We’ve gone from 14,500 banks to a little over 4,000 over the last 30 years. I think recent troubles in the bank sector are going to accelerate that trend. So, partly, we’re going to see lower commercial real estate lending from banks just because there are fewer local and regional banks. And partly, I think local and regional banks are going to respond to the recent events by reducing leverage and by increasing their cautiousness. So, I think there’s going to be a need for incremental lending capital in the space. I think it’s logical to look to the private credit — the real estate private credit segment as a potential source of capital. I don’t think it’s going to be easy because this isn’t just an issue of availability of credit. This is also an issue of creditworthiness.
We’ve got a lot of commercial real estate in this country that is seeing declining rent trends and increasing interest expense trends. And there’s not just a need for more debt capital. There’s going to be a need for more equity capital.
Raymond Cheesman: Thank you very much.
Operator: Your next question comes from the line of Ryan Lynch with KBW. Your line is open.
Ryan Lynch: Hey, good afternoon. I really appreciate all the comments you’ve given on kind of how you guys are viewing your portfolio and the economy as we go through these choppy times. I know each individual business that you lend to has individual circumstances that affect its performance. But I would just love to hear as you kind of take a step back and look at your overall portfolio in the different segments and sectors, are there any sectors in your portfolio that you are noticing having very strong returns in this current environment? And you expect that to continue throughout the year? And then conversely are there any sectors in your portfolio that are noticeably more challenged currently and the expectation is to run into additional challenges throughout 2023?
David Golub: Sure. Good to hear from you Ryan. I’d point to a couple of observations. You’re right everything’s a situation at a granular level, but there are some trends that are visible. One trend — and you can see this in the Golub Capital Middle Market Report numbers for the last several quarters, one trend is — it’s sustained strength in business-to-business mission-critical software companies. And I don’t think this is surprising, right? If you think about these companies, they’re selling services that are aimed at improving the efficiency of their clients. So, as their clients and their prospective clients are under more pressure to achieve efficiencies, it actually drives more business for them. So, I think we’re likely to see continued reasonably strong results in the business-to-business software space.
It’s interesting because that’s not what we’re seeing in consumer-facing software. We’re not meaningful lenders to consumer-facing software companies. But as investors we all know what’s been happening in the large consumer-facing technology sector with companies experiencing falling demand. So, it’s an interesting split between consumer-facing and business-focused software. Second trend I’d identify is in health service — it’s health care services. The companies that are very heavily reliant on Medicare, Medicaid payments and to some degree, those that are focused on payments from insurance companies, they’re seeing a challenge, managing price as quickly as their costs are changing. So in many cases we’re seeing a similar dynamic here. We’re seeing costs go up primarily wage costs because of challenges filling positions.
I think it’s going to get a little easier with the slowing economy but this has been a challenge. And we’re seeing these companies unable to pass through fully those cost increases in the form of higher pricing. And I think we’re going to continue to see some healthcare service firms – it’s not all of them but selectively we’re going to see some continue to struggle with that. They simply don’t have the same pricing power that they wish they had.
