolio diversification. As you can see on slide 15, True first lien middle market spreads are currently averaging 546 basis points. Looking at our first lien deployments, we've kept a focus on quality where our average first lien since externalization is approximately 500 basis points. Additionally, investors may notice that Unitron spreads have tightened materially and now sit on top of first lien senior loans. Slide 16 shows a slight uptick in leverage during the first half of 2019. for the all-senior, first-lane MEDS, and first-lane, second-lane categories, continuing the increasing leverage trend of recent years. Today's lending environment affords investors many opportunities to relax standards on leverage in order to compete for deals, which once again emphasizes my earlier points about investing focus, discipline, and diversification. We continue to focus on finding quality transactions over meeting yield or deployment targets, which we believe will ultimately be best for long-term shareholder returns. With that, I'll turn the call over to John to provide more color on our financial results.

Thanks, Ian, and good morning. On slide 18, you'll see a bridge of the company's net asset value per share from March 31st to June 30th. Now, the primary components of the NAV increase to 1159 $11.59 were net unreliable depreciation on our investment portfolio of $0.04 a share, our net investment income for the second quarter exceeding our quarterly dividend by $0.02 a share, and $0.01 per share increased due to the accretion from the share we purchased planned. And jump to slides 19 and 20. These show our income statement and balance sheet for the last four quarters. As you know, pursuant to our advisory agreement, The base management fee paid to bearings increased from 1% last year to 1.125% in 2019. Now, while both the first and second quarters of 2019 were based on that same rate, the base management fee increased in the second quarter due to a higher average asset balance. Now, the management fee is calculated based on the average of assets for the previous two quarters. which in the first quarter included assets at the end of the third and fourth quarters of 2018. Now, unsettled transactions are not included in the asset base for the fee calculation, and the high level of unsettled transactions at September 30th, that subsequently settled early in the fourth quarter, resulted in a lower average asset base for the first quarter management fee calculation than the second quarter fee calculation, and that led to a quarter-over-quarter fee increase. Now, as Eric mentioned, we also incurred higher interest and other financing fee expense due in part to commitment fees associated with our new $800 million corporate credit facility. Our $1.2 billion investment portfolio was supported by borrowings of $75 million under this new corporate credit facility, $211 million under the company's BSL facility, and $348 million from our static CLOS issuance in May. Overall, quarter-end leverage was 1.09 times or 1.01 times after adjusting for cash and short-term investments and net unsettled transactions. As we discussed on the last course conference call, our BSL funding facility was reduced to a total commitment size of $300 million in conjunction with the static CLO issuance in May. And we further reduced that facility to $250 million in June based on future usage expectations. The details regarding both credit facility and the static CLO are all shown on slide 21. Slide 22 shows our paid and announced dividends since Barings took over as the investment advisor to the BDC. We announced yesterday that our third quarter dividend of 14 cents a share will be paid on September 18th, our fourth consecutive increase to align our dividend with the earnings power of the portfolio. Now looking ahead, Slide 24 summarizes our investment activity since June 30th. In the third quarter, we made approximately $70 million of new middle market private debt commitments, of which $33 million has already been funded. All of these investments were first lien, floating rate loans with an average three-year discount margin of 7.1%. Now, in addition to these new investments, we received two full middle market debt repayments at par in July. Now turning to our probability weighted pipeline on slide 25, here investors can see our current North American private finance investment pipeline is approximately $420 million on a probability weighted basis. And that remains heavily first lien senior secured across a variety of different industries. Now as we've discussed, this pipeline is estimated based on our expectation of closing rates for all deals in our investment pipelines. And then lastly, on our call, last quarter we announced that Barings BDC entered into a joint venture with the state of South Carolina Retirement System, a JV that will have approximately $550 million in underlying equity and a highly diversified asset mix across multiple asset classes. Barings BDC invested its first $5 million of its $50 million commitment in late June as a part of the first capital call for the joint venture, which began investing in July. We continue to expect investments in the JV to ramp over the approximately 10 quarters. And with that, operator, we gladly open the line for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Finn O'Shea from Wells Fargo. Your line is now live.

Hi, guys. Good morning. Thanks. Just a couple questions on portfolio rotation. Looking at BSL prices post-quarter, there's a bit of improvement. Are you seeing... pipeline of more refinancings in that area assuming some of these loans are maybe coming closer to par and then just sort of a second part to that question for middle market growth you know understanding that allocations go on available capital which is constant will a freeing up of your portfolio capacity via BSL repayments, would that potentially allow for larger allocations? You know, if the paper is there in the platform, basically the question in one part would be, would the BSL rotation speed up middle market allocations?

Yes, and this is Tom McDonnell on the BSL side. So I think the market has improved, as you indicated, after And, you know, a lot of that has to do with some of the technicals in the market, some big repayments of loans in the market. And then just, I think, some of the fundamentals have supported it as well. So technically, we've seen fewer outflows out of mutual funds and strong demand by CLOs. So that's boosted prices in the secondary market. So I think that's really what you're seeing. So I think the market's pretty well in balance now at this point in terms of supply and demand.

Your second part of the question, Finn, on will the improvement in BSL prices lead to more liquidity, which leads to enhanced allocations for middle market? The short answer is no. The way we look at our allocation policy and the way it works is we look at the gross commitment of the vehicle relative to the asset class. So in this case, first lien senior secured North American assets, regardless of where we are in kind of the BSL pricing or situation. they're allotted their allocation on a pro rata basis along with other vehicles that we manage. So you should expect, as John mentioned, you know, $100-ish million a quarter is what we have modeled out and what we believe is doable. But you've already seen from us in the past four quarters, we've had quarters above $100 million and we've had quarters below $100 million. But we think $100 million is a good number. I'd say what we're beginning to see as you saw with the two full repayments here, is it really gets to what's the net new middle market. And I think as we're seeing in the middle market space, Ian referenced the illiquidity premium as it really all-time tights from when they started tracking the data. That's leading to more refinancing activity in the middle market. And that's really the part we can't control. And so what we really can control is the front end. What we can't control is those refinancings. And so What that net number is, frankly, is a little bit determined by what happens in the market environment during that quarter.

Very well. Thanks for the color. And then just a second question on allocation practices. Does the advisor for bearings take any form of upfront fee for any service, any service related to capital structuring and so forth? before distributing to funds, including the BDC?

So, Sid, I want to make sure I get your question right. If we receive two points up front on a deal from an investor, so sponsor X underwrites a deal, and we provide $100 million of capital to that, and we get two points up front, that fee is passed on to the investor equally across all of our vehicles. We do not take a portion of that up front fee to the advisor and then the account take a portion of it, that upfront fee is passed on to the investor. We believe that that upfront fee is a part of the economic consideration, similar to the spread that we pick up on assets.

Sure. So there's no – and when these are – when there's two points that say broken up, what are the typical services provided – in this fee letter that you see that you, of course, you're saying you take it to the BDC, but how would you describe these services?

So, Finn, this is Bach. When you think about the services, I think you're probably referring to, like, admin agent fees, structuring fees, things to that effect. Is that what you're referring to?

Yeah, the service that the advisor is providing to the issuer or the sponsor that would allow for a side fee letter.

Okay, so let me make sure I'm real clear with this. So when we are agent on a deal, there is an annual administration agency fee that is charged for the processes and the operations of being an agent. you know, funding, cash, and things like that you do as an agent. That's typically a very small number, and that would come to us on an annual basis. As far as the fees associated with the asset, when the asset comes into an underwriting and an approval process for us, that fee is, in almost all circumstances, one upfront fee. There's not components of it that add up to make that upfront fee. There's not a structuring fee plus an underwriting fee plus a this fee and a that fee that equal to two points. It's simply written as a two-point upfront fee. That upfront fee is passed on to the investor as part of their economic consideration. So the transaction I used as an example earlier, the BDC and our other accounts would have that asset that would move into their accounts at 98 in that example. you know, on a per-rata basis based off of the vehicle.

Hey, Finn, it's Ian, and just following on Eric's point, be really clear that admin fee that Eric referred to, that is tied to the revolver.

Sure. All right, well, thank you guys so much, and thanks for taking my questions.

Thank you. Our next question is coming from Kyle Joseph from Jefferies. Your line is now live.

Hey, good morning, guys. Thanks for taking my questions. I just wanted to get a little bit more color on your asset yields. Obviously, we saw a little bit of compression sequentially from someone that's not involved with the mill markets on a day-to-day basis. How much of that is being driven by spread compression versus ultimately the lower rate outlook we have currently?

Yeah, so spreads are relatively flat. It's really been LIBOR that's impacted the total yield.

Got it. That makes sense.

Oh, sorry. Go ahead. Hey, Kyle. This is Eric. I mean, I think one of the things that we've said all along is we're not the type of manager who's going to reverse engineer in order to drive a dividend yield. We're going to invest in assets that we believe are appropriate for the vehicle and we believe our appropriate risk return, that's what we can control. And so when, you know, we can't control LIBOR, what we can control is the credit spread and the quality of assets on the front end. And so as we see LIBOR move down, and frankly the illiquidity premium that Ian referenced in his points, that it's at all-time tights relative to when they started tracking it, the combination of those factors does mean that the all-in asset yield is lower today than what we booked, you know, two quarters ago.

Yep. No, that absolutely makes sense. And it's a good segue to my next question. You already answered the first part. But my question would be, have you seen any changes in the competitive environment as a result or any changes in competitive behavior as a result of lower rates?

I'm not sure I'd say it's lower rates as much as it's just you know, there are a large number of private debt managers or direct lending managers out there with various different strategies. And so I just think depending on the transaction at any given time, I'd say that, you know, in the past, if there might be, you know, 10 managers that could do that transaction and hold $200 million or more, that number now instead of 10 is 15 or 20. And so I just say the competitive environment is such that it's just a pretty, you know, a pretty difficult competitive environment out there. I think what we bring to that, however, is things we've highlighted all along, right? We've been doing this in the U.S. for over 20 years. The diversity of our sponsor franchise. Now, as we've referenced globally, we've done transactions over the last couple years for over 100 private equity firms. We were able to speak for scale around all different asset classes, so our ability to walk in and speak for $150-plus million in a given deal Our ability to speak up and down the capital structure, first lien, second lien, MES. Again, we don't do different parts of the capital structure in different accounts, but the ability for a sponsor to call us and get a read on a first lien, second lien structure, an all first lien structure, a Unitron structure, a MES thing. We believe the combination of all those factors has created an environment that allows us to continue to get really attractive deal flow.

And, Kyle, this is Ian. I guess I would also point out, I wouldn't say that we're seeing different behavior in terms of spreads. I think you need to look at it in terms of, you know, where you're actually investing in the capital structure. And so I think what we have seen, and I referenced it in the remarks, is that Unitronch is sitting on top of FirstLean right now. And so I think what some managers are doing is going deeper in the capital structure and at a lower return. So one of the things that we focus on is really what kind of return are we generating per turn of leverage? And so that's part of our analysis. Eric referenced the illiquidity premium. That's another thing. With Tom's group, we have the ability to get comps in the liquid market so that we can price that illiquidity premium. So as you look at what other managers are doing, I think you're seeing you know, potentially some deeper deals in the capital structure at a lower return. For us, we're just staying right where we've always stayed, which is that kind of four and a half times 500 basis points.

No, that's great color and appreciate that. One last one from me, you guys deployed about 5 million bucks into the joint venture. You know, how quickly can that ramp? Is that a, is that a decent quarterly runway? Is that more market dependent? Can you give us a sense for that?

Yeah, Kyle, this is Fox. So when you look at it, we announced kind of the equity drawdown schedule over preceding or following 10 quarters. I wouldn't necessarily see that changing. And when you think of how wide that investment frame of reference is, whether it's liquid, illiquid, U.S., Europe, multi-geographic, and across a number of, you know, extracting illiquid premium from a number of asset classes, you need to say that slow and steady deployment wins the race. So no interest in jumping unless market conditions allow for it, and really this is a matter of just us working with our institutional partner, and you can imagine everyone's pragmatic and focused on generating good return without having to rush.

I think it's fair to say, as John mentioned, if you were to model that out, I'd model it out over a 10-quarter period of time.

Got it. Thanks so much for answering my questions, guys. Really appreciate it.

Thank you. Our next question is coming from Casey Alexander from Compass Point. Your line is now live.

Hi. Good morning. Excuse me. This is a pretty simple question, but you show some industry metrics on slide 16, and then on slide 11, you have a representation that shows... that your current multiple in your portfolio is 5.0 times EBITDA. So how does your multiple compare to the industry multiples? And are you guys actually investing at a little bit higher multiple to stay acyclical and defensive in your portfolio?

So, Casey, it's Ian. So the 5.0 that you're talking about is the broadly syndicated loan portfolio. Our middle market portfolio that we're constructing is focused at four and a half times average weighted senior leverage in companies that are not overly levered at 5.1 times. And so if you actually look at the last quarter, we were even below that average. In terms of senior leverage, we were 4.27 times average weighted senior leverage in deals that were levered 4.8 times. I think, you know, as you think about, you know, the strategy here, obviously we're highly focused on asset selection, picking the right credits, making sure that we have the right partners, but it's also about diversification and really, you know, investing down the middle in terms of firstly in senior security. And so for us, it's really in that four to four and a half times LIBOR plus 500 with companies that are between 20 and 40 million EBITDA, which is right in the middle of the middle market.

You're right. I was looking at the wrong column. I appreciate the clarification. Thank you. And thanks for taking my question. Thanks, Casey.

Thank you. Our next question is coming from Robert Dodd from Raymond James. Your line is now live.

Hi, guys, and congrats on the quarter. Questions on kind of the subsequent events, and not only the repayments, I mean, those happen. On the, you made commitments of $70 million, closed $33 million. Can you give us, funded $33 million, can you give us any color on the mix? I mean, is that just a function of timing? You know, you made a commitment that, you know, July 29, and it hasn't had time to fund yet. Or is there a much higher mix of, say, delayed draw facilities in that? And then, obviously, the follow-on, is that what you're seeing? What are you seeing in terms of mix of delayed draw versus funding commitments in the pipeline?

I'd say it's a former. So you've made a commitment to a deal that has not yet closed but is expecting to close inside of, you know, a three-week timeframe. and not heavily relying on the delayed draw term loans. While those exist, that's not a majority of the unfunded commitment exposure.

Got it, got it. And then the other thing that ties to that, in the press release, you say the yield on those commitments was, I think, 8.9%, if I'm, hang on, sorry, I flipped to the wrong page. Yeah, 8.9%, which obviously your middle market portfolio right now is at 7.5%, so that's, Is that just a fluke of one of the deals that's in that new commitment? It's a small number. Or is there something shifting in the market about what you're targeting or what you're seeing in deals that are attractive?

Yeah. So, again, Robert, mostly the former. So we had an opportunity to do a – one transaction that was in the BDC at a slightly wider spread as a result of our relationship with a sponsor and focus on a unique capital structure that they found very attractive. So more of a credit to the origination team that made that loan that closed this quarter and getting outsized return per unit of leverage.

Got it, got it, I appreciate that. And then just onto the JV. Obviously, you've given us colors that ramp up over 10 quarters. I mean, what's the, you know, these type of JVs, obviously, it takes them a while to build any scale. They've got them overhead. It takes them a while before they can use any leverage, et cetera. So, I mean, I would imagine your target ROE, ultimately, for that capital is probably high single digits. What would you expect? If you ramp at $5 million incremental capital a quarter, over 10 quarters, how long would you expect it to be before you get to target ROE on that invested capital?

So, I mean, our liability or funding profile, our goal is to deliver levered ROE day one. So you have the ability to do that. through the use of a few financing lines. So I'd say you'd probably be approaching the ROE targets on those level of deployments sooner rather than what you'd see of where you would draw down on all the equity capital and the ROE itself is low and then ramps up. So slow and steady, and what you'd expect is a levered return that would be commensurate with some of the returns that you're looking at as we deploy capital.

Okay, got it. I appreciate it. Thank you.

Thank you. Our next question is coming from Ryan Lynch from KBW. Your line is now live.

Hey, good morning. Thanks for taking my question. I just have one this morning. As you guys look to rotate the portfolio out of DSLs into middle market loans, if I look at your guys' current yield today on the middle market loans of 7.5%, I fully understand that you guys are not trying to build a portfolio to target any sort of ROE because that would not be the right way to build a portfolio and you guys want to be conservative and build a conservative portfolio first and foremost before sort of targeting any sort of ROE. If I just look at the ROE in the middle market portfolio today, which you guys hope to ramp 100% of the portfolio over the next several years, The kind of ROE that that spits out for the BDC, to me, looks around 7%, 7.5%. So fully understanding the conservative nature that you guys are looking to build a portfolio, how do you balance that conservatism with generating an ROE that I look at at 7% to 7.5%? Yeah.

Ron, listen, I appreciate your question, and I think that forward look is important. And we obviously model that out ourselves on a consistent basis. The spread that's referenced in there that is in the modeling does not include our upfront fee. And so if you include our upfront fee and use your 7.5%ish ROE that was only spread dependent, and then you add in the upfront fee, you kind of bridge yourself to around that eight number. And, you know, and we started off this about as I started off our call a year ago, we were voted in to be entrusted as the manager of this, of the capital base by shareholders. And we intentionally set our hurdle rate at 8% consistent with the dividend yield that we were targeting because we don't believe it's appropriate to get an incentive fee until we deliver to shareholders what we communicated to them we were going to deliver. And that's that 8% targeted ROE. As we model out the portfolio today with our spreads we have today with the upfront fees we're getting today, with the risk we're comfortable taking on a forward-looking basis, we get to right around that 8% number as we model it out, inclusive of all those components.

Okay. I appreciate that. That's my only question today.

All right. Thank you. We reach the end of our question-and-answer session, and I'd like to turn the floor back over to management for any further or closing comments.

I just want to close by kind of where I started, which is thank you for the past year. We've obviously been busy. We referenced the JV. We referenced the static CLO. I hope what investors have seen is the coordination of bearings across liquid and illiquid collateral and our ability to find value for our investors. I think the shareholder alignment, we put a stake in the ground 12 months ago that we intended to kind of really align ourselves with shareholders. We own over 20 separates. 27% of the company, we put in a share buyback program. So I hope the number one thing we've done over the course of the past year is deliver to you what we told you we were going to do a year ago. We look forward to continuing doing that in the future.

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