your portfolio as well uh i guess how good of a grasp do you think that you have in terms of um kind of outlining the tail within the portfolio i mean at this point do you think that that detail within the portfolio is is pretty much known or it's still growing at this point i mean it's relatively kind of early on in this normalization process i'm just curious kind where you think the industry is at in terms of the tail that we've seen increasing across the space and then also i guess within gbdc's portfolio thanks paul so i think you're onto some

if there's a critical point for investors and and analysts to focus on right now i think it's exactly where you were headed we're in we're in the credit cycle i've been saying it for a year Others denied it for a while. I don't think there's a lot of denial anymore. We're in a credit cycle. There's elevated credit stress. It's going to result in winners and losers within people's portfolios, and it's going to create winners and losers between different managers because it's during credit cycles that dispersion between different managers becomes really significantly pronounced. So we've already started to see that. I think we're going to see more. One of the patterns that I've seen over 30 years is that some managers do a better job than others in early identification of problems. We're giant believers in early identification of problems. The reason we focus so much on this is that when, in our experience, when you identify a problem situation early, there are just a lot more options that you can explore with a sponsor, with a management team. And when you come into a situation that's problematic late, when there are liquidity issues, there tend to be no good options and a choice between some bad and terrible options. So we're very focused on this early identification. That leads us, I think, to identify our tail earlier than others. It also leads us, I think, to value that tail more accurately because we're on it. um so i i think that's where we're at right now i think we're we're in in in at a phase where we're we're most the way toward you know having identified the the credits in our portfolio that are going to have challenges and i think across the industry there there are others who are who are not at the same phase and and you're going to see that over the course of this quarter and next several quarters thanks for that david it's very helpful um and also i guess in terms of like

the growth that you're seeing because there is still growth you know out there as well of course and um you know it's obviously different across different industries but what is like the quality of growth that you're still seeing within sponsor back portfolios is it you know maybe coming down not as strong as it was but i'd just be curious how much of this is this organic growth versus uh growth that's just you know becoming more challenged and perhaps you know requires more m a to kind of achieve that uh those sufficient growth rates so i think if you look at the cobb capital upland index numbers it's it's instructive vis-a-vis your question paul

what it shows if you look at the the numbers is that we're still seeing a growing economy we're still seeing growth in revenues and in EBITDA in our portfolio companies. The pace of that growth is moderate, especially on an inflation-adjusted basis. It's moderate. It's not as strong as it was in the immediate post-COVID period. It's not bad. It's not recessionary, but it's muddling growth. My expectation is that we're going to continue to see that pattern. There's some outlier events that may occur, including a situation in the Middle East that could drive in a more negative direction. But I see a lot of momentum right now and a lot of resilience in the U.S. economy in this slow to medium growth range. What does that mean for M&A volumes? I think there are a lot of pent-up buyers and pent-up sellers in the private equity ecosystem. What we need is a period of stability, a period where we've got less uncertainty around rates, less uncertainty around energy prices, and we'll start to see a growing degree of M&A, and I think that would be very healthy for the PE ecosystem.

Got it. Appreciate it. Those are all the questions for me.

Your next question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.

Morning, everybody. David, if I can go back to software, I apologize almost for that. I mean, I think three of you knew Nonocruals this quarter were software. Were they all in the group that you would have considered elevated AI risk? or are there other themes also going on in um the the software kind of segment and your software segment is is pretty broad because the way you define it um are there other issues going on there or were all of those issues you precisely just say like going to the table quickly and kind of uh putting them on non-accrual um uh earlier than than um you think some others might be willing to to do?

Look, it's a great question, Robert. I don't think there's ever just one reason for almost anything in life. So I don't want to lead everyone to think, oh, this is all just AI. There are always multiple issues. In some cases, there are acquisitions that have been made where the integration maybe isn't going as smoothly as was expected. It's very difficult to successfully generalize about sources or reasons for underperformance. But I would also say I think AI is and will continue to be a meaningful factor.

Got it. Thank you. The number you gave, I mean, your internal assessment was less than 10% subject to elevated AI risk. And then the third party, I think, was less than three, if I heard correctly. That's a pretty significant difference in terms of the third party being meaningfully more optimistic than your internal assessment, but maybe, hey, credit guys are always pessimistic. So can you give us any, what would they, You gave a little color on it, but I mean, were there significant, is there a theme there on why their analysis, the third party, came out with a meaningfully more optimistic assessment than your own internal review?

I actually view the two much more similarly than you do. I wouldn't get too focused on the difference between these two. We don't have exactly the same grading scale. There's no agreement on here's the basis for making an assessment or here's what exactly the words mean. I think I would take a different conclusion or a different lesson from the two different analyses, which is they're both low numbers. And that's the really important thing, Robert. They're both low numbers. The reality, if you ask me, is that if we looked across the software industry, the proportion of software companies that are going to be vulnerable to AI-related elevated risks, it's a lot higher than what's in our portfolio. Our focus on enterprise risk systems that are deeply embedded in their clients' businesses, that control data, that are systems of record, that are in many cases in regulated industries where security and other issues are hard to manage i mean that's why our software is in good shape it's because of choices that we've made underwriting decisions that we've made over an extended period of time about what what constitutes a gola software credit and i think that's really the key thing i want to i i i i i would like for

for you and others to take away got it got it appreciate that one one more if i can real quick On the dividend in prior quarters, you said you'd revisit the dividend or re-evaluate the policy in context of industry trends, right? Better spreads, moderate base rates. That was the past. Right now, it sounds like spreads are moving a little higher. The forward outlook for base rates might be more up than down or at least stable. I don't think we're going to three SOFA any time soon. but that's, I'm not a rate forecaster. So, would you say, you know, the dividend is always unreviewed, obviously, but do you think there's any re-evaluation is likely to be a more longer term issue if we sit in an environment with a little higher SOFA, a little wider spreads in the short term, the re-evaluation might not be necessary?

So, those are clearly helpful, I mean, higher base rates are good. Higher spreads are good. Whenever we talk about dividend policy, I just want to remind everybody about our approach. And our approach is we want to pay out an amount that is a good distribution for shareholders while at the same time holding a steady nav and not changing our dividend too frequently. So those are all things we need to weigh. And, you know, I'd say the trends in the last quarter were a little helpful on that front. I don't think many of us were expecting the SOFR forward curve to switch directions and has. That's a useful thing from the standpoint of being able to project future earnings power. But it's something we're going to have to continue to watch. It's part of what being a floating rate debt manager involves. You've got to constantly be looking at what's forward earnings power.

Got it. Thank you.

Your next question comes from the line of Ethan Kay with Lucid Capital Markets. Your line is open. Please go ahead.

Hey, good morning, guys. You mentioned some opportunities, I think, in the secondary market here. Can you kind of just help us, help kind of, like, size that for us, how much was done? I guess maybe this quarter wasn't too significant given the overall investment levels, but, you know, is this something that you think there's still opportunity for going forward? And maybe also can you kind of ballpark at what, you know, percent discount some of these purchases were executed? Sure.

So let me take a step back, because this, again, is a subject that's gotten a lot of, in my mind, confusing and misinformation. So there have been a series of articles in the press about how secondary sales of private credit, that this is new and bad. And I want to take the opposite position. I think it's old and good. We've had a desk at Gallup Capital focused on sales and trading of private credit loans for more than a decade. We're a market leader at doing it. This is something that we have been doing a very long time. Why is it good? Well, sometimes in private credit or lending groups, there's a lender who wants to sell. You know, if you think about this in the simplest of context, you know, they have an old fund. They have a desire to rebalance and put their capital in a different place. They have a debt facility that's maturing. They have lost confidence in a sponsor or a sponsor relationship. There are lots of different reasons. And from a borrower standpoint, once there's a lender who wants to sell, their choice is they can either have an unhappy lender in their group or they can have a new lender. We think that it's almost always better for them to have a new lender, and we're in the business of facilitating that. In the process, we also, because of this position we're in as the largest sales and trading party, we also get to see a lot of stuff. And sometimes what we see, we want to buy. In the calendar year to date, the Gallup Capital sales and trading activity has exceeded $2 billion. It's a record first half for us. And across the platform, we've seen some opportunities to buy some loans that we think are attractive. Is it a major part of the platform's overall origination activity? No. The vast preponderance of what we're doing is origination of new loans. But we think it's a meaningful competitive advantage of the platform to have this sales and trading expertise. We think it's good for our sponsor clients because we're able to help them replace unhappy lenders with happy ones. And we think it's good for our investors because it gives us a source of information and opportunities that aren't widely available. For GBDC and calendar Q2, this was not a meaningful source of new investment activity, but I'm glad you raised it because I think it's an example of a competitive advantage of the Gallup Capital platform.

Understood. I appreciate that. And then one more for me. You talked about, in the prepared remarks, some of the kind of reversal of some of the spread-driven markdowns from last quarter. I think we heard from another peer kind of indicate on their call that there was still actually some pressure on their NAV in 2Q from this. I'm just wondering if there's anything, you know, maybe you can point to that might drive that distinction, right? Like, is it perhaps a function of the respective markets you guys, you know, are focused on?

So I don't think we saw a lot of spread-related valuation movement in the portfolio in Q2. I think that was primarily a Q1 event. There was a little bit of bounce back in, what I mean by that is spread tightening in the larger size range of the private credit universe in Q2, but not a lot. the main story was stabilization. So I think what you're going to see across Q2 results in the industry is credit-related valuation changes. And my expectation is we're going to see a bunch of those. That's what happens when you're in a credit cycle.

Got it. Thank you, guys.

There are no further questions at this time. I will now turn the call back to David Golub for closing remarks.

Great. Thanks, everyone, for listening today. As always, if you have a question that we did not cover today or that you think of later, feel free to reach out, and we look forward to talking to you again in a quarter.

This concludes today's call. Thank you for attending. You may now disconnect.