Sixth Street Specialty Lending Inc (TSLX) 2025 Q4 法說會逐字稿

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s fourth quarter and fiscal year ended December 31, 2025, earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, February 13, 2026.

I will now turn the call over to Ms. Cami Senatore, Head of Investor Relations.

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

Yesterday, after the market closed, we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 2025, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of, and for the fourth quarter, and fiscal year ended December 31, 2025. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. This marks my first earnings call as CEO, and I'm energized by the continued strength of our platform and the discipline our team has maintained through a dynamic 2025, and into 2026. Before we dive into the financial results, I'm pleased to introduce Ross Bruck, who is joining us on this call today for the first time in his capacity as Managing Director and Head of Investment Strategy. Ross was one of our first members of our direct lending investment team, having joined Sixth Street more than a decade ago.

He has had roles across the Sixth Street platform in both the US and Europe, applying his deep underwriting expertise to various credit investment strategies. Ross brings a unique perspective that bridges complex asset level underwriting with a strategic lens on market opportunity. This appointment reflects our commitment to elevating our internal talent to drive disciplined investment decisions, and we are excited to have his voice on these calls. For our prepared remarks, I will review full year and fourth quarter highlights and pass it over to Ross to discuss investment activity in the portfolio.

Our CFO, Ian, will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported fourth quarter results with adjusted net investment income of $0.52 per share, or an annualized operating return on equity of 12%. And adjusted net income of $0.30 per share, or an annualized return on equity of 7%. Adjusted net investment income of $0.52 per share exceeded our base dividend of $0.46 per share, providing base dividend coverage of 113%. As presented in our financial statements, our Q4 net investment income and our net income per share, inclusive of the unwind of the noncash accrued capital gains incentive fee expense were $0.53 and $0.32, respectively.

The difference between adjusted net investment income and adjusted net income of $0.22 per share in Q4 was primarily driven by $0.12 per share of unrealized losses from idiosyncratic credit impacts, and $0.10 per share of prior period unrealized gains that reversed this period and moved into this quarter's net investment income related to investment realizations. For the full year 2025, we generated adjusted net investment income per share of $2.18, representing an operating return on equity of 12.7%, which exceeded the top end of our guidance range we communicated throughout the course of 2025. Adjusted net income per share was $1.76, corresponding to a return on equity of 10.3%.

From an economic return perspective, which is calculated using movement in net asset value plus dividends paid in the year, we delivered a return of 10.9%, representing our tenth consecutive year of double-digit economic returns, highlighting the durability of our business across different credit and interest rate environments. Consistent with our ongoing messaging regarding the importance of earnings one's cost of capital, our 2025 net income ROE and economic return both exceeded our estimated cost of equity of 9%.

It's hard to have a thoughtful conversation about the market today without spending real time on enterprise software and the impact of AI. So we're going to address this directly in our prepared remarks. We've been thinking deeply about these issues for quite some time. And consistent with our investment framework. We have taken a forward-looking approach in how we underwrite and manage risk.

Longtime followers will know that our team has been investing in technology-related businesses for more than 2 decades, and we've navigated multiple periods of significant change. In each case, there were predictions of the demise of incumbents or the erosion of margins. With hindsight, those shifts tend to expand addressable markets, and create opportunities for those who could distinguish between durable and fragile business models. That insight is where we will focus our commentary today. What we're not going to do is resort to (inaudible) about the portfolio or describe our performance with words like impeccable.

We generally find that kind of language not particularly credible because credit outcomes are always idiosyncratic. More importantly, this is not about congratulating ourselves on the historical performance, which has been good from a credit lens, and is [crudely] reflected in the cumulative net realized gain and loss metrics in our financial statements. Our job is, and has always been, about the forward. It's about how business models evolve from here under a new cost curve in a different competitive landscape. Throughout cycles, we have maintained an intensive focus on the durability of business models grounded in deep understanding of specific business unit economics, sector-specific ecosystems, valuation discipline, in the resulting margin of safety embedded in our investments.

The reality is that capital is never a long-term moat for our business. It's merely a tool. At its core, AI levels (inaudible) for additional competition because the cost curve is shifting down. Capital in tenency was never the primary barrier to entry for a business and replacement cost is not a concept we have ever felt was applicable in assessing the intrinsic value of a software company. So rather than AI bridging a moat that protected businesses in their margins, we see AI is leveling the playing field on development costs that does not fundamentally change the intrinsic moat that protects a business.

Existing enterprise software companies should benefit from this shift in the cost curve if they are well managed and have limited technical debt. They can use these tools to accelerate product development and enhance their value proposition. The moats and software are what the customer is actually purchasing as a product. A single source of truth, ongoing maintenance and customer service, security, governance and compliance, and often transaction enablement. In many ways, these customers are also effectively purchasing an insurance policy.

A guarantee these tools will work reliably for mission-critical applications where the cost of failure is far higher than the cost of the software. The vast majority of our portfolio companies today have a massive incumbency advantage. They own the distribution, they own the customer relationship, and they possess deep domain expertise. These moats, data integration, network effects and regulatory complexity are incredibly difficult for a new entrant to come in and displace, even in a world where it is faster and cheaper to write code. If we did our job correctly, we ignored purchase prices and market valuations, and looked at how durable the business model was to support the credit thesis.

This has always been our lens. As credit investors, we don't participate in the growth or the upside of equity valuations. We are focused on the durability of an asset in its cash flows. We are not saying that tails might not be wider on the margin for field prepared business models and management teams. But generally, we think this is an equity valuation problem.

We believe many software businesses will likely have less pricing power given the change in the cost curve, and therefore, may see less revenue growth. Less growth means fundamental valuations of these assets is lower, but that doesn't mean they aren't generally credit worthy. If you look at the credit spreads since the beginning of the year of public enterprise software companies, and how little they have widened about 10 to 20 basis points on average, compared to the compression in the TEV multiples about 2 to 3 turns, or about 15% on average, it illustrates this point. For more levered private software companies, we see broadly syndicated loan spreads about 50 to 100 basis points wider versus the beginning of the year. The market is rerating the equity risk, but the credit remains resilient.

By focusing on the most that drive durability, we assess not just where the business stands today, but how well it is positioned to withstand even the benefits from AI-driven change. With some credit investors focused on historical results, our underwriting has been forward-looking from day 1. This emphasis on future durability, rather than tax performance, is a core differentiator in our investment process and underpins our confidence in the resilience of the businesses within our portfolio today and in the future. Turning to our portfolio in aggregate. Our borrowers continue to demonstrate strong credit statistics, characterized by consistent revenue growth and expanding EBITDA margins.

As of year-end, the weighted average LTV within our portfolio company was approximately 41%, remaining broadly stable year-over-year as steady earnings growth offset lower equity valuations in the broader market. Our view of LTV is based on our own fundamental valuation of these companies which incorporates the rerating of enterprise values to reflect current market conditions. We believe the resilience of our portfolio reflected in LTM revenue and earnings growth rates of approximately 9% and 12%, respectively, for our core portfolio companies is a testament to our disciplined allocation of capital and our ability to apply a (inaudible) asset selection across market environments. We understand many of our peers map the industry exposure differently from us with a specific software classification, which is intended to illustrate enterprise software exposure. We do not view software as a stand-alone industry, but instead, we view it as a mission-critical tool that enables a broad range of end user markets.

For that reason, our industry disclosure is organized by end market, such as health care, business services and financial services, rather than by specific products or delivery mechanisms used to serve those markets. We believe this is a better approach to risk management. As the primary driver of credit performance is a health and demand of the end markets being served rather than the technology used to deliver the service. At this moment in time, however, we felt it beneficial to our stakeholders providing a more comparable figure to our peers. We have mapped our portfolio to enterprise software exposure, which comprises approximately 40% of our total portfolio by fair value.

The credit statistics of this portfolio are largely consistent with the overall portfolio, including a weighted average LTV of 40%, LTM top line growth of approximately 9%, and LTM earnings growth of approximately 15%. As we've said for several quarters, we've remained disciplined in our credit selection in what has been a tighter spread environment. Periods of market volatility and uncertainty (inaudible) to our strength, and we would love to see an environment where we can put more capital to work. We ended the year at 1.10x debt to equity, positioning us with $246 million of investment capacity before we reach the top end of our target leverage range. This compares to ending leverage of our peers in Q3 of 1.22x near the upper end of the target range for BDCs.

Our liquidity represented approximately 3% of our total assets. And we had nearly 6x coverage on our unfunded commitments available to be drawn by our borrowers based on contractual requirements in the underlying loan agreements. This compares to a peer median of approximately 2x as of September 30. Our robust liquidity, combined with our capital available, means that we have substantial investment capacity and flexibility during these uncertain times. Further, our capital base is permanent in nature.

As noted in our November shareholder letter, unlike other structures of BDCs, we are not subject to redemptions or outflows and believe as a result, we are able to take advantage of opportunities created by market dislocations. These times of market volatility have been the environments where we have shown that the Sixth Street platform excels and create shareholder value. There is significant change happening in our ecosystem, and we have always performed better on a relative basis in changing in dynamic environments. Our expertise spans [affirm], from our investing teams across direct lending, growth, digital strategies and infrastructure, to our technical leadership of our engineering team and Chief Information Officer, alongside our Vice Chairman and pioneering AI Strategist, [Martin Chaves]. Ultimately, we believe that as the market enters a more complex era, we remain uniquely positioned to lean into volatility and extend our track record of outperformance.

Moving back to our financial results. Reported net asset value per share at year-end was $16.98, compared to $17.11 in Q3, and $17.09 at year-end 2024. The latter two, after giving effect to the supplemental dividends declared for those periods. Factors contributing to net asset value movement during Q4 includes the over-earning of our base dividend through net investment income, which was offset primarily by the reversal of net unrealized gains from investment realizations during the quarter. The impact of winding credit spreads on the valuation of our portfolio [and] portfolio specific events.

Ian will discuss movements in net asset value in further detail. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of March 16, payable on March 31. Our Board also declared a supplemental dividend of $0.01 per share relating to our Q4 earnings to shareholders of record as of February 27, payable on March 20. The supplemental dividend was capped at $0.01 per share this quarter in accordance with our distribution framework. As a reminder, we limit the payment of supplemental dividends such that any decline in net asset value over the preceding two quarters, inclusive of any supplemental payment, does not exceed $0.15 per share.

We have maintained this framework since we declared our first supplemental dividend in 2017 to prudently retain capital and stabilize net asset value in periods of market volatility.

With that, I'll now pass it over to Ross to discuss our market outlook and summarize this quarter's investment activity.

Thanks, Bo. I'd like to start by layering on some additional thoughts on the direct lending environment and more specifically, how we are positioned for the opportunity set we are anticipating this year. Our base case is that the investment environment for 2026 will be characterized by the continued imbalance between the supply of private capital and the demand for financing, resulting in sustained levels of competition and tight spreads for regular way on the run transactions. In contrast to what is implied by terms across our market, we believe that asset selection today remains complex. Fluctuating macroeconomic conditions, geopolitical paradigm changes and rapid technological advancements create significant cross currents.

With this backdrop, we remain focused on driving investment activity through our differentiated and thematically oriented originations engine, and our deep underwriting capabilities, in each case, leveraging unique capabilities from across the Sixth Street platform. Our asset selection prioritizes businesses with positions in their value chain and resulting unit economics that are robust in the face of potential headwinds. Additionally, we remain focused on thoughtful structuring and deal documentation, providing us with the tools to actively manage credits during our investment period to preserve capital and generate incremental economics for shareholders. While we remain highly selective in investing capital, we see two potential upside nodes for accelerated originations. The first is capitalizing on generalized market volatility to finance businesses in which we have high conviction at attractive risk-adjusted returns.

By maintaining a strong balance sheet through the cycle, we are well positioned to be a capital solutions provider in times of uncertainty. The second is an acceleration in the market correcting rebalancing of capital. As noted in our November shareholder letter, we anticipated higher redemptions from non-traded BDCs, which began to materialize at the end of 2025, and view this capital reallocation as a healthy development for the ecosystem. While we expect this rebalancing to extend over a prolonged period, we recognize that this trend may accelerate given less predictable retail capital flows. We are pleased with our level of originations to close out a strong year for funding activity.

In Q4, we provided total commitments of $242 million and total fundings of $197 million across 5 new portfolio companies and upsizes to 4 existing investments. For full year 2025, we provided $1.1 billion of commitments and closed on $894 million of fundings. To characterize our funding activity in Q4, 97% of our investments were in first lien loans, underscoring our commitment to investing at the top of the capital structure. All 5 new investments were cross-platform transactions where we leveraged the expertise of Sixth Street's investment teams to execute on opportunities that offer compelling risk-adjusted returns. During the quarter, we further diversified our end market exposure with five new investments spanning four distinct industries.

On funding trends for the year, nearly half of fundings were off the run in what we consider Lane 2 challenged businesses with good asset bases, and Lane 3, good businesses with challenged capital structures. We also had an approximately even split in 2025 between sponsor and non-sponsor investments, highlighting the importance of our thematic investment approach in sourcing across both of these channels. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost decreased quarter over quarter from 11.7% to 11.3%, with the majority of this decline, or 33 basis points, attributable to lower underlying base rates. Despite market credit spreads remaining tight from a historical perspective, we continue to maintain discipline and focus on transactions with economics that over earn our cost of capital. This is evidenced by weighted average spreads on new investments that were abandoned within a 30 basis points range across all four quarters of the year.

In Q4, our weighted average spread on new investments was 691 basis points, which compares favorably to the 551 basis points reported by our public BDC peers in Q3. Moving on to repayment activity. We experienced a moderate slowdown in payoffs during the fourth quarter to finish off a record year. Total repayments in Q4 were $235 million across eight full and two partial investment realizations. Total repayments were $1.2 billion for the year, representing the highest annual repayment activity since inception.

In 2025, portfolio turnover was 34%, well above our three-year average of 22%. This significant volume of repayment activity contributed to $0.64 per share of activity-based fee income in 2025, representing the highest level of fee income since 2020. Refinancings were the dominant theme during the fourth quarter, driving six of eight repayments in our portfolio. Four of these six were refinanced at lower spreads, including one in the BSL market, and three in the private credit market, highlighting the realization of our investment [thesis] as these credits improved during our hold period. The other two resulted in the repayment of our existing investment, followed by the opportunity to continue lending to the business through a new money term loan.

As evidenced by this quarter's activity, we will continue to selectively participate in refinancings where we believe the investment represents an appropriate use of capital for our business, and where we can leverage our expertise into uniquely insightful underwritings. Moving on to credit statistics. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.3x, respectively, with weighted average interest coverage of 2.1x. As of Q4 2025, the weighted average revenue and EBITDA of our core portfolio companies was $449 million and $127 million, respectively. Median revenue and EBITDA were $159 million and $48 million.

Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.13, on a scale of 1 to 5, with 1 being the strongest, compared to last quarter's rating of 1.12. Our very limited exposure to a second lien term loan in [Alkagen], which we acquired as a de minimis position was added to nonaccrual status during the quarter, representing 0.01% of our total portfolio by fair value. Total nonaccruals remained unchanged at 0.6% by fair value as of December 31.

With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. In Q4, we generated net investment income per share of $0.53, resulting in full year net investment income per share of $2.23. Our Q4 net income per share was $0.32, resulting in full year net income per share of $1.81. We experienced an unwind of $0.05 per share of capital gains incentive fees in 2025 and resulting in adjusted net investment income, and adjusted net income per share for the year of $2.18 and $1.76, respectively. At year-end, we had total investments of $3.3 billion total principal debt outstanding of $1.8 billion, and net assets of $1.6 billion, or $16.98 per share, which is prior to the impact of the supplemental dividend that was declared yesterday.

Our ending debt-to-equity ratio was 1.1 times, down from 1.15 times in the prior quarter. Our average debt-to-equity ratio increased from 1.1 times to 1.17 times quarter over quarter. Ending leverage was lower than average leverage during Q4, driven by the timing of repayments occurring near quarter end. For full year 2025, our average debt-to-equity ratio was 1.17 times , down slightly from 1.19 times in 2024. We continue to have ample liquidity with approximately $1.1 billion of unfunded revolver capacity at year-end against $199 million of unfunded portfolio company commitments eligible to be drawn.

In terms of upcoming maturities, we have reserved for the $300 million of 2026 notes due in August under our revolving credit facility. After adjusting our unfunded revolver capacity as of year-end for the repayment of the 2026 notes, we continue to have significant liquidity that exceeds our unfunded commitments by 4.2 times. We remain focused on our established cadence in accessing that market annually to maintain our funding mix.

Pivoting to our presentation materials. Slide 10 contains this quarter's NAV bridge. Walking through the main drivers of the change in net asset value, we added $0.52 per share from adjusted net investment income against our base dividend of $0.46 per share.

There was a $0.10 per share decline in NAV from the reversal of net unrealized gains from paydowns and sales, the impact of widening credit spreads on the valuation of our portfolio had a negative $0.03 per share impact to net asset value. Other changes included $0.04 per share increase in NAV from net realized gains on investments, and a $0.12 per share reduction to NAV primarily from unrealized losses from portfolio company-specific events. Moving to our operating results detail on slide 12. We generated total investment income of $108.2 million, down slightly compared to $109.4 million in the prior quarter. Walking through the components of income, interest and dividend income was $95.5 million, up from $95.2 million in the prior quarter.

Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were also higher at $10.9 million compared to $6.8 million in Q3, driven primarily by prepayment fees earned on our investments in (inaudible) and Arrowhead. Other income was $1.9 million, down from $7.4 million in the prior quarter. Net expenses, excluding the impact of the non-cash accrual related to capital gains incentive fees were $58.2 million, down from $58.4 million in the prior quarter. Our weighted average interest rate on average debt outstanding decreased from 6.1% to 6.0%. This was the result of a decline in base rates quarter over quarter.

As a reminder, our liability structure is entirely floating rate, which means our cost of debt will move in the same direction as interest rates. Included in our earnings release yesterday, was the announcement of the formation of Structured Credit Partners, or SCP, a joint venture between both BDCs managed by Sixth Street, and two BDCs managed by the Carlyle Group. The investment objective of the JV is to invest equity into newly issued broadly syndicated loan CLOs managed by Sixth Street or (inaudible).

By combining the investment capabilities of both platforms, this partnership enhances diversification and expand investment flexibility for SLX. We believe the unique structure will be highly accretive for earnings providing access to a core Sixth Street competency in a fee-free format, as SCP will not charge any management or incentive fees on the underlying CLOs or at the joint venture level. We believe SCP will generate returns in the mid-teens on capital invested, which will be accretive to our overall asset level yields. SLX's total commitment to the joint venture is $200 million.

Looking ahead to 2026. We continue to focus on the evolution of the interest rate environment and new issue investment spreads, and their combined impact on normalized earnings. As a core tenant of our dividend framework, we established our base dividend level using the forward interest rate curve to assess durability through cycles.

As it relates to new issue investment spreads, our disciplined capital allocation and focus on asset selection can alleviate pressure from compression under various competitive environments. Based on that assessment, we believe the earnings power of our portfolio remains well aligned with our existing base dividend. We believe the anticipated returns from our newly established JV will also provide support to our earnings profile. Based on our model, which incorporates the forward curve, reflects leverage in the middle of our target range and assume spreads on new investments remain broadly stable, we expect to target a return on equity on net investment income for 2026 of 11% to 11.5%. The lower end of this range reflects normalized activity-based fees, while the upper end reflects activity-based fees above our three-year historical average.

Using our year-end book value per share of $16.97, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $1.87 to $1.95 for full year 2026 adjusted net investment income per share. At year-end, we had $1.21 per share of spillover income. We will continue to monitor this figure closely as part of our ongoing review of our distribution strategy.

With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. I'll close by tying together a set of themes we've been consistently communicating in our shareholder letters and on recent earnings calls. For several quarters now, we've been very vocal that the sector has been over allocating capital into a tighter spread environment. We've also been clear that as reinvestment spreads compressed and the forward curve rolled over, rate curve rolled [over, our] sector ROEs would come down. While net investment income may decline slightly further based on the current shape of the forward curve, we believe we are (inaudible) trough earnings for the space, absent any care losses.

As anticipated, the natural outcome of this misallocation is a reallocation of capital. We believe that the market is in the early innings of a gradual market cracking rebalancing. As Ross mentioned, this began to materialize in December with a meaningful increase in redemptions from the perpetually offered nontraded BDC vehicles. Over time, we expect capital to migrate towards managers in structures that can consistently earn their cost of capital and away from those that cannot. Should we see capital continue to pull back, whether due to generalized AI fears, or broader macro uncertainty, we are very well positioned with significant liquidity and a robust balance sheet to capitalize on the opportunity set.

These periods of market retreat and heightened volatility represent the greatest environment for SLX to fully leverage the breadth and depth of the broader Sixth Street platform. Our firm's extensive sector expertise, flexible and diverse capital base and integrated investment capabilities enable us to provide differentiated bespoke capital solutions. Coupled with our technical underwriting and thematic investment approach, this unique combination has historically allowed us to outperform during periods of market instability or uncertainty.

Our average net income ROE during years of heightened volatility has been nearly 14%, outperforming the average net income ROE of our peers during that period by over 600 basis points, and our own average ROE in more benign periods by 200 basis points. Should the investment environment present a similar opportunity, we have the necessary resources and structural advantages to generate differentiated risk-adjusted returns and create lasting value for our shareholders.

With that, thank you for your time today. Operator, please open the line for questions.

(Operator Instructions) Brian McKenna, Citizens.

So just my first question, how much of the portfolio has turned over since 2022? And then if you look at the mix of loans today, what year or two where the majority of these assets originated in?

Sure. Thanks for the question, Brian. So as we've stated before, we have less exposure to pre-2022 vintages than our peers. I think today, we sit at about 20% to 25% of NAV. The vast majority of our portfolio, we originated post the rate hiking cycle in 2023 and 2024.

We've been less active of late as the markets have gotten tighter. But yes, so about 20% of NAV before 2022, which is much different than our peers.

Okay. That's helpful. And then, I guess, somewhat of a related question. I appreciate all the detail on software and how Sixth Street is thinking about the sector and really where we go from here. But I think what the market might be missing is that there's going to be a very large new set of deployment opportunities, really across a number of sectors over time in and around what's happening with AIs.

So thinking through how you invest and why, and I know you're thoughtful about that. But I would just love to get your thoughts on how you see the deployment environment evolving here over the next few years? And really what this ultimately means for the evolution of your portfolio?

Yes, sure. It's a great question. Look, I think, first of all, we did try to provide a framework of how we're thinking about the sector given a lot of the noise related to enterprise software and its effect on direct lending, and its effects on portfolio. Hopefully, people found that helpful. It sounds like [you] did.

What I would tell you is we're thematic investors here at Sixth Street and have always been. And the great thing about being thematic investors, themes rotate often. 18 to 24 months is a general gestation period of a theme, and we're constantly rotating across the platform on a relative -- looking at things on a relative value basis to find the best risk-adjusted return and define those durable moat businesses that we talked about in the earnings script. We've never thought of software as a sector. And as such, we've always had rotating themes in and out of the sector.

And I think that's really important because over the past two to three years, our team has been focused on the impact that AI have on the ecosystem and where businesses are going. And we've been rotating our capital to those businesses that we think are going to be the beneficiaries in the future. Those are the ones that I talked about that have the strong moats that are able to invest in product and what we ultimately think will expand the TAM of the market. So we're pretty excited about that. On top of what we think is going to be a misunderstanding generally, and we're seeing that already of the threats and the opportunities.

I want to be clear, we think there's going to be winners and losers here. There's going to be businesses that are fragile that will, over time, be disintermediated by AI. But there's going to be businesses that are systems of record that have strong data moats, most importantly, own their customers that are going to be able to invest in product and drive TAM. And we're looking forward to being providers of capital to that -- to those winners.

Finian O'Shea, Wells Fargo Securities.

I'll move over to the JV. Will these look like more BSL, CLOs, just sort of true third party that you and [Carlyle] already have big platforms in? Or is this something like more of a typical JV where it's a little more senior-type direct lending, or you're selling stuff down to it from the book as it matures?

Good question, Fin. I'm going to address at the -- just what the criteria it was for us to invest in this JV, and then pass it over to Ross and Ian, who actually were very instrumental in working through this for that question. I think it's a very good question.

But the two important criteria is it has to be clearly accretive to our shareholders on a returns basis and on a relative value basis to other options that we see. That's one. And then two, it has to overlay with the core competencies of our platform and what we do well here at Sixth Street. And this hits both of those. Ross, do you want to address Fin's question directly?

Sure. Thanks, Fin. So in terms of the underlying collateral, these will be broadly on CLOs. We don't anticipate the CLOs holding private credit either originated by us, or third parties. And we'd expect that on the liability side, they be financed like traditional PSL CLOs, as you mentioned, that ourselves and Carlyle already have large platforms originating and managing.

The main exception to third-party CLOs will be there'll be no management fees at either the CLO or the joint venture level, a typical third-party CLO fees are 40 to 50 basis points of assets, or about 400 to 500 basis points to the equity. So that's the real differentiator in driving accretion for shareholders of the BDCs that are participating in the joint ventures.

Great. Thanks, Ross.

Okay that's helpful. Sorry, Ian, were you going to --?

Nope.

Okay. What about like -- you already -- I missed the number. I'm sure you said it on spillover, but it's something reasonably high. How do you address the spillover problem that sort of true BSL, CLO equity brings?

So it's a good question, Fin. I think we've made the comment multiple times about monitoring spillover income. And it's something that we think about deeply about how we can generate the best return on shareholder value, taking that into account. There's not one factor that matters the most, but we take them all into account, including where we're trading, how much of that still over needs to be distributed in the near term, what our prospects for over earning are? Your point is a really good one on the BSL side.

I think just to address that more directly. It's going to take us some time to ramp the JV. So we talked about a commitment of $200 million. That's not investing $200 million today. So this is not going to create an impact on spillover income in the next quarter, the next two quarters.

This is going to be something that happens over time. And as you saw, spillover income can move quarter-to-quarter. Our supplemental dividend framework was really designed to help us manage that without sacrificing stability in NAV. So it will be something that we will develop, and we'll be monitoring that as we go. But I don't have a specific answer on whether that changes our approach. I think it just goes into another factor that we included in our assessment.

Why will it take a lot of time for operational reasons, or because you want to -- the (inaudible) is a really tight kind of thing and you want to manage it to that?

Well, just think about the general sequence and cadence of CLO creation, we're not looking to create a CLO with, in our case, $200 million equity commitment today. That's going to allow us to create multiple CLOs.

Arren Cyganovich, Truist Securities.

I was wondering if you could talk a little bit about the investment pipeline and some of the disruption that we've seen from the public software space, and if that's impacting any of your deals? I know it's quite early thus far, but just curious if you've had any conversations with sponsors?

Well, actually, we've had a lot of conversations over the last few weeks as you'd imagine, with sponsors. I think sponsors are trying to understand the landscape of who's going to be providers of capital in this market and who is not. I would say it's too early to see if there's going to be a pickup in pipeline from this disruption. I think we're well suited, as I mentioned, in the script to take advantage of any dislocation. These dislocations are really what our platform is built for.

So we stand ready and able to take advantage of that. As far as the generalized pipeline, I think the pipeline is decent. We have good activity in Q4 as you saw a pickup in M&A activity, particularly on the sponsor side. Last year, our non-sponsor to sponsor origination was around 50-50, so 50% non-sponsor versus sponsor. We were certainly focused on origination away from the regular channel as allocation to -- we were allocating our capital to transactions that we believe earned our cost of equity.

But we're encouraged by the pipeline. Certainly encouraged if this dislocation continues whenever there's a lot of uncertainty, that's the period that we generally step in and take advantage of.

And then the unrealized losses were -- they weren't too high, 1% impact to NAV. What was driving some of those impacts to your portfolio companies?

Yes, sure. So this is Ian, Arren. There was about $0.03 per share was attributable to spreads. And then on the credit side, there were some specific reversals of [carats], which is a public equity name that we hold, the market price at [9.30] was higher than what it was at [12.31]. So that creates a reversal of previously unrealized gains.

And then there was an impact from a restructuring at IRD and a couple of other portfolio companies that were less impactful individually.

Ken Lee, RBC Capital Markets.

Just one on the SCP JV again. I wonder if you could just talk a little bit more about some of the motivations here. Are you seeing particular opportunities within the BSL markets? Just wanted to flesh that out a little bit more.

Yes. Ken, this is Ross. So I mean, to echo Bob's comments, we are constantly on the lookout of how we can leverage core competencies of the Sixth Street platform for shareholders. As you know, we've leveraged the expertise of our structured credit platform for some time now, investing in CLO debt with a very strong track record in that asset class. And so we've been thinking about ways to do more beyond CLO debt and we developed this structure, which Carlyle happened to be kind of considering on their end simultaneously.

And so the motivations are we think the risk return generated by fee-free CLO equity is really attractive within a portfolio context for SLX. It's not so much picking a specific market environment in which we think the [RF] is more attractive or less attractive. The idea as Ian alluded to, is that we're going to deploy this equity capital sequentially in CLOs over time, creating very high diversification across borrowers and across vintages. And so those are some of the key motivations.

Got you. Very helpful there. And just one follow-up, if I may. I wonder if you could talk a little bit more about what you're seeing in terms of spreads on new investments. There's a little bit of a delta (inaudible) but just wondering whether is driven more by mix rather than any kind of spread compression widening.

Yes. Generally speaking, we've seen spreads pretty stable throughout the course of 2025 and expect that in 2026. We took maybe a bit of a pickup given the broader markets recently. But [any] -- I think we were within a 50 basis point band, across the four quarters last year. Again, speaking to the breadth of our platform and our ability to find things off the run thematically.

But broadly, we see stability. We don't -- we're not anticipating any real change in that going forward. Our hope is capital continues to reallocate in the sector, that spreads will continue to widen a bit, but we haven't seen that as of yet.

Sean-Paul Adams, B. Riley Securities.

Could you provide just a little bit more color on the restructuring for IRG Sports?

Yes, I'll take that one really quickly. IRG Sports is a business that we've been investor in for 8 or 9 years now, I believe. We concluded the sale of one of the operating assets during the quarter. That was actually above our NAV. We have been in process of marketing and selling the other operating asset.

We have marked that to what we believe is the midrange of the bids that we have today and feel good about that. Hopefully, may actually do a little bit better than that.

Paul Johnson, KBW.

Most of mine has been asked. But I am curious, though, on the 40% software exposure, where has that gone over time? Has that come down? Or has that been pretty consistent over time? And just based on current market conditions, I guess, where would you expect that to trend to just with your pipeline and your selectivity, I guess, currently?

Yes. So I'll take that, given that we've always mapped to the end market, and I think we've provided a framework why we think that's the right way to think about risk because that is ultimately what you're underwriting. We don't have historical statistics. We actually took a look at the portfolio and wanted to provide some clarity given the market context and mapped the portfolio to broadly what we believe people -- how people in the space are defining enterprise software. What I would say anecdotally, I would believe that has come down marginally over the past couple of years, in part because we were seeing a decline in unit economics across the software space post the COVID pull-through of demand.

And I think that's one of the things that's really important to note that people are losing sight of is that valuations of software companies are coming down in part because unit economics are slowing. There's a little bit of cannibalization of AI budgets in enterprise software budgets that are costing some of that. There's not disruption and dislocation from AI taking market share yet though. But as we saw unit economics coming down and frankly, more capital in the private markets, which are over-indexing probably to software and certainly private credit to software. We were just less competitive in the regular way (inaudible) financing for software companies.

A lot of the businesses that we did invest in, in the software space over the last couple of years, we're off the run direct to company or very thematic in some of the areas that we were rotating to. So I don't have the exact numbers because we've never tracked it that way. What I would tell you is, anecdotally, it has come down marginally over time because we were less competitive. As far as future, we're going to we're going to invest where we feel we can invest in defensible businesses that meet our criteria. I'm hopeful on the margin that we're more competitive in the regular way financings for the winners in the future, but that will remain to be seen.

Rick Shane, JPMorgan.

Look, I'm going to start with a strange comment. Jill Morgan used to say that the difference between a five run lead and a four run lead is more than one run. I would argue in the BDC space trading at a 15% premium to NAV and trading in the 5% discount to NAV is more than a 20% differential. You guys are one of the few BDCs that enjoys this advantage. You're not in a position right now where you need additional capital, but that advantage is (inaudible).

You do have a maturity, a bond maturity, or no maturity coming up this year. Can BDC's issue converts, and is that a way for you guys to sort of lock in that advantage, and also get ahead of your maturity?

Rick, it's Ian. And first of all, welcome back to this forum. You're probably familiar with from your previous (inaudible), we have issued converts in the past. We did it at a time where the unsecured market was not well developed. And since we've experienced those maturities of the converts that we previously issued, that market has become a lot more supportive of the space, providing cost of debt that's pretty competitive.

To answer your question directly, we do consider converts. We get pitched by the bankers that cover us quite regularly with new ideas, converts being one of those ideas. And we consider that on a quantitative basis against the cost of debt that we see in the regularly unsecured market. So we just view that as another alternative financing tool available to us, and we assess it on its merits.

Got it, Ian. And yes, I have to admit. I was kind of trying to rack my brain whether the BDCs can issue converts. So thank you for that. Again, sort of getting back to this competitive advantage that you enjoy in terms of your multiple and cost of capital.

We all know how this works, which is that there will be a time where you guys want to put capital to work. You have that opportunity, but there is no way to ensure that, that advantage will persist. How do you think about locking that in right now when most of your peers can't take advantage of that multiple?

I think the way we think about it is on a broader liquidity perspective, but we have to marry that with the opportunity set in front of us. So we're not going to run with so much excess liquidity that it becomes a drag on earnings. We actually think that we have a very strong liquidity position today. Bo mentioned in his earlier remarks that one of the levers that we have is that we can take leverage up. We're only at 1.1x.

So we have capacity on leverage today before we get to the upper end of our target range.

I know your question is focused on how do you lock it into that today? I think we're focused on providing a more durable business model. And if you look at our history as a public company, since we went public 12 years ago, we've traded at a premium for 98% of the trading (inaudible). So we've had that opportunity to lock it in. As you say, but we've always in mind on just being efficient with capital.

Yes. I mean, the only thing that I'll add is by focusing on the shareholder experience and allocating capital to credits that earn our cost of equity and really focusing deeply on the quality of our underwriting and our loan management. Ultimately, that has allowed us to trade above NAV in periods of dislocation and always be able to take advantage of of markets. And that's our North Star. It will continue to be our North Star, and I think we'll be rewarded with that when we need it.

No. It's interesting looking back through our model that goes back all that way. It's clearly true. The asset selection focus has not changed here. It is interesting, I think -- also 2025 was the first year where you actually had -- where paydowns exceeded fundings.

At what point -- I mean how long are you willing to let the runoff continue? Do you see an inflection point approaching, or given where spreads are and liquidity, even though private credit is paying down a little bit, the liquidity that's in the market, how big an impediment is that in the first half of '26?

Look, we're always going to size the portfolio to the opportunity set in the market. We can't control payoffs when markets tighten up. That's why we structure things with call protection and capture fees. Those fees drive income in periods of heightened repayment activity. The great news is we have a very strong originations engine that can originate things away from regular [weight] deals.

We proved that last year. We had a great origination in the year. But again, we're always going to allocate capital to the opportunity set. And we just don't think of the world in terms of how do we control repayments, we don't control repayments. We have call protection in our names most generally.

But if markets tighten and irrational, we don't control that.

Robert Dodd, Raymond James.

I've got some questions about the JV, but I think I'll follow up with you on those. On the spread question going forward, if I can. I mean in your guidance, and you kind of -- prepared remarks, you're saying you expect (inaudible) spreads to remain tight. So does that mean that you think that the market AI software concerns are going to blow over rapidly? Because, obviously, right now, software spreads in the liquid market.

Obviously, we don't want to see them in the private credit market yet. But those are 150 basis points wide give or take. And that's not just the explicit software (inaudible) healthcare IT, anything where software is the product spreads are materially wider, but you expect them to, maybe, tight for the year. So can you reconcile (inaudible)? Do you expect it to blow over?

Or how do those two things align?

Thanks for the question, Robert. Look, our base case coming into the year is that the credit spreads are going to be stable and not increasing. What I would tell you is it's too early to tell if the dislocation recently in software and in the BSL market. And I think for performing BSL for software names that we said in our script, is closer to 50 to 100 basis points. I think you're quoting more broadly software and some of the more challenged names that (inaudible) out to 150.

Like, overall, that should be support for the ability to find -- to find risk with better spread environment in the past. But I don't think that's our base case now. I think we -- I think the markets are still generally a loss with liquidity and capital, that could reverse, right? We saw redemptions and nontraded BDC sector pick up in Q4. I can't imagine that they're going to slow down any in Q1.

I think -- we think that's a gradual reallocation of capital in the sector, which is healthy. Over the long arc, we believe this space needs to earn its cost of equity, spreads need to widen, that's going to take time. Our base case isn't that they're going to, in the near term, but that could change very quickly. I do think over the long term, they have to.

Got it. One more again. I mean software technology has been a core part of the platform for a considerable period of time. And the personnel background even before that. How long has there been, say, I don't know, an AI risk section in an investment committee memo, or an investment committee meeting?

I mean, it's not like I think AI risk suddenly appeared over the last 3 months. So how long has that been a core part of your underwriting for the software as a product, rather than software as an end market kind of businesses?

We've been thinking about how AI impacts the ecosystem, both positively and negatively, really over the past 3 years. And as I mentioned, working thematically to reposition our portfolio and our new activity to the areas that we think are both most protected and can benefit from those. The other great thing about Sixth Street in our platform is we have a purview of what is going on in the ecosystem. It's not just in direct lending. We have a growth franchise that -- it starts to see businesses just post kind of venture.

And then we have folks that are looking at things in the broadly syndicated market, and also on the distressed market. So we have this perfect current view of what's going on across the ecosystem, and that allows us some early signals of where we should be focusing our capital and where thematically we should be thinking about positioning our portfolio. So it's been for quite some time. Our team has been working on this and thinking through it. And, so.

Brian McKenna, Citizens.

Just two more unrelated questions, if I may. So how much of your software and related exposure is sponsor versus non-sponsor? And then one for you, Ian. When you look back at the last decade as a public BDC, what's been the low end of the initial target range for ROE? What do the operating environment look like during that period, specifically as it relates to base rates and spreads, et cetera?

And then where did the ROE actually come in for that period?

Might be easy if I answer your question to me first. We've provided guidance excluding this year for 2026. We've done it on 11 prior occasions. Our actual operating ROEs have ended up above our guidance range in 8 of those years, and the other three years we've met the midpoint of those ranges. And so that's across a period from 2015 to 2025.

You had different periods where base rates were elevated in 2018, you had some dislocation from energy markets on the broader market in 2015 -- 2014, 2015. You had (inaudible). I'm not as familiar with what our peers do on the guidance side that we have been providing guidance now for -- this is our 12th year of providing guidance.

And then just going back quickly to your question on sponsor versus non-sponsor in the software space. We don't have it broken down for the software space, but I would (inaudible) say that it would mirror the broader portfolio that has traditionally been close to 35% non-sponsor versus sponsor, of course, of late over the last 18 months. That activity has been closer to 50-50.

I'm showing no further questions at this time. I'd like to turn the call back over to Bo Stanley for closing remarks.

Well, thank you, everybody. Thanks for the great questions today and for listening to us. I also want to thank everybody in this room for the tremendous amount of work for -- preparing for this in every quarter, and wish everybody a great long weekend. Thank you.

Thank you for your participation. You may now disconnect. Good day.