Barings BDC, Inc.

Greetings. At this time, I would like to welcome everyone to the Barings VDC, Inc. conference call for the quarter ended September 30th, 2021. All participants are in a listen only mode. A question and answer session will follow the company's formal remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.bearingsbdc.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 and 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, 2020, and quarterly report on Form 10-Q for the quarter ended September 30, 2021, each as filed with the Securities and Exchange Commission. Barron's BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I will turn the call over to Everett Lloyd, Chief Executive Officer of Barings BDC.

Thank you, Hillary, and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our third quarter 2021 earnings presentation as posted on the investor relations section of our website. On the call today, I'm joined by Barings BDC's President and Barings Co-Head of Global Private Finance, Ian Fowler. Brian High, Barings Head of U.S. Special Situations and Co-Portfolio Manager, and the BDC's Chief Financial Officer, Jonathan Bach. Before Ian and John review details of our portfolio and third quarter results, I'll begin with some high-level comments about the quarter. Many of the things we highlighted in the second quarter continued into the third, most notably robust market activity in the U.S. and globally, with elevated deal volumes and increased competition. And this increased activity and associated portfolio velocity helped drive the stable earnings profile and dividend increase we will outline today. Let's begin with the market backdrop shown on slide five of the presentation. The backdrop remained largely the same in the third quarter, with elevated broadly syndicated loan prices and strengthening BDC equity prices. Many BDCs trade at or above their pre-COVID highs, and the competitive market for private credit assets drove associated BDC net asset values and valuation premiums higher. Barings BDC's steady and stable return performance continued with the highlights summarized on slide six of the presentation. Net asset value per share was up one penny in the quarter to $11.40. Our net investment income increased to 23 cents per share aided by accelerated OID from repayments as well as increased interest income associated with net portfolio growth. Recall the underlying stability of our net investment income is further enhanced by our incentive fee structure. as our earnings continue to exceed our 8% hurdle rate and remain in the investment catch up. As a result of these trends, our board elected to increase our fourth quarter dividend to 22 cents per share, equating to a 7.7% yield on our net asset value of $11.40. Regarding new investments, we had originations of $276 million in the third quarter. This was offset by $232 million of sales and prepayments, 89 million of which were sold to the JV. Our investment portfolio continued to perform well in the third quarter and remains valued at above original cost. We had one new non-accrual investment from the acquired NBC portfolio, equating to 70 basis points of total portfolio fair value. Slide seven outlines summary financial highlights for the quarter. In the third quarter, increased investment activity and associated portfolio velocity continue to drive total investment income and net investment income higher, both on an absolute and on a per share basis. Net unrealized depreciation was $3.3 million, and this was offset by $3.8 million of net realized losses, with the majority of those moves due to a foreign currency hedging. Net leverage, which is leveraged net of cash, short-term investments, and unsettled transactions, was 1.19 times and remained within our target range of 0.9 to 1.25 times. Additionally, many of you might recall our recent announcement related to the acquisition of Sierra Income Corporation on September 21st. I will not outline details of that transaction on this call and would direct any interested investors to our proxy statement that was filed on October 29th. That said, I do believe the transaction crystallizes the strong return and growth opportunities we have at Barings globally. We remain a leader in our core markets with an extremely wide investment frame of reference that allows us to be selective when competitive market forces increase. Our commitment to investor alignment, exhibited by our incentive fee structure, provides an earnings cushion against unforeseen events when our net investment income exceeds the 8% hurdle rate. Recall, a decline in earnings caused by non-accrual loans or having to refinance assets at lower yields would first result in a lower incentive fee, insulating investors from those negative items. I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.

Thanks, Eric, and good morning, everyone. If you turn to slide nine, you can see additional details on the investment activity that Eric mentioned. Our middle market portfolio declined by $46 million on a net basis in the quarter, with gross fundings of $165 million, offset by sales and repayments of $211 million. New middle market investments included 16 new platform investments, totaling $107 million and $58 million of follow-on investments and delayed draw term loan fundings. We also had 106 million of net new cross-platform investments in the quarter, with the majority of that attributed to our closing of Eclipse Business Capital. We continue to believe portfolio repayments will remain elevated across the market, and in the third quarter, Barings BDC experienced an increase in repayments, along with the associated fee income acceleration. Of our 211 million in middle market sales and prepayments, 88 million was associated with full repayments this quarter, $4 million was from partial pay downs, and the remaining $117 million were sales, predominantly to our joint venture. Recall joint venture sales enable us to increase portfolio diversification while maintaining a prudent leverage profile at Barron's BDC. Slide 10 updates the data we show you each quarter on middle market spreads across the capital structure. As capital seeking private credit return enters the market at a rapid pace, market conditions become extremely competitive as evidenced by spread compression, loosening terms, and higher leverage levels. Turn to slide 11. As we outlined last quarter, unit tranche executions were expected to provide a level of pricing premium when compared to first lien, second lien structure as a one-stop financing solution provides private equity sponsors with ease of execution. Today, the spread differential between a Unitron's transaction and a first lien, second lien execution is approaching all-time tights. Additionally, investors can see that Covenant Lite issuance in Unitron's transactions is at an all-time record. A bridge of our investment portfolio from June 30th to September 30th is shown on slide 12. On slide 13, you will see a breakdown of the key components of our investment portfolio on September 30th. As we have discussed in the past, the goal of this slide is to provide details on the three key categories of our portfolio, which are our middle market portfolio, the legacy MVC capital portfolio, and our cross-platform investments. The middle market portfolio remains our core focus and makes up 70% of our portfolio in terms of total investments and commitments, and 67% of our portfolio in terms of revenue contributions. This portfolio is comprised of 133 portfolio companies with geographic diversification across the U.S., Europe, and Australia regions. Underlying yields on our middle market investment portfolio, 6.7%, remain reflective of our boring-as-beautiful approach to credit. For our middle market portfolio, weighted average first lien leverage was five times, consistent with our boring-as-beautiful investment approach. In addition to our middle market exposure, we continue to draw upon Barron's wide investment frame of reference and complement our core portfolio with 13 investments in the legacy MVC capital portfolio and 24 cross-platform investments, which have yields at fair value of 13.8% and 8.4%, respectively. We had one non-accrual at core end, accounting for 70 basis points of the fair value of the portfolio, which was associated with the acquired MVC portfolio. Importantly, no Barron's directly originated loans are on non-accrual, and the total portfolio had no material modifications to the cash payment terms of our debt investments during the quarter. Our total investment portfolio, excluding short-term investments, is now made up of 73 percent first lien assets. Slide 14 provides a further breakdown of the portfolio from a seniority perspective. The core Barron's originated portfolio, which makes up 90% of our funded investments, is 80% first lien. This is down from 87% last quarter, driven largely by our investment in Eclipse Business Capital. The MVC portfolio is comprised primarily of equity, second lien, and mezzanine debt investments, which brings the first lien component of the total portfolio down to 73%. With regard to the MVC assets, we saw an uptick in the repayment activity with three investments paying off in the quarter. Our top 10 investments are shown on slide 15. Our largest investment is 5.9% of the total portfolio, and the top 10 investments represent 22.4% of the total portfolio. Recall our largest investment, Eclipse Business Capital, is backed by a large portfolio of asset-backed loans, conservatively structured inside of the collateral net liquidation value. Additionally, two investments acquired from MVC Capital are in our top 10 holdings. Remember, these are covered by the credit support in place from Barings LLC, thus reducing potential downside risk. The overall portfolio remains diverse from an industry perspective as well, with 170 investments spread across 29 industries. I'll summarize my market comments by saying Behring's broad investment scope across geography and private asset classes allows Behring's BDC to create an optimal and differentiated asset mix that is not reliant on any single investment product or channel. Furthermore, we choose to look at alignment differently, and our focus on an aligned fee structure and hurdle rate gives us the latitude to ensure our investment teams make the right investment. at the right price for the risk. Being unique is endemic to our culture and our platform, and I believe it's a key ingredient to achieving long-term success. I'll now turn the call over to John to provide additional color on our financial results.

Thanks, Ian. And turning to slide 17, here's a full bridge of NAV per share movement in the third quarter. Our net investment income outpaced our dividend by 2 cents per share. Net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of 6 cents per share, while our unrealized depreciation on our investment portfolio and foreign currency transactions, primarily associated with our foreign exchange hedging, drove an increase of 5 cents per share. Additional details on this net unrealized depreciation are shown on slide 18. And on the middle market portfolio, price appreciation and credit performance both increased unrealized depreciation by $1.6 million and $700,000 respectively. However, there was a slight offset by roughly $6.1 million of unrealized depreciation associated with the foreign currency investments due to the weaker euro. This depreciation is offset by our foreign currency hedges on the portfolio. Our cross-platform investments saw a total of appreciation of approximately $700,000, while the legacy MVC portfolio saw a total net unrealized depreciation of 1.6 million. Near the bottom of slide 18, you can see that the credit support agreement with Barings was unchanged from last quarter. Slides 19 and 20 show our income statement and balance sheet for the last five quarters. And as we've discussed, our net investment income per share increased to 23 cents for the quarter. driven by a $1.8 million increase in total investment income. Higher dividend income associated with our investment in Eclipse Business Capital and several of our joint venture investments, as well as an increase in accelerated OID on repayments, drove this increase. The increase in total investment income was partially offset by higher interest and financing fees, which rose as a result of increased borrowing levels. The third quarter also saw the payment of an incentive fee to the manager, as pre-incentive fee net investment income exceeded our 8% hurdle rate. Now, from a balance sheet perspective on slide 20, total debt-to-equity was 1.39 times as of September 30th, although this level was artificially high given the timing of certain asset sales and was 1.19 times after adjusting for cash, cash equivalents, and unsettled transactions. Turning to slide 21, you can see how our funding mix ties to our asset mix, both in terms of seniority and asset class. Compared to the end of 2020, our reliance on senior debt has decreased as we have continued to diversify our balance sheet to match our diverse portfolio of assets. Details on each of our borrowings are shown on slide 22, which shows the evolution of our debt profile for over the last three quarters. We continue to have an additional commitment to raise up to $25 million of unsecured debt. Plus, we have the available borrowing capacity under our $800 million senior secured credit facility. Now, furthermore, on November 1st, Barings BDC received an investment grade rating of BBB minus from Fitch, our second investment grade rating following our BAA3 rating from Moody's received in 2020. Jumping to slide 23, you can see the impact to our net leverage using our available liquidity to fund our unused capital commitments. Barings BBC currently has $99 million of delayed drop-term loan commitments to our portfolio companies, as well as $36 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of these commitments, if called upon, while maintaining cushion against our regulatory leverage limits. Slide 24 updates our paid and announced dividends since Barings took over as the advisor to the BDC. And as Eric mentioned, we announced yesterday that our fourth quarter 2021 dividend will be $0.22 per share, an increase of a penny per share compared to the second quarter, and a 7.7% distribution on current net asset value. Turn with me now to slide 26. This shows a graphical depiction of relative value across the triple B, double B, and single B asset classes. And with spreads across the liquid credit spectrum at or near their three-year tights, investors rightly outlined that excess spread per unit of risk is increasingly hard to find. And so investors seek alternatives where they can, in effect, manufacture excess spread per unit of risk in the form of directly originated transactions. seizing on both illiquidity and complexity spread premium. And we speak often of these pricing premiums relative to liquid credit, and this translates into the actual results shown on slide 27, which outline the premium spread of our new investments relative to liquid credit benchmarks. Barings BDC deployed approximately $180 million at an all-in spread of 757 basis points, which represents a 327 basis point spread premium to the comparable liquid market indices at the same risk profile. Now, diving deeper into our core middle market segments across Europe and North America, we averaged a 308 basis point spread relative to the liquid market indices. And for cross-platform investments, the spread relative to liquid market indices was even greater at 574 basis points. And we continue to believe our ability to invest across platforms and generate excess shareholder return via illiquidity and complexity premium will be a key differentiator for Barings BDC in the current market cycle. I'll wrap our prepared remarks with slide 28. And this summarizes our new investment activity so far during the fourth quarter of 2021 and our investment pipeline. The pace of new investments remains steady compared to the last two quarters. with $239 million of new commitments, of which $164 million have closed and funded. Of these new commitments, 76% are first lien senior secured loans, 14% are in cross-platform investments, and 21% are in European or Asia-Pacific Australia investments. The weighted average origination margin, or DM3, was 7.8%. And we've also funded approximately $4 million of previously committed delayed drop term loans. The current Barings Global Private Finance investment pipeline is approximately $3.1 billion on a probability weighted basis and is predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. And with that, operator, we'd be happy to open the line for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please note, we ask that you limit yourself to one question and one follow-up per person. One moment, please, while we poll for questions. Our first question is from Kyle Joseph of Jefferies. Please proceed with your question.

Hey, good morning, everyone, and congrats on another good quarter. Obviously, you guys had strong originations, but just going through the last couple quarters of originations, I wanted to kind of pick your brain and see how we should expect this to impact the P&L. Obviously, 2Q was highlighted by Eclipse. 3Q cross-platform was very strong. But can you walk us through, A, how you're sourcing those opportunities and, B, how you anticipate those impacting the P&L?

Sure, Kyle. So the question was centered in on cross-platform investments and how they're sourced and then kind of the forward kind of rates that we're seeing on those types of investments on a go-forward basis.

Yeah, and also talk about Incorporate Eclipse and the impact on the P&L and, you know, whether we should, whether the mix between dividend income and interest income going forward.

So, Kyle, you're rightly pointing out, right, dividend income increased materially this quarter with the Eclipse investment effectively paying an 8% distribution on the equity, which is our largest position inside of BBDC. So that was effectively $1.7 million of the two-plus that you see in the financials. And additionally, you can see our JV investments in particular on Thompson Rivers also paid another million dollars or so. These are expected to be ongoing, right, in terms of distributions. The business models are very stable and, most importantly, very differentiated in terms of how they focus on asset-based lending in specific as well as a level of unique mortgage origination. that come from our strong partnerships. I think it'd be best to lateral to Brian High when he thinks about the head of our special situations practice in the U.S. to outline the return opportunities he's seeing in these cross-platform investments like Eclipse and the forward prospects. So if that's all right, I'll lateral to him.

Sure. Thanks, John. And good morning, Kyle. I guess I would say, you know, our – Our pipeline has shifted over the last couple of quarters. The opportunistic liquid bucket is relatively dry. There's not a lot of opportunity out there in the secondary markets. We've been primarily focused on special situations, one-off investments where we can provide financing solutions to storied credits, and we're sourcing those through both our sponsor networks as well as agencies that we have relationships with in the space that are representing some of these potential issuers and borrowers. That's what our pipeline looks like today. As you think about types of income, a lot of this is what I would call primary issuance of opportunistic financings. It would be primarily generated through interest income as opposed to buying something at a steep discount with a lot of OID. In terms of Eclipse, I think partnering with them has been very fruitful for both them originating new opportunities on the asset-based lending side as well as us looking at potential term loans in markets that we otherwise weren't covering historically.

Got it. Very helpful. And then my follow-up. Probably more for Eric and Ian. Just want to pick your brain on kind of your macro perspective and the potential implications for credit. Obviously, we've kind of lapped the easiest COVID comps. There's some uncertainty out there, whether it's supply chain, inflation, wage pressure. et cetera, but just walk us through, you know, how your companies and maybe focus on the middle market are doing in terms of REV and EBITDA growth first expectations and how you would expect those to trend. Let's call it intermediate term, just given your comments about the market remaining competitive.

Eric, do you want to cover the macro and then I can talk about the portfolio?

Sure. Listen, I think you just hit on it, right, which is – all we know when we underwrite the electric credits is there's going to be something during the life of that credit, maybe multiple things that are frankly unforeseen are, and which is why we really stress those downside cases when we're underwriting deals. Right now, I'd say that the biggest thing that we see kind of occurring is what's kind of now playing through and kind of what you saw, I think it was yesterday's news on the PPI index. And then I think he, and then this morning, there's already some more news on consumer and, I think it really is that combination of wage pressure, commodity input increases that are creating basically margin compression. Depending on the company, some companies can pass through those increases better than some other companies. But I'd say in general, companies are still performing well, but I'd say they're more cautious based off of the inputs they're just seeing that are occurring through inflation, basically. And to your point, some of the supply chain stuff. But Ian, I'll turn it over to you to talk about anything more specific.

Yeah. And Kyle, just, you know, following along Eric's comments, I mean, when we look at our portfolio, I mean, we're definitely seeing decent top line growth across the portfolio. Um, but on the other hand, we are seeing some, uh, wage inflation and other costs input inflation. I think a lot of it is driven by the supply chain disruption, which I think has created a fair amount of inefficiencies. Um, and so like one of the analysis that we've done, for example, is, you know, you look at natural gas as an example and natural gases, I think almost doubled in price. And so, you know, we've looked at our portfolio and what companies are, you know, could be impacted heavily by increases in natural gas. And, you know, for example, we don't have a lot of paper, chemical or plastic businesses that would fall in that category. But that's kind of the work that we're doing from a portfolio perspective. But, you know, we feel like, you know, as Eric said, when you underwrite these deals, you expect certain things to happen. And so we do that in our underwriting and we also make sure we pick the right partners on the equity side to work through any issues that occur.

Great, really helpful. Thanks for answering my questions.

Our next question is from Ryan Lynch of KBW. Please proceed with your question.

Good morning, and thanks for taking my questions. First off, Eric, congratulations on the promotion to president of Barings. And then my first question was, you guys have done a great job of overall, I think, really investing in some unique areas, particularly the cross-platform investments with the some structured products, opportunistic, special situations, JVs and such. But as I looked at your portfolio currently, a lot of those investments are non-qualifying investments, and that's about 26% of your portfolio today. Now, Sierra also has kind of a similar exposure, so I don't think that's really going to ease the non-qualifying bucket either. So as that bucket starts to increase closer to that 30% level, does that restrict your all's ability to continue to kind of source, you know, those really attractive, unique investments in this environment?

Great question, Ryan. The way I would try to look at it too is so included in that 26% is a level of exposure to European direct lending. And so depending on the market environment, and in terms of joint ventures, right, we're, you know, think things are establishing or think things are running well, you can have a relative risk-return trade-off, right? And with the ability to sell down and manage our non-qualified asset exposures for diversification purposes down with the joint ventures like our partners in Jocasi, we have plenty of capacity to make the investments when we find the right investments to make. So plenty of capacity to – and then beyond that, many cross-platform investments, when you think about Brian on the special situations and the cross-platform side, can be qualified, right? Think of some of the stress or distress, either ABL or corporate-style lending that kind of fits that bucket. So it still has a pretty wide berth. But at the same time, if we were to find something that was non-qualified, we do have plenty of levers to move around to ensure that it's That's the best possible use for our capital.

That makes sense. And then just my follow-up, and maybe this is not the way you guys are looking at it, but I want to ask a question regarding sort of the earnings profile, you know, of BBDC, because it looks like this quarter you guys might have gotten above the upper end of your pre-incentive fee hurdle rate. And so now at this point – Do you guys, because you guys always talk about kind of generating, you know, kind of a stable, you know, sort of we've always thought about as an 8%, you know, operating ROE. It looks like now you guys are really in a spot where that can actually increase higher. And, of course, the hurdle rate is going to change when Sierra closes. So maybe this is kind of a moot point. But are you guys looking to continue to execute the way you are and actually grow more? the operating ROE higher, or now that you guys have kind of hit that 8% ROE, is it more of a function of let's turn down risk and generate that stable operating ROE and, you know, continue to have the safest portfolio we can generating that return?

I'd probably start with kind of how we, you know, are the operating levers of the business likely to put you above the high hurdle steady state? And the answer is yes, right? There's a great origination premium coming from our private credit businesses as well as our cross-platform investments. One item that we've always found from our study of BDC research would be that having both a steady and stable dividend, but at the same time increasing your net asset value, that's a very, very rare combination in the space. And so You'll probably see us continue to operate the way we will, where you'll see dividend distributions from our select investments and cross-platform strategies to satiate the yield profile. But then at the same time, the underlying earnings of those ventures are probably exceeding those dividend distributions, giving you a level of increase to the book. So the goal will be to try to shoot right down the middle, ensure that we're paying exactly what we're paying at a very, very attractive risk profile, but at the same time recognizing that there's still a level of earnings contribution that's inside these businesses that's accreting to your net asset value. That would be the proposition that we'd be looking to offer in this environment because trying to stress over-distribution can come at the sake of sacrificing long-term return on NAV, and you want both stable and growing NAV and a steady and stable and boring dividend distribution.

that's helpful and I think makes a ton of sense. I appreciate the time today.

Thanks, Ryan. Thanks, Ron.

Our next question is from Lee Cooperman of Omega Family Office. Please proceed with your question.

Thanks. I'm a relatively new shareholder as a result of your acquisition at MVC, and I'm very pleased with your performance. I congratulate you. I'm curious if you could lay out your acquisition criteria, because I assume there will be more growth coming via acquisition. Thank you.

You know, we look at it this way to where we like opportunities that are both good for BBVC shareholders, target shareholders, as well as our manager complex, right? And you have to have checks in all three. Where that normally comes out is in situations where the shareholders of an underlying target are actually being able to be awarded for the benefit of the transfer of the management contract. So in the history of BDCs, right, you've seen a couple of transactions. Think of it, you know, American Capital and a manager that purchased them, as well as NBC Capital and then now recently Sierra, where there's effectively cash offered to shareholders as a result of a merger for the contract. So that's a very important combination, is that if we are able to use our manager resources to purchase an underlying portfolio at a discount for our shareholders, but the target shareholders are receiving that distribution as opposed to an individual manager. That's something that we get excited about, and it's rare in this environment, Lee, but it can and does happen. And so we think about that. And then also our view is, Lee, is scale and growth by acquisition strategy is important, and there's always a benefit to being big. Our philosophy is one of big enough. And so when we have the opportunity to be accretive to your underlying dividends and net asset value, we make those decisions and allocate capital and mobilize our manager resources to bear. And in situations where we feel that price is too high, we won't. Over time, we think corporate governance may create more opportunities in the BDC space, but we'll look at them episodically and always keep in mind that we want to make sure it wins for those shareholders as well as ours.

Thank you. Thank you very much, and good luck.

Thank you, Lee. And I just add to what John said too. I think that when we have seller boards that see that alignment and see the credit support agreement we put in place in the MDC deal, the one that we've announced as part of the, the Sierra deal, I think those boards look at this in a way that we are, we as the manager in this case, bearings LLC or insulating shareholders from potential downside risk in the portfolio. And then remember to extend that portfolio, you know, you purchased it at a discount, If you refinance it and get back par on those assets, all that benefit accrues to the shareholder. So that alignment where we're really putting our own money behind it, besides the cash payment as John referenced, as well as the credit support agreement, I think when selling boards see that, they see us as an acquirer that will stay consistent with the shareholder alignment that we've talked about from day one.

Our next question is from Robert Dodd of Raymond James. Please proceed with your question.

Hi, guys, and congrats on the quarter. That's me. Background noise. When I look at slide 13, and I'm going to stick to slide 13 for now rather than slide 27 because it's easier, the total portfolio average spread is about 80 bps higher than middle market. Obviously, it's considerably higher. The spread over the liquid market is even higher than that. But even over just the middle market kind of sponsor-backed business, you're generating 80 bps more related to, obviously, allocation of capital to cross-platform and acquired businesses. Do you think the market is conducive to you maintaining or even expanding your that 80 basis point kind of excess spread and excess value creation beyond what's available in the core private credit middle market today?

I'll start with a comment on cross-platform and then also kind of a discussion of the uniqueness of how we create risk return, which will go to Ian, inside of middle market, right, because we stick to our knitting and finding attractive risk return. On the cross-platform side, just given the level of complexity of premium that we'll access that's basically unique or bespoke to the bearings management complex, the answer is you'll still see a level of yield maintenance above that spread that you see there, Robert, and it likely to increase. Because even in periods where there's flush capital, right, the level of human capital or intellectual work that goes into making some of these investments, they're very, very difficult. And when they're very, very difficult, you can extract attractive pricing premium. We see opportunities where that can continue to increase, and Brian outlined that in some of our proprietary transactions on that side. But at the same time, Just our focus and growth on the middle market side, it's a very large and wide market where we're attracting strong sponsors. But I'll turn it over to Ian on spread maintenance inside the middle market.

Hey, Robert. Yeah, a couple things just to throw out there. I guess the first thing is, again, as we look at the middle market, we see different components within the market, market segments. And, and there's definitely a differentiation between those market segments in terms of risk return. And so on a, on a relative value basis, I think, you know, as we, as we look at opportunities, we're, we're always focused and, you know, we're bottoms up and, you know, credit fundamental investors, and we're always looking for, for good platforms. But we're also very much focused on the relative value value, the illiquidity premium. that we can generate in the market. And pretty much every transaction that we do, we're looking at that sort of 200 to 300 basis point illiquidity premium. And then we really factor in this, you know, we look at the illiquidity premium on a paternal leverage basis. And so when you look at, for example, Refinitiv did an analysis in the large market your spread per turn of leverage is around 74 basis points. In the middle market, it's about 124 basis points. So on a relative value, we see attractiveness there. But even within the middle market itself, we focus on segments that are more attractive than others. And then the other thing I would point out, which is beyond just the spread, when you look at the The private equity market, and this is another reason why we find this market so attractive, is most of the transactions that we're doing are financing the original platform and then supporting that platform as it consolidates an industry and through delay-draught term loans. And so every time you finance the growth of that platform, you're generating additional fees, you're putting more dollars at the work, And we've looked at transactions where the original platform of, call it, $15 million in EBITDA with an origination yield of 7.5% generated IRR of 13%, 14% after everything was said and done. As the sponsor grew that business, sold it to another sponsor, we financed that acquisition and then continued to finance the growth of that platform until it was ultimately sold to a strategic company.

I appreciate that. Thank you. And just to follow up, if I can, I mean, to, to the point, I mean, BDCs aren't just, you know, spread coupon investments that are we investments, right? So, you know, the, the three tools, uh, the, the spread, the management fee and, and the cost of capital in a sense, and the management fee, um, shifting that in shareholder's favor when, when Sierra closes on the, the, the cost of capital, more specifically the cost of debt, um, Do you think you can, subject to how the treasury markets move, do you think you can lower your blended cost of debt? Obviously, now with two investment grade ratings, you could increase unsecured, but your revolver is pretty cheap. How are you viewing the calculus on maybe shifting the mix, secured, unsecured, versus, you know, maybe being willing to take the blended cost up a little bit, given you have flexibility on your ROE and your levers above kind of the hurdle right here.

So, Robert, our view would be that the unsecured marketplace, particularly public IG, both maximizes your ability to deploy capital efficiently across a wide spectrum of investments, as opposed to, we'll argue, more restrictive bank line style financing. And you are seeing the pricing of those underlying, on a spread basis, of those underlying unsecured inside or certainly at where folks are borrowing on a secured basis. So you could expect that level of mixed shift to continue. You're right in pointing out that the second investment grade rating also offers a very important point to access those public markets, and you could expect to see us do so. as we outlined post the Sierra acquisition announcement. So I'd expect more on security. They may arguably put a slight degree of pressure, right, as it relates to the fact that more treasuries have gone. That being said, the pickup that you get in the enhanced flexibility to make the right investment and the right structure at the right time probably gives you more enhancement on the top line which makes the unsecured well worth the effort.

We have reached the end of the question and answer session. I will now turn the call over to Eric Lloyd for closing remarks.

Thanks, Hillary. And again, thank you for everybody for your questions. Thank you for taking the time to listen in to our conversation today and our earnings call. And for the shareholders, thank you for your continued support. We hope we have followed through with what we committed to you over three years ago when we started this journey of alignment, transparency, and communication. And so thanks for everybody's time today. Everybody stay positive and stay healthy out there.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.