Sixth Street Specialty Lending, Inc. (TSLX) Q4 2025 Earnings Report, Transcript and Summary

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s Fourth Quarter and Fiscal Year Ended December 31st, 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 13th, 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 31st, 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 31st, 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. She has had roles across the Sixth Street platform in both the U.S. 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. His 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 10th 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 are taking a forward-looking approach in how we underwrite and manage risk. Long-time 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 tended to expand addressable markets and create opportunities for those who could distinguish between durable and fragile business models. That insight is where we'll focus our commentary today. What we're not going to do is [ resort ] to [ hyperbole ] 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 clearly 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've maintained an intensive focus on the durability of business models grounded in deep understanding of specific business unit economics, sector-specific ecosystems, valuation discipline and 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 the [ playing ] field for additional competition because the cost curve is shifting down. Capital in tendency 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 and their margins, we see AI as leveling the playing field on development costs that does not fundamentally change the intrinsic moats that protect a business. Existing enterprise software companies should benefit from the 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. I 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 and its cash flows. We are not saying the tails might not be wider on the margin for ill-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 creditworthy. 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 re-rating 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 it is well -- how well it is positioned to withstand even the benefits from AI-driven change. With some credit investors focus on historical results, our underwriting has been forward-looking from day 1. This emphasis on future durability rather than past 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 re-rating 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 nuanced lend to 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 the 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 to provide 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 remain disciplined in our credit selection in what has been a tighter spread environment. Periods of market volatility and uncertainty pay 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 30th. 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 and dynamic environments. Our expertise spans the firm 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 Chavez. 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 2 after giving effect to the supplemental dividends declared for those periods. Factors contributing to net asset value movement during Q4 include 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 widening 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 16th, 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 27th, payable on March 20th. 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 2 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 2 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 (sic) [ $242.4 million ] and total fundings of $197 million (sic) [ $196.7 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 leverage the expertise of Sixth Street's investment teams to execute on opportunities that offered compelling risk-adjusted returns. During the quarter, we further diversified our end market exposure with 5 new investments spanning 4 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 an 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 banded within a 30 basis points range across all 4 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 8 full and 2 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 3-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 6 of 8 repayments in our portfolio. 4 of these 6 were refinanced at lower spreads, including 1 in the BSL market and 3 in the private credit market, highlighting the realization of our investment thesis as these credits improved during our hold period. The other 2 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 non-accrual status during the quarter, representing 0.01% of our total portfolio by fair value. Total non-accruals remained unchanged at 0.6% by fair value as of December 31st. 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, 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 1.1x, down from 1.15x in the prior quarter. Our average debt-to-equity ratio increased from 1.1x to 1.17x 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 1.17x, down slightly from 1.19x 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 4.2x. 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 Merit and Arrowhead. Other income was $1.9 million, down from $7.4 million in the prior quarter. Net expenses, excluding the impact of the noncash 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 2 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 Carlyle. By combining the investment capabilities of both platforms, this partnership enhances diversification and expands 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 tenet 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 assumes 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 3-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 overallocating 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, 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 approaching trough earnings for the space, absent any credit 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 non-traded BDC vehicles. Over time, we expect capital to migrate towards managers and 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.

Our first question comes from Brian McKenna with Citizens.

Okay. 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 2 were 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 AI. 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 the 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 to find 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 2 to 3 years, our team has been focused on the impacts 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.

Our next question comes from Finian O'Shea with Wells Fargo Securities.

I guess we'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 just what the criteria 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 2 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 syndicated loan 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'd 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. In 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.

That's helpful. Sorry, Ian, were you going to. 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. 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 spillover 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 or the next 2 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 -- that 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's just -- it's another factor that we include in our assessment.

And why will it -- will it take a lot of time for operational reasons or because you want to -- the [ ARB ] is 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.

Our next question comes from Arren Cyganovich with 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 and 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 had 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 company?

Yes, sure. So this is Ian, Arren. There was about $0.03 per share that was attributable to spreads. And then on the credit side, there were some specific reversals. So [indiscernible], 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 IRG and a couple of other portfolio companies that were less impactful individually.

Our next question comes from Ken Lee with 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 Bo'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 [ ARB ] 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 quarter-to-quarter, but just wondering whether that's driven more by mix rather than any kind of spread compression or widening.

Yes. Generally speaking, we've seen spreads pretty stable throughout the course of 2025 and expect that in 2026. We hope 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 4 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 as capital continues to reallocate in the sector that spreads will continue to widen a bit, but we haven't seen that as of yet.

Our next question comes from Sean-Paul Adams with 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 an 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 then are 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, it may actually do a little bit better than that.

Our next question comes from Paul Johnson with KBW.

Most of mine have 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 in software companies are coming down in part because unit economics are slowing. There's a little bit of cannibalization of AI budgets and enterprise software budgets that are causing 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 LBO financing for software companies. A lot of the businesses that we did invest in the software space over the last couple of years were 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 are less competitive. As far as future, 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.

Our next question comes from Rick Shane with JPMorgan.

Look, I'm going to start with a strange comment. Joe Morgan used to say that the difference between a 5-run lead and a 4-run lead is more than 1 run. I would argue in the BDC space trading at a 15% premium to NAV and trading at a 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 ephemeral. You do have a maturity, a bond maturity or no maturity coming up this year. Can BDCs 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 experience, 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 the 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 regular way 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, it's been long enough, 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 in 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 days. So we've had that opportunity to lock it in, as you say, but we've always been mindful of 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 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, it 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 the 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. That -- 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 way deals. We proved that last year. We had a great origination 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 are irrational, we don't control that.

Our next question comes from Robert Dodd with 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 remark, you're saying you expect 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 can't really see them in the private credit market yet. But those are 150 basis points wider, give or take. And that's not just the explicit software, health care, IT, anything where software is the product, spreads are materially wider, but you expect them to may be tight for the year. So can you reconcile that for me? Do you expect it to blow over? Or how do those 2 things align?

Thanks for the question, Robert. Look, our base case coming into the year is that credit spreads are going to be stable and not increasing. What I would tell you is it's too early to tell the dislocation recently in software and in the BSL market. And I think for performing BSL for software names, 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 out to 150. I think overall, that should be support for the ability to find risk with better spread environment than in the past. But I don't think that's our base case now. I think we -- I think the markets are still generally awash with liquidity and capital. That could reverse, right? We saw redemptions in the non-traded BDC sector pick up in Q4. I can't imagine that they're going to slow down any in Q1. We think that's a gradual reallocation of capital in the sector, which is healthy. Over the long arc, we believe the 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, if I can. On -- I mean, software and technology has been a core part of the platform for a considerable period of time. And the personnel backgrounds 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 and 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 starts to see businesses just post kind of venture. And we -- 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 purview 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. Yes.

Our next question is a follow-up from Brian McKenna with Citizens.

Just 2 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 did 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 3 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 COVID. I'm not as familiar with what our peers do on the guidance side, but we've 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 venture to 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.