the private credit investment landscape -...

The Private Credit Investment Landscape Meghna Desai Director, New York Presbyterian Hospital Kipp deVeer CEO, Ares Capital Corporation; Partner, Head of Ares Credit Joshua Easterly Co-CEO, Co-CIO of the Adviser, TPG Specialty Lending Matt Liepert Managing Director, Antares Capital Gregory A. Robbins Managing Director, Head of Corporate Strategy and Development,

Golub Capital Moderator: Jonathan Bock Managing Director, Wells Fargo Securities

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All estimates/forecasts are as of April 26, 2017 unless otherwise stated.

Please see page 18 for rating definitions, important disclosures and required analyst certifications.

Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

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If we had to pick a theme song for today’s private credit / BDC environment, what would it be?

(A) We Are the Champions, Queen I’ve never been able to raise (and charge fees on) so much capital!

(B) Everybody Hurts, REM I can’t find good (yieldy) deals, and no one else can either

(C) Dream On, Aerosmith I’m not deploying gobs of capital in this environment—I simply can’t safely

(D) Hold On, Wilson Phillips Hold on for one more day…things will go your way.

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…And Leverage Is Lower

The Middle Market Pitch…an exercise in relatives…

Source: Thomson Reuters, LPC and Wells Fargo Securities, LLC

Middle Market Yield Premium is Wide…

From the Top Down…

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With the share of par-plus loans now at 73% (up from 2% this time last

year) on a dollar weighted basis, are you really optimistic about forward loan return? If

so, why?

Share of loans bid >=100 & >=101


A Look At Returns

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BDCs who have delivered greater ROEs over the

past three years trade at a premium price / NAV multiple.. What is your view on the ability to deliver outsized ROE given today’s tighter spread environment?

3-Year ROE vs. PB

Source: SNL and Wells Fargo Securities, LLC SOURCE: SNL FINANCIAL LC. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM SNL. FOR RECIPIENT’S INTERNAL USE ONLY

TSLX

ARCC

PSEC

FSIC

AINV

FSC

GBDC

SLRC

NMFC TCPC

PNNT

GSBD

MCC

BKCC

TCRD TICC

FSFR

CPTA

HTGC

SUNS

TCAP

TPVG

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

1.5x

-3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0%

Thre

e Ye

ar A

vera

ge P

rice

/ NAV

Three Year ROE, NAV plus Dividends

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In our view, The Pitch Sounds Like This… Here’s how the pitch sounds…

Source: Company reports and Wells Fargo Securities, LLC

We do PE style due diligence

We’ve got best in class deal flow We’re part a big franchise

We have an excellent track record

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We Write Big Checks, Just Like Everyone Else, in our view


0 25 50 75 100 1251x

2x

3x

4x

5x

6x

7x

8x

Avg. LTM adjusted EBITDA ($m)

Avg

. deb

t to

EB

ITD

A (x

:1)

Total leverage to EBITDA comparison: 4Q16 vs. 1Q17

4Q16 1Q17

We Write Big Checks, Just Like Everyone Else, in our view

+0.3x/0.2x

-20bps

+0.4x

-0.7x

-30%

8 Source: Thomson Reuters, LPC and Wells Fargo Securities, LLC **per LPC data

9 Source: Thomson Reuters, LPC and Wells Fargo Securities LLC

If we had to pick a theme song for today’s private credit / BDC environment, what would it be?

(A) The SMA “bespoke solutions for clients sound great until you can’t manage it well and we’ve all seen leverage on SMAs get pulled by the banks”

(B) GP/LP Structure These funds always hit the end of their lives at the wrong time

(C) BDC I remember a time when those traded well below NAV

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The Structures That Access Private Credit…

Levered/Unlevered Separately Managed

Account (SMA)

Business Development Company (Public or Inst.

Private) GP / LP Structure

Did you ever consider the risks in the two above?

Ramp up periods

Ramp down periods

Lack of true match funding (debt)

Limited diversity of fundings


The BDC Structure -- A Growing Space

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Total BDC AUM now exceeds $87B

BDC AUM


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1Q02

1Q

02

3Q02

1Q

03

3Q03

1Q

04

3Q04

1Q

05

3Q05

1Q

06

3Q06

1Q

07

3Q07

1Q

08

3Q08

1Q

09

3Q09

1Q

10

3Q10

1Q

11

3Q11

1Q

12

3Q12

1Q

13

3Q13

1Q

14

3Q14

1Q

15

3Q15

1Q

16

3Q16

Non-Traded Assets

Publicly Traded BDC Assets

The Institutional Private BDC Structure

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Institutional private BDCs are now ~$7B in assets and are growing

fast

Institutional Private BDC Assets Under Mgmt ($ in Millions)


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Total Private BDC Assets, Institutional

BDC Market Differentiation by Valuation

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Quality slowly plays itself out in a BDC’s long-term

valuation

The Wells Fargo BDC Scorecard (as of 4/26/17)


Quartile 1 HTGC Outperform $15.20 1.53x 8.2% 0.7% 3.5% 32.6%GBDC Outperform $19.89 1.26x 6.5% -0.6% 4.2% 23.3%TSLX Outperform $20.58 1.29x 7.6% -0.1% 4.5% 35.5%NMFC Outperform $14.48 1.08x 9.3% 1.4% 0.4% 27.9%ARCC Outperform $17.55 1.07x 8.7% -0.6% 1.5% 26.5%TCPC Outperform $17.19 1.15x 8.4% -1.3% 2.3% 26.0%Average 1.20x 8.1% -0.1% 2.8% 28.6%

Quartile 2 SLRC Outperform $22.64 1.04x 7.1% -0.9% 3.8% 39.6%SUNS Market Perform $18.02 1.07x 7.8% 1.6% 4.3% 33.6%TCAP Outperform $18.61 1.23x 9.7% 0.1% 0.8% -2.2%GSBD Market Perform $25.00 1.37x 7.2% -0.6% 1.0% 37.0%FSIC Market Perform $9.53 1.01x 9.2% -0.5% -0.5% 14.6%Average 1.14x 8.2% -0.1% 1.9% 24.5%

Quartile 3 HRZN Market Perform $11.53 0.95x 10.5% 2.6% 12.6% 12.5%TCRD Market Perform $9.96 0.84x 10.8% 2.1% 3.5% -1.4%AINV Market Perform $6.61 0.96x 9.0% -0.3% 6.0% 23.5%TPVG Outperform $13.83 1.02x 10.5% -1.4% 7.9% 46.4%PNNT Market Perform $7.86 0.86x 9.2% -2.7% 0.4% 36.3%Average 0.93x 10.0% 0.1% 6.1% 23.5%

Quartile 4 MCC Outperform $7.72 0.82x 11.4% 1.4% 3.5% 29.0%FSC Market Perform $4.40 0.60x 11.4% -1.1% -0.5% -3.4%BKCC Market Perform $7.25 0.88x 10.0% -1.8% -3.7% -15.1%TICC Underperform $7.35 0.98x 10.9% -0.1% 4.4% 71.5%PSEC Underperform $9.15 0.95x 10.9% 1.1% 2.3% 37.8%Average 0.85x 10.9% -0.1% 1.2% 23.9%

S&P 500 -0.5% -1.1% 13.8%S&P 600 Financials -1.0% -6.2% 27.2%High Yield Corp ETF (HYG) 0.0% 1.8% 12.0%

1 Month 1-year

April -2017 BDC Scorecard Total Return

Rating Price Price/NAV Div. Yield 1 Week

BDC Market Differentiation by Performance

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Interestingly enough, there is returns

persistence in quality

Top Quartile and Bottom Quartile BDC Performance Relative to WFBDC (as of April 2017)


70

90

110

130

150

170

190

210

230

4/26

/201

1 6/

8/20

11

7/21

/201

1 9/

1/20

11

10/1

4/20

11

11/2

8/20

11

1/11

/201

2 2/

24/2

012

4/9/

2012

5/

21/2

012

7/3/

2012

8/

15/2

012

9/27

/201

2 11

/12/

2012

12

/26/

2012

2/

08/1

3 3/

25/2

013

5/07

/13

6/19

/201

3 8/

01/1

3 9/

13/2

013

10/2

5/20

13

12/0

9/13

1/

23/1

4 3/

07/1

4 4/

21/1

4 6/

03/1

4 7/

16/1

4 8/

27/1

4 10

/09/

14

11/1

9/20

14

1/5/

2015

2/

18/2

015

4/1/

2015

5/

14/2

015

6/26

/201

5 8/

10/2

015

9/22

/201

5 11

/3/2

015

12/1

6/20

15

2/1/

2016

3/

15/2

016

4/27

/201

6 6/

9/20

16

7/22

/201

6 9/

2/20

16

10/1

7/20

16

11/2

9/20

16

1/12

/201

7 2/

27/2

017

Wells Fargo BDC Index

Top Quartile Return

Bottom Quartile Return

Since 4/26/11, the top-ranked BDCs are up 105%.The BDC index is up 57% while the lowest rank BDCs are up 60%, respectively. The S&P 500 returned 75% over this time frame.

BDC Credit Performance—How Could It Be Bad For Some?

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Over the past 12 and 24 months credit

performance highlights the significant

differentiation in the space – All BDCs are not

created equal as manager selection is paramount, in

our view

BDC Credit Performance Over the Past 12 and 24 Months(as of 12/31/16)

Source: Thomson Reuters, LPC and Wells Fargo Securities, LLC Note: Red shading indicates loss rate below -3%

Company NameTTM BDC Gain/Loss Rate

% Portfolio Company NameT24M BDC Gain/Loss Rate

% Portfolio

FS Energy and Pow er Fund 13.06% FS Investment Corporation IV 11.37%TICC Capital Corp. 11.91% Ow l Rock Capital Corporation 3.69%

FS Investment Corporation IV 11.37% Golub Capital BDC, Inc. 0.58%FS Investment Corporation III 4.38% PennantPark Floating Rate Capital Ltd. 0.53%Ow l Rock Capital Corporation 3.69% TICC Capital Corp. 0.39%FS Investment Corporation II 3.45% Main Street Capital Corporation 0.37%

CION Investment Corp 3.01% Monroe Capital Corporation 0.12%Solar Capital Ltd. 2.58% TPG Specialty Lending, Inc. -0.35%

Crescent Capital BDC 2.56% CION Investment Corp -0.37%PennantPark Floating Rate Capital Ltd. 2.20% Carlyle GMS Finance, Inc. -0.44%

FS Investment Corporation 2.10% Ares Capital Corporation -0.83%TPG Specialty Lending, Inc. 1.99% Solar Capital Ltd. -0.87%

Solar Senior Capital Ltd. 1.84% TCP Capital Corp. -0.88%New Mountain Finance Corporation 1.46% New Mountain Finance Corporation -0.96%

Main Street Capital Corporation 1.21% Solar Senior Capital Ltd. -1.18%WhiteHorse Finance, Inc. 1.02% FS Investment Corporation -1.78%

PennantPark Investment Corporation 0.99% Prospect Capital Corporation -1.92%Carlyle GMS Finance, Inc. 0.70% FS Investment Corporation II -2.02%

Monroe Capital Corporation 0.49% Hercules Capital, Inc. -2.38%Prospect Capital Corporation 0.17% Gladstone Capital Corporation -2.39%

Golub Capital BDC, Inc. 0.03% Capitala Finance Corp. -2.40%TCP Capital Corp. -0.02% Crescent Capital BDC -2.42%

Gladstone Capital Corporation -0.03% Triangle Capital Corporation -2.53%Ares Capital Corporation -0.19% WhiteHorse Finance, Inc. -2.65%

Corporate Capital Trust, Inc -0.78% Business Development Corporation of America -2.97%Business Development Corporation of America -1.10% THL Credit, Inc. -3.05%

Hercules Capital, Inc. -2.36% Goldman Sachs BDC, Inc. -3.07%Triangle Capital Corporation -2.48% FS Investment Corporation III -3.17%Medley Capital Corporation -2.67% FS Energy and Pow er Fund -3.31%

Capitala Finance Corp. -2.91% TriplePoint Venture Grow th BDC Corp. -3.46%Goldman Sachs BDC, Inc. -3.10% PennantPark Investment Corporation -3.63%

THL Credit, Inc. -3.70% Corporate Capital Trust, Inc -4.39%KCAP Financial, Inc. -4.43% Horizon Technology Finance Corporation -5.00%

TriplePoint Venture Grow th BDC Corp. -4.51% Medley Capital Corporation -5.43%Apollo Investment Corporation -6.28% Fifth Street Finance Corp. -6.66%

Fifth Street Finance Corp. -7.75% KCAP Financial, Inc. -6.72%Horizon Technology Finance Corporation -9.07% Apollo Investment Corporation -6.80%BlackRock Capital Investment Corporation -12.15% BlackRock Capital Investment Corporation -7.71%

A Look At The Math…

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In general, BDC fee structures / dividend

yields require that capital be deployed at a ~10%

return over the long-term

“The Math” – Required BDC ROA to Meet the Dividend Yield


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Today, considering an investment in a well-respected, high quality, Quartile 1 BDC. Over the long-term (5-10 year horizon) are you…

(A) Bullish “a well run BDC can likely generate strong total returns relative to other forms of accessing the middle market space”

(B) Bearish “the structural limitations of this model will likely lead to its downfall…”

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Disclosures

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Disclosures

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