Plain vanilla private credit, spreads have definitely trended with the public markets, but our focus in off the run private credit, the capital structure in a solution area and providing capital to less conventional companies. That opportunity set, spreads have remained more consistent. And I think that’s because there’s less competition there and kind of less visibility. So tighter public markets, our private opportunity set has kind of really more or less remained the same. There definitely has been a positive though for our opportunity set from a deal flow perspective. So last year with like an uncertain economic environment, companies, whether they were sponsor-owned, entrepreneur-owned, family-owned, we’re much more cautious on doing things, expanding M&A, acquisitions, whatnot.
With the performance in the market last year and a more benign outlook by many, at least with the markets are pricing in, we’re starting to see activity rev up, and that’s good for deal flows. Our deal flow is up somewhat significantly to start here.
Robert Paun: Great. And the next question, I believe you said 63% of new investments during the quarter were in privately originated investments. Can you talk about why this opportunity is attractive today?
Andrew Beckman: Yes, so I think that dovetails with the first question. And what we’re really seeing is the opportunity set in those niche private transactions. The return premiums there relative to the public markets are very, very significant and that spread has grown as public markets have compressed. We’re seeing better spreads, but we’re also seeing better structural terms and better protections to protect downside through credit documents. When public markets are fraught, the credit documentation is often weak. And that’s the case with the average transaction coming through the public markets right now.
Robert Paun: And just to follow up there, can you talk about how the team sources these private deals? Maybe you can talk about the origination and the due diligence process here.
Andrew Beckman: So our sourcing is a combination of team led sourcing and firm wide sourcing. Our team is up to 21 individuals. So there’s 21 investment professionals focused on the strategy. Each and every professional has a tremendous number of relationships in the industry. We’ve got a CRM where we cover various counter-party management teams, brokers, law firms, advisors, et cetera. And we’re constantly trying to kind of suck deal flow out of those relationships. Many of us have been doing this for north of kind of like 15 years and have a history of doing transactions with these counter parties that just continue to lead to continued deal flow. We combine that team led sourcing effort with a firm wide sourcing funnel. As we mentioned FS is a $76 billion organization with a number of different businesses and tentacles into lots of organizations.
Every business at FS is out essentially trying to help other businesses on their sourcing. So when they’re taking meetings, they’re communicating what other businesses are up to, what we’re looking for, and then just sucking in deal flow. And then deal flow makes it to the relevant group.
Robert Paun: Great. And next question, where in the capital structure are you seeing opportunities today? Is it predominantly firstly in senior secured risk or are you willing to go down the capital structure?
Nick Heilbut: Yes. As the portfolio reflects, we generally prefer being at the top of the capital structure. However, if we can create attractive upside optionality in senior securities, we can leave that as nicely to the funds overall return profile. As the cycle’s been lengthening, we’ve moved up in quality a bit, which has generally resulted in more secured debt. So I’d say, broadly speaking, that’s where we see the best opportunity, though, from time to time. Some de-asyncratic things will show up, that fit really nicely and the portfolio’s complement.
Robert Paun: Great. And next question in the chat. Would you consider investments in the commercial real estate sector, considering the need for many real estate features to refinance in the next few years?
Andrew Beckman: So, yes, the answer is, we would. We have been looking at some opportunities in the commercial real estate space. I still think it’s early in terms of the problems kind of manifesting themselves in that space, as well as valuations being reset. We do have a real estate business at FS. So to the extent we look at real estate opportunities, we try to collaborate with that business to get the institutional knowledge and sometimes specific asset knowledge. I wouldn’t expect it to be a huge portion of the portfolio, but it is an opportunity to take a look at.
Robert Paun: Great. And then in terms of your valuation process, can you provide some color there? Do you use the third-party valuation firm? Any color on the process and how often it takes place would be helpful.
Andrew Beckman: Sure. So as mentioned, and everyone knows, we’ve got public investments and private investments in the portfolio. Public investments are marked using a third-party pricing service. Those instruments are marked daily. Our private investments, we use a third-party valuation firm. And the third-party valuation firm used to provide valuations on a monthly basis. And intermonth, those positions would be internally marked to the extent there was any material events or news flow causing valuation to change. In 2024, the firm is, or the fund is continuing its process on the public side of kind of daily marking those instruments, but we’re moving to third-party marks, third-party private valuations being done on a quarterly basis with internal marks on those positions inter-quarter. We believe that’s more consistent with industry practices and will also lead to some G&A savings for the fund.
Robert Paun: And the next question, curious to your views of the macro environment today. And expectations for the year, where do you see rates headed at the end of the year? Any macro thoughts that your investment team considers when making investments would be helpful?
