Blackstone Secured Lending Fund Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the Blackstone Secured Lending First Quarter 2024 Investor Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Stacy Wong, Head of Shareholder Relations. Please go ahead.

Speaker 1

Thank you, Katie. Good morning, and welcome to Blackstone Secure Lending Fund's 1st quarter conference call. Joining me today are Brad Marshall and Jonathan Bach, Co Chief Executive Officers Carlos Whitaker, President and Teddy Deloitte, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation of our results and filed our 10 Q, both of which are available on the Shareholder section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call.

Speaker 1

I'd like to remind you that today's call may include forward looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the Risk Factors section of our most recent Annual Report on Form 10 ks. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I'd like to turn over the call to Brad Marshall.

Speaker 2

Thank you, Stacy, and good morning, everyone. Thanks for joining our call this morning. So turning to this morning's agenda, I'm going start with some high level thoughts before John, Carlos and Teddy go into some more details around our portfolio and this quarter's results. DXSL reported another strong quarter of results including net investment income or NII of $0.87 per share representing a 13.1% annualized return on equity. Our NII per share was impacted by $0.02 per share from accrued capital gains incentive fees.

Speaker 2

These results reflect continued strong credit performance with a minimal non accrual rate of 0.1% at cost and a robust 11.8% weighted average yield on debt investments benefiting from the current elevated rate environment. We also had the 2nd best quarter since our IPO from an earnings standpoint with net income of $0.96 per share which resulted in a NAV per share increase to $26.87 Our distribution of $0.77 per share is well covered at 113% and represents an 11.5% annualized distribution yield, one of the highest among our traded BDC peers with as much of their portfolio invested in 1st lien senior secured assets with BXSL at 98.5%. Moving to Slide 5. As we discussed last quarter, we've been positioning BXSL for an anticipated ramp up in deal activity. We saw the start of that cycle in the Q4 which has continued into the Q1 of this year.

Speaker 2

We had nearly $1,200,000,000 in new investments commitments at par, which was the most active quarter since 2021. Further, we had $719,000,000 of fundings, 98% of which were into 1st lien senior secured debt and overall had an average LTV of 44.5%. This reflects our continued focus on 1st lien debt investments in high quality companies with what we believe are better risk adjusted returns. Additionally, new transactions for the quarter had a weighted average spread of approximately 5 70 basis points with an average OID of 174 basis points and over 2 years of call protection representing approximately 11.4% all in yield to maturity. Our commitment activity during the quarter aligns with the focus on our high conviction investment themes.

Speaker 2

We leverage BXEZY's incumbent relationships to originate opportunities in attractive industries. For example, IT services and software. Benefiting from a wide network of internal sources including a public portfolio of over 2,700 credits and from our existing portfolio in BXSL of over 250 private companies. And our repayment activity was partially in industries that may experience more cyclicality including electrical equipment and energy equipment and services, a portfolio rotation that we believe supports ongoing quality. Just looking at the past two quarters collectively, we have seen more commitment activity than the preceding 7 quarters combined and see this momentum carrying through into the 2nd quarter as BXEI utilizes our global platform, including BXEI's expanded European credit platform and seeks to create what we believe to be quality deal flow for our investors.

Speaker 2

And despite a period of slower M and A activity, we see our continued deal flow being driven from 4 primary factors. 1st, the XSL benefits from having physicians across 2 10 portfolio companies that in the absence of being sold may look to grow through debt and equity finance acquisitions. 2nd, with BXEZI's incumbency across over 4,500 issuers globally, We believe our scale and existing relationships helped to drive deal flow. In fact, approximately 65% of BXSL's Q1 fundings were to incumbent borrowers of BXCI. 3rd, we have deepened our focus on specialization across sectors that we believe have long term tailwinds.

Speaker 2

For example, in April, we opened a new credit office alongside our life science private equity colleagues in Cambridge, Massachusetts, where our Global Head of Healthcare, Brad Coleman, along with colleague, Jonathan Bremen, will expand our presence. This is an area that is highly specialized and in great need of knowledgeable expertise. Finally, we continue to hear from companies that seek services offered by BXC and I's value creation program during a period of heightened inflation. While the services we provide are not a silver bullet, it can be quite additive. And as such, we believe a partnership with Blackstone is valued by sponsors in the market.

Speaker 2

You'll hear more from the team, but I'm particularly excited about the overall quality of our earnings, the continued improvement in NAV and our ability to lean into pipeline drive income for our investors. With that, I'll pass it over to my colleague, Jonathan.

Speaker 3

Thank you, Brad. And let's jump to Slide 6. We ended the quarter with $10,400,000,000 of investments, an increase from $9,900,000,000 in Q4. This resulted in a modest increase in ending leverage of 1 point zero three times and an average leverage of approximately 0.98 times given the timing of some of our investment fundings. We maintain our strong liquidity position at $1,400,000,000 comprised of cash and available borrowing capacity across our revolving credit facilities, including ABLs to lean into that expanded pipeline that Brad mentioned.

Speaker 3

The weighted average base rates over the quarter expanded approximately 50 bps on our nearly 99% floating rate debt portfolio compared to Q1 last year as rates remained elevated. While spreads have modestly compressed, weighted average all in yield on debt investments at fair value remains attractive at 11.8% this quarter compared to 12% last quarter. New investments continue to be accretive to our net investment income. The yields on new debt investment fundings and assets sold and repaid during the quarter averaged 11.4% and 11.9% respectively. Let's take a look at the portfolio.

Speaker 3

Jump to Slide 7. Approximately 99% of BXSL Investments are in 1st lien senior secured loans and 99% of those loans are the companies owned by financial sponsors who have significant equity value in these capital structures demonstrated by an average loan to value of 47.8%. And as Brad noted, our non accruals are still at only 0.1% at cost. Our portfolio also starts from a strong LTM EBITDA base averaging $193,000,000 a 6% increase from last year. This is more than 2 times larger than the private credit market where we also see continued strength of performance from larger companies, the bedrock of our portfolio relative to their smaller EBITDA counterparts on both growth and defaults.

Speaker 3

The XL's portfolio is compared to the broader private credit market measured by the Lincoln International Private Markets Database has seen growth rates in line with the broader market and over 15% more profitability on an LTM EBITDA margin basis. Now we continue to stress the importance of interest coverage. The LTM EBITDA coverage based on average LTM EBITDA for BXSL portfolio companies over the last 12 months, that was 1.6 times in Q1, which again compares favorably to the Lincoln database for the broader private credit market at 1.4 times average coverage in Q1. On an LTM basis, only 2.4% of the portfolio has interest coverage below 1 times versus 16% for the broader private credit market of which 75% of this population represents companies with EBITDA less than $50,000,000 Now further Slide 8, this focuses on our industry exposure. In Q1, the number of portfolio companies in BXSL increased to 210, while we maintain nearly 90% of exposure to historically lower default rate industries, including nearly 40% of funded deals to new portfolio companies and software and IT services, our top conviction areas as we continue to build out expertise as Brad mentioned.

Speaker 3

Now I'll conclude with a point on amendment activity. Amendment activity continues to be relatively benign as the performance of the portfolio remains strong. And in the Q1, there were 45 amendments for BXL Private Investments, the vast majority of which were associated with add ons, BDTL extensions or other technical matters. With that, I'd like to turn it over to Carlos.

Speaker 4

Thanks, John. To expand on Brad's point regarding deal activity, I'd like to take a few minutes to dive into a new deal for the quarter, a $2,000,000,000 debt financing for Park Place, a leading provider of 3rd party maintenance for data centers and an incumbent portfolio company that we knew well. This marked one of the largest private financings to take out syndicated debt in the quarter. BXCI not only led, but also committed along with 3rd parties 90% of the total financing package across the capital structure. We believe several key differentiating factors allowed BXCI to win the deal.

Speaker 4

1st, scale. BXCI has the ability to commit quickly in size, taking down the vast majority of a very scaled loan package, something we believe few in the market can match. 2nd, incumbency. We leveraged BXCI's existing anchor position in the syndicated loan and strong relationship with the sponsor. 3rd, value creation.

Speaker 4

As an existing position for BXCI, Park Place has been a telling story for our value creation program. The borrower was introduced to Blackstone Portfolio Companies through cross sell as a preferred provider and became active in a number of portfolio companies and had already experienced the benefits of our partnership approach. 4th, deep diligence and sector knowledge. We utilized our internal Blackstone expertise, technologists and differentiated market insights and data centers along with strong prior institutional knowledge of Park Place. In fact, digital infrastructure, particularly data centers is one of our highest conviction investment themes across Blackstone with $50,000,000,000 of data centers owned or under construction globally, which also includes QTS, the largest data center company in North America today.

Speaker 4

Finally, flexibility. BXCI offered a one stop service with multiple tranches of debt, creating ample flexibility best suited for Park Place's need. In an increasingly competitive private credit market, we believe we differentiate ourselves as not just a lender, but also a value added partner helping credits grow equity value. BXSL borrowers are offered full access to BXCI's value creation program through cross sell opportunities, cost savings procurement and capabilities, including cybersecurity and data science, all at no additional cost because we understand the end benefit to the investment portfolio. And with that, I'll turn

Speaker 5

it to Teddy. Thanks Carlos. I'll start with our operating results on Slide 10. In the first quarter, BXSL's net investment income was $166,000,000 $0.87 per share. While our total investment income remained consistent with Q4, net investment income on a dollar basis decreased primarily as a result of a full quarter impact of the fee waiver, which expired near the end of October and capital gains based incentive fees accrued in the Q1.

Speaker 5

BXSL recorded its highest quarterly GAAP net income and 2nd highest in per share term since IPO at $184,000,000 and $0.96 per share respectively, up 12% from a year ago. Total investment income for the quarter was up $39,000,000 or 15% year over year driven by increased interest income primarily due to higher interest rates. It is important to highlight the high quality of our earnings as interest income excluding tick fees and dividends represented approximately 93% of total investment income in the quarter. Turning to the balance sheet on Slide 11. We ended the quarter with $10,400,000,000 of total portfolio investments at fair value, dollars 5,300,000,000 of outstanding debt and approximately 5,200,000,000 dollars of total net assets.

Speaker 5

With our strong earnings in excess of the distribution in the quarter as well as healthy fundamentals and tightening spreads supporting asset values, NAV per share increased to $26.87 up from $26.66 last quarter. This represented the 6th consecutive quarter of NAV per share growth. Moving to Slide 12. In addition, we saw the 4th consecutive quarter of commitment growth as Brad outlined with BXSL committing to nearly $1,200,000,000 in the quarter, funding $719,000,000 and an estimated additional $347,000,000 committed by BXCI and earmarks for BXSL as of March 31. We expect to see continued momentum through the Q2 and into the back half of the year.

Speaker 5

Repayments remained relatively muted at $181,000,000 in the quarter or a 7% annualized repayment rate. Next, Slide 13 outlines what we believe to be our attractive and diverse liability profile, which includes 53% of drawn debt in unsecured Our unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in its elevated rate environment and contributed to an overall weighted average interest rate on our borrowings of 5.1%. This compares to a weighted average yield at fair value on our debt investments of 11.8%. Additionally, we have no maturities on our liabilities until 2026 and our debt and funding facilities have an overall weighted average maturity of 3.2 years. The strength of BXSL's funding profile has been recognized by rating agencies as well.

Speaker 5

We previously noted that BXSL earned improved outlook from Moody's to Baa3 positive and this quarter we earned notch upgrade from Fitch to BBB Flat. We ended the quarter with $1,400,000,000 of liquidity in cash and undrawn debt available to borrow, providing us with significant capacity for continued portfolio growth. Ending leverage at March 31 was 1.03 times, up from 1 times at year end. We have positioned our balance sheet to have what we believe is ample capital to deploy into what we expect will be a growing opportunity set through year end. In closing, we are moving forward from what we believe is a position of strength with underlying earnings power, credit performance and investment capabilities and an optimized balance sheet that distinguish us in the market.

Speaker 5

We will strive to remain laser focused on delivering returns and protecting investors' capital. With that, I'll ask the operator to open up for questions. Thank you.

Operator

Thank

Speaker 2

you.

Operator

We'll go first to Melissa Wedel with JPMorgan.

Speaker 6

Good morning. Thanks for taking my questions today. Definitely took your point about the higher volume and level of activity in the Q1 and that you're looking for that to continue into the 2nd quarter. A point of clarification on that, is that on a gross basis? Or are you also expecting net originations to remain elevated, certainly noting that repayment activity was particularly low, it seems in relation to gross originations in the Q1?

Speaker 2

Melissa, it's Brad. I'll take that question. When we talk about origination, obviously, we're talking about both

Speaker 7

on a

Speaker 2

gross basis, but really what grows the portfolio is as you point out on a net basis. And we continue to expect that the portfolio will grow on a net basis. On deals that are repaying, They feel somewhat muted or we're kind of extending our exposure. There's a little bit less turnover in the market right now. And on the gross basis, we're just seeing more and more capital solutions that we're able to provide for issuers right now.

Speaker 6

Okay. Appreciate that. Following up on the level of activity during the quarter, I'm wondering if there was anything in terms of a timing impact that we should think about, whether originations were skewed towards the end of the quarter or it was more evenly distributed versus timing of repayments? Thanks so much.

Speaker 2

Yes. No, you hit the nail on the head. It was definitely skewed to the end of the quarter, which is why you saw leverage on at quarter end higher than what the average leverage was, and some of the commitments spilled over into the second quarter.

Speaker 6

Got it. Is there any have you quantified a rough estimate on what the impact to NII might have been from that timing during the quarter?

Speaker 2

No, we haven't quantified it.

Speaker 6

Okay. Thank you.

Operator

Thank you. We'll go next to Mark Hughes with Truist.

Speaker 7

Yes. Thank you very much. You talked about the spreads being compressed a bit. I wonder if you could quantify that at all of the kind of your typical spread in Q1 versus what you might anticipate on the deals that are in the pipeline now?

Speaker 2

Yes. So I would say, you've seen some spread compression in some areas and you've seen no spread compression in other areas. It really depends on the type of deal, whether it's clubbed up or whether it's a proprietary deal that's kind of driving the spreads. So if you look at the Q4, we're about 11.7% on new deals. This quarter, we're 11.4%.

Speaker 2

By the way, if you look at that on a more of a yield to 3 year basis, it gets closer to 12%. And if you look at kind of the assets that we did during the quarter, they range from 11% to 13%. Speaking to my point earlier, it really depends on the type of deal. The one thing that we don't kind of highlight and we should probably do a better job of this, but the spread for unit risk has actually come down if you look at it on a comparative basis to let's say 2021. So companies just because rates are higher companies are taking a little bit less leverage.

Speaker 2

Deals are set up with lower loan to value. So spread per unit risk is fairly constant. And then in terms of on a go forward basis, you'll continue to see this range. You'll see deals that will be closer to 11% and you'll see deals that kind of are north of 12%. But overall, I would say the market putting us aside, the market has seen something like 50 to 75 basis points of spread compression since the start of the year.

Speaker 7

Thank you for that. And then you'd mentioned that more of your existing portfolio companies are doing M and A. Is that part of the strong pipeline that even existing companies are borrowing borrowing for M and A purposes? Is that part of it? Or is that just kind of an ongoing dynamic?

Speaker 2

I think what you're seeing is sponsors are holding that onto their assets for longer. So you're seeing less sale processes. So they're looking at their existing assets and trying to find ways to grow them either operationally or through acquisition. So we've seen more companies look for growth capital in order to grow their businesses. So I expect that to continue for the balance of the year.

Speaker 2

But the other part of kind of what we're trying to do is look across our broader portfolio and see where private capital solutions are a better solution for the company versus the public debt that they may have trading in the market today. So that was the example Carlos went through with Park Place. We just came up with a better mousetrap and better capital structure for their long term growth objectives. And that's kind of where that's what's driving a lot of our deal flow, this ability to use our scale, go into the market, create deals. So while maybe others are seeing more muted deal activity, our deal activity is really starting to accelerate.

Speaker 7

Appreciate that. Thank you.

Operator

Thank you. We'll go next to Paul Johnson with KBW.

Speaker 8

Yes, good morning. Thanks for taking my question. Last quarter, kind of on your last question here, but last quarter you kind of talked about 100 deals or so that you had identified in the market that were potential repricing opportunities kind of away from syndicated markets. It sounds like you've capitalized on some of those. How many of those deals do you think you kind of executed on this quarter?

Speaker 8

And do you still you have a number of those opportunities left today?

Speaker 3

Hi, Paul. This is Bak. So I would say if we're thinking about the tighter spread environment and you recall comments from the prior call, this is essentially where we're using incumbency to our advantage, right? And the goal is to retain the assets that are more susceptible to repayments as a result of the tightening spread environment. And those are loans that have either above market spreads, they've outperformed and it's where we have call protection generally that's rolled off.

Speaker 3

Now in those situations, we'll often agree to new terms for an existing portfolio company and that includes market or above current liquid market spreads and also receive extended call protection among a few other improvements. And so to get to the question this quarter, it's about less than 4% of the portfolio had some spread tightening as a result of that at around 50 to 60 basis points on average. And we received an additional one and a half years of call protection. So still well within the range of new unitranche financings on companies that we know and like. I would say that that was rather muted.

Speaker 3

And more importantly, as we continue to drive additional flow throughout our broad origination framework, It's a nice complement to ensure that we're retaining attractive assets at the same time to Brad's comment growing into new portfolio companies

Speaker 2

as well. And maybe just talk about the pipeline. So we go through this exercise of trying to identify deals like Park Place, maybe it's in our public portfolio, maybe it's somewhere else in our private portfolio, and create those what we call reverse kind of originations, so ideas that we're reversing into the sponsor of the company. At the start of the year, we had 98 of those that we were working through, and we're still chipping our way through that list. Not all of them will resonate.

Speaker 2

Not all of them will work out like Park Place did. But there's a pretty healthy kind of backlog of those deals that we're doing diligence on and negotiating with private equity sponsors.

Speaker 8

Thank you. That's very helpful. And then last one for me is just, I guess, kind of general outlook on net leverage for the year. Equity is obviously hard to predict and you guys have a lot of capacity for growth. But kind of given the environment, do you kind of have any preferences in terms of where you're sort of operating at in terms of your leverage range?

Speaker 8

Thanks.

Speaker 5

Yes. So we ended the quarter right above one turn, so near the low end of the range. I would say we've taken some intentional steps here to build capacity to deploy in what we see as a growing opportunity set, both from a volume standpoint and the fact that at 11.4% new investment yield, that's very accretive to our dividend. So we have quite a bit of capacity to deploy. I don't think there's any change in message in terms of leverage target 1 to 1.25 is what we've said historically and I'd expect that we're in that range through the back half of the year.

Operator

Thank you. We'll go next to Kent Lee with RBC.

Speaker 9

Hey, good morning. Thanks for taking my question. Just one on the liability side. How do you think about the outlook for the potential funding mix on the liability side, especially given the rates outlook? I just want to see some of the thoughts there.

Speaker 9

Thanks.

Speaker 5

Yes. We have a lot of optionality today. Bach mentioned it $1,400,000,000 of liquidity. No maturities this year. We have 53% of our exposure today that's in unsecured bonds.

Speaker 5

We have seen quite a bit of tightening in the market. For example, our 5 year bond is at sort of 160 over treasury today, that's in 65 bps versus the BDC index of closer to $2.15 So that is relative to even secured liabilities is historically kind of near all time tights just from a spread perspective. So significant optionality, we'll be opportunistic with it. We do have liabilities that were put in place a couple of years ago at an average cost of capital of sub sulfur plus $200,000,000 So we have that to grow into as well.

Speaker 9

Got you. Great. And just one follow-up on in terms of the pipeline and what you're seeing broadly across the BXCI platform. I wonder if I could just get a little bit more color around the activity. Is it fair to say that most of it is around growth capital?

Speaker 9

Or is it just you're seeing a lot of refi activity? Just want to get a little bit more granularity around that. Thanks.

Speaker 2

Sure, Ken. Yes, it's a mix of public to privates, add on activity in existing portfolio companies, some refinancings out of the public markets, some refinancing out of the private markets. I would say it's a pretty healthy balance between all of those. I would say what's lagging is just regular way sponsor to sponsor M and A activity. But even that, we've seen an inflection point probably about 3 weeks ago in terms of that volume starting to pick up.

Speaker 2

You won't see it because it takes a while for these deals to happen for another quarter or so. But that activity is really starting to pick up as well.

Speaker 9

Got you. Very helpful there. Thanks again.

Operator

We'll go next to Robert Dodd with Raymond James.

Speaker 10

Hi, guys. Good morning. I've got a question on PIK, right? So PIK this quarter stepped up again. It's about a little more than 6.5% of total investment income, roughly slightly less than double where it was a year ago.

Speaker 10

Can you give us any color on the drivers there? I mean, how much of that is structured as PIK versus modified PIK? Obviously, Benefit Street was modified, but that was a while ago. So can you give us any color on the drivers for that direction?

Speaker 5

Yes, you're right. 6.5% of income Q1 was PIK that was up modestly over last quarter. Nearly all of that was driven by 1 issuer that previously did have PIK's flexibility through Q3 and that was part of the original deal. We did agree to extend that beginning in Q1. That company by the way has almost tripled EBITDA since we closed.

Speaker 5

If you look at our PIK concentration, 5 companies represent about 85% of PIK exposure. All of those were originally set up with partial PIK flexibility and we would characterize as performing. They're all marked sort of high 90s above 97. So I think it's a tool in certain cases that we will use to differentiate versus the syndicated market that can come in a couple of different forms. But overall, our PIK activity was fairly concentrated to performing assets.

Speaker 2

And Robert, those companies that are picking, they're not 100% pick. So if their coupon is 12%, 80% of that is being paid in cash and more like 20% is picking.

Speaker 10

Got it. Thank you. Since you brought up Park Place, I'll so it's $2,000,000,000 facility now. I mean, 3 years ago, obviously, they've made acquisitions since, but could you walk us through it in terms of like 3 years ago, it was a first lien, second lien, dollars 1,000,000,000 with a blended spread like $575,000,000 Now it's $2,000,000,000 with a dividend taken out with a blended spread, I think, dollars 525,000,000 So could you give an obviously, I don't think the leverage is any higher, but what's the thought process for you? And you're in the 2nd lien before.

Speaker 10

What's the thought process of going through unitranche for that particular structure? I mean, for them more for you, I mean, obviously, they choose, in terms of that because it's gone to all uni with a dividend taken out with a lower spread and less OID, I presume as well. So, is it just that much better of a business today than it was 3 years ago?

Speaker 2

Yes, that's not exactly accurate, Robert. So it's actually a 1st lien and pref capital structure. So what you had was an all cash pay, 1st, 2nd lien capital structure. The company continues to grow, wants growth capital. So we approached the company and said why don't we do a 1st lien security and put a big pref that's 100% pick behind that.

Speaker 2

It will free up your cash flow in order to continue to grow. We'll give you some additional growth capital to do some acquisitions. So it was highly strategic to them on 2 fronts. 1, gain more flexible capital structure 2, freed up a lot of cash flow and the junior part of that capital structure sits in kind of higher risk oriented funds and the 1st lien sits in our lower risk strategy. So I would not characterize that as a unitranche.

Speaker 2

It's a 1st lien plus pick pref.

Speaker 10

Got it. And by the

Speaker 2

way, the momentum I'll just add to that. The momentum in data centers is an incredible opportunity and Carlos hit on this. But Blackstone across QTS and Digital Realty owns something like $100,000,000,000 in equity and data centers. So we are highly strategic to assets like Park Place and we think the long term tailwinds in this sector are enormous. It's one of Blackstone's key investment theses if you've kind of listened to John Gray kind of highlight this on previous earnings calls, but it is something that we're very bullish on.

Speaker 10

Thank you.

Operator

Thank you. We'll take our final question from Casey Alexander with Compass Point.

Speaker 11

Yes, good morning. Thanks for taking my questions. This is just more of a a curiosity. Over the last couple of years there when the deal activity was more prevalent, You guys were expanding in software. There was a lot of software around the market.

Speaker 11

I'm just curious if the composition industry wise of deals being introduced has changed? And if so, what kind of industries are you guys seeing opportunities in it? And what kind of industries does it look like private equity seems to be centered on if we're kind of starting a new cycle of deal flow here?

Speaker 5

Yes. I think I wouldn't say there's any material change over the last couple of years as where we're focused. What you see is more of an intentional focus on quality, right? Larger companies in the right parts of the market. We're in this period where we've seen inflation abate a little bit, but we are seeing deceleration of growth really across the economy.

Speaker 5

If you look at default rates, for instance, in direct lending, you see some of the cyclical more capital intensive businesses at the higher end of the range, north of 4% default rates, whereas services and software are less than 2%. I think that's where the majority of the capital is going both from a credit perspective and an equity perspective.

Speaker 2

Yes. Okay. That's my only question. Thank you.

Operator

With no additional questions in queue at this time, I'd like to turn the call back over to Ms. Wang for any additional or closing remarks.

Speaker 1

No, that would be all. Thank you all for joining us this quarter. We look forward to speaking to you next quarter. Thanks everyone. Goodbye.

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