Good morning, and welcome to Sixth Street Specialty Lending, Inc. Second Quarter Ended June 30, 2021 Earnings Conference Call. 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. filings with the Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, the Company issued its earnings press release for the second quarter ended June 30, 2021, and posted a presentation to the Investor Resources section of its website. The presentation should be reviewed in conjunction with the Company’s Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc. earnings release is also available on the Company’s website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today’s prepared remarks are as of for the first quarter ended June 30, 2021. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you. Good morning, everyone, and thank you for joining us. As usual with me today is my partner and our President, Bo Stanley, and our CFO, Ian Simmonds. For our call today, I will review this quarter's results and then pass over to Bo, to discuss this quarter’s originations activity and portfolio. Ian will review our quarterly financial results in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported second quarter adjusted net investment income per share of $0.46, exceeding our quarterly base dividend per share of $0.41. This corresponds to the annualized return on equity of 11%. Adjusted net income per share for the quarter was $0.88, which corresponds to an annualized return on equity of 21.4%. Year-to-date, our annualized return on equity on adjusted net investment income is 12.4%, ahead of our full year target of 11.5% to 12%. And return on equity on an adjusted net income is 22.2%. This quarter’s net investment income reflects continued strength in the core earnings power of our portfolio. The difference between this quarter’s net investment income and net income was due to significantly net realized and unrealized gains on our investments, which Bo will cover. Since these gains resulted in accrued capital gains incentive fees, we have adjusted this quarter's results to exclude the impact of this non-cash expense, which was approximately $0.08 per share. There are a few reasons to do this. To start, the accrual for capital gains incentive fee is a GAAP requirement in quarters where cumulative gains exceed cumulative losses, less previously paid capital gain incentive fees. The rationale is that when these gains become realized, they will be subject to capital gains incentive fees. Note, however, that only a portion of our cumulative unrealized gains at quarter-end would actually be subject to a capital gains incentive fee, if our entire portfolio were realized in normal course, at the June 30 mark. The rest of the cumulative unrealized gains are related to the evaluation of our debt investments, inclusive of call protection. If prepaid, we resolved in the recognition of fees and investment income in trigger reversal previously accrued capital gains incentive fees related to these investments. At quarter-end, we had approximately $0.16 per share of cumulative accrued capital gains incentive fees on our balance sheet. But only $0.04 per share would actually be payable in cash, if our entire portfolio were realized at their quarter-end mark in normal course. A reminder that the calculation of accrued capital gains incentive fees as actually payable to the advisor is done annually at calendar year-end. Capital gains incentive fees would only be payable to the extent our cumulative net realized gains exceed our cumulative net realized and unrealized losses on an inception-to-date basis, less any previously paid fees. All cumulative unrealized gains are disregarded for this calculation since the gains must be realized in order for us to be eligible to receive fees. Therefore, illustratively if we were at year-end today, and calculating the capital gains incentive fees payable based on our Q2 financials, none of our cumulative accrued capital gains incentive fees would be actually payable. Given the capital gains incentive fee accrual creates noise around the fundamental earnings power of our business, we've adjusted our results to exclude this line item. Continuing with this quarter's results, gains on investments drove strong net asset value per share growth of 2.7% quarter-over-quarter to $16.85, up $0.44 per share from Q1 performance net asset value per share of $16.41. If we were to look at the growth in our net asset value since the onset of COVID through today, which would require adjusting for the impact of special and supplemental dividends, we've grown that asset value per share by 12.2% since year-end 2019. From a total economic return perspective, which would factor in the benefit of quarterly base dividends as well, we've generated a return of 26.8% for our shareholders over this time. While we think the challenges of COVID are far from over, we believe our strong results today demonstrate the robustness of our business model and ability to create value across uncertain market environments. Yesterday, our board approved a base quarterly dividend of $0.41 per share to shareholders of record as of September 15, payable on October 15. Our board also declared a supplemental dividend of $0.02 per share based on our Q2 adjusted net investment income to shareholders of record as of August 31, payable on September 30. Pro forma for the impact of the Q2 supplemental dividend, our quarter-end net asset value per share was $16.83. Reviewing our first-half progress, we continue to generate attractive risk adjusted returns by focusing on segments of the market where we believe we have the highest value proposition for our portfolio companies, management teams and sponsors. After experiencing elevated portfolio turnover in 2020, and faced with reinvestment headwinds from falling credit risk premiums and the broader loan market, we're able to grow our portfolio while maintaining stable portfolio yields, and portfolio credit metrics, which Bo will cover in more detail. By remaining disciplined to our specialty lending focus and drawing on the breadth and depth of the Sixth Street platform, we're able to find opportunities where our deep sector knowledge and structural capabilities allowed us to generate our targeted levels of returns for our investors. With that, I’ll now pass over to Bo, to discuss our Q2 originations activity and portfolio metrics.

Thanks, Josh. We had a very active quarter supported by a robust deal-making environment. And against improving macro backdrop, transaction levels were elevated as sellers looked to capitalize on attractive valuation environments, and buyers looked to accelerate growth through strategic acquisition. Meanwhile, sponsors with record levels of dry powder continue to focus on buying and building portfolio companies. With busy activity levels for the first-half of this year, our thematic approach and scale, and resource benefits of being part of the $50 billion plus Sixth Street platform continued to serve as an important competitive advantage. Our thematic playbook allowed our team to efficiently focus on transactions where we have the expertise and the capital base, to provide financing solutions that few other competitors could replicate. In addition, the market insights and resources across the Sixth Street platform, which allow us to provide value beyond capital became an important consideration for our management teams and sponsors looking to successfully navigate today's complex and evolving market dynamics. In addition to the strong originations activity we had in Q2, we also have a strong backlog for the second-half of this year, including agent roles on three large financings that total over $1.5 billion in facility size. As you can expect, we're partnering with our affiliated funds and other managers on these transactions, which provides us the flexibility to determine the optimal final hold sizes for TSLX. This quarter, we had $303 million of commitments and $265 million in fundings across seven new investments, and up sizes to eight existing portfolio companies. As an illustration of the power of the platform, the majority of our new investments were completed in collaboration with funds across the Sixth Street platform, perhaps reflective of broader market trends. All of our new investments this quarter were financed to support acquisitions, or growth. Six of the seven of these were backed by financial sponsors. We continue to execute on our educational technology theme with new first lien term loan investors, Axonify and Modern Campus. Given that we were one of the first lenders to market on this theme, and have significant familiarity with a business model and market dynamics, we’re able to provide speed of execution, and a level of deal structure customization that set us apart from our competition. As for our other new investments this quarter, they all had the hallmarks of our focus on well-managed businesses with mission-critical, deeply embedded, tech-enabled solutions. And they were all sourced through our proprietary origination channels. On the repayment front, activity continued to be relatively muted this quarter at $108 million across two full pay downs in one sell down, which partly reflects the more recent vintage of our portfolio as we began the year. This resulted in net funding activity of $157 million for Q2. The two pay downs this quarter were both M&A driven, and the sell down was our small Neiman equity position at a price above our cost basis, as mentioned on our last earnings call in May. During the quarter, a few of our portfolio companies were in the press following certain milestone events, a couple of which I'll touch upon here. In May, Cares completed a growth equity round at nearly $8 billion post-money valuation, led by Sixth Street’s healthcare and Life Sciences team. Since 2018, TSLX has made relatively small investment in the company's capital structure alongside our affiliated funds and received warrants as part of these transactions. Based on the valuation of Cares' latest financing round, the fair value of our junior debt, warrant and preferred equity positions increased significantly quarter-over-quarter, contributing to this quarter's unrealized gain. Sprinkler, another one of our portfolio companies and a provider of customer experience management solutions completed its IPO on June 23. We made a small investment in Sprinkler’s convertible notes alongside affiliated funds last May. Upon completion of the IPO, our notes automatically converted into common equity. The quarter-end fair value market of our equity position reflects a discount to the company's June 30 closing share price, given the trading restrictions on our equity security but still represents a 2.5x NOM on our capital invested. Driven primarily by the unrealized gains and the debt equity conversion of certain investments upon milestone events this quarter, our portfolios equity concentration increased slightly from 4% to 6% on a fair value basis. We continue to be focused on investing at the top of the capital structure, and our portfolio remains predominantly first lien oriented with 94% first lien at quarter-end. As Josh alluded to, the credit quality of our portfolio remains robust with minimal changes in our credit metrics compared to the prior quarter. The weighted average EBITDA of our core borrowers this quarter was steady at $41 million. Our portfolio's average attachment and detachment points remain stable at 0.4x and 4.2x, respectively. The average interest coverage on our core borrowers improved slightly from 3.2x to 3.4x quarter-over-quarter. Our investments on non-accrual status remain minimal at 0.02% of the portfolio at fair value, representing our restructured sub notes in American Achievement, as discussed on our call in May. Our portfolio's weighted average yield on debt and income-producing securities at amortized cost continues to be steady. This quarter’s yield was 10.1%, the same as the prior quarter and approximately 10 basis points higher than what it was a year ago. The yield impact on new versus exit investments this quarter was minimal. The weighted average yield at amortized cost of new investments this quarter was 10.0% compared to a yield of 9.5% on exited investments. With that, I'd like to turn it over to you, Ian.

Thanks, Bo. Reviewing the headline results for Q2, we generated adjusted net investment income per share of $0.46 and adjusted net income per share of $0.88. Quarter-over-quarter total investments at fair value grew by approximately 8% to $2.6 billion, driven by net funding activity and the positive impact valuations on the fair value of our portfolio. Total principle debt outstanding at quarter-end was $1.3 billion, and net assets were $1.2 billion or $16.85 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. This quarter’s average debt to equity ratio increased to 1.07 times compared to 0.93 times in the prior quarter, as a result of net funding activity, as well as the payment of our $1.25 per share special dividend in April. Our debt to equity ratio at June 30 was 1.08 times. We continued to have ample liquidity with $1.1 billion of unfunded revolver capacity, against $121 million of unfunded portfolio company commitments eligible to be drawn. At quarter-end, we remain match funded with 4.1 years of weighted average remaining time to maturity on our debt liabilities, against 2.4 years of weighted average remaining life of investments funded by debt. Our next debt maturity is approximately a year away in August 2022 on the $143 million remaining par value of convertible notes. This quarter, the average share price of our stock continued to exceed the adjusted conversion price on these notes. As we've mentioned previously, we have the flexibility under the indenture to settle the aggregate value of these notes in either cash, stock or a combination thereof. The triggers for early conversion have not been met, and we will make a determination on the most efficient settlement method when the time comes, based on our then balance sheet leverage and investment opportunity set, so that we can manage the impact on NAV per share and ROEs. A reminder that per our early adoption of ASU 2020-06 last quarter, the diluted EPS in our financial statements uses the if converted method, which shows the maximum dilution effect of our convertible notes to common stockholders, regardless of how the conversion can actually occur. Moving back to our presentation materials, Slide 8 contains this quarter's NAV bridge. Walking through the notable drivers of NAV growth, we added $0.46 per share from adjusted net investment income against our base dividend of $0.41 per share. As Josh mentioned, there were $0.08 per share of accrued capital gains incentive fees related to this quarter's net realized and unrealized gains. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.04 per share impact, and there was a positive $0.51 per share impact from other changes, primarily net unrealized gains on investments of $0.43 per share due to portfolio company-specific events, which Bo provided some examples of earlier. Moving on to our operating results detail on Slide 9, total investment income for the quarter was $62.8 million, compared to $66.2 million in the prior quarter. Walking through the components of income, interest and dividend income was $59.4 million, up $3.5 million from the prior quarter, primarily as a result of an increase in the average size of our portfolio. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were $2.2 million, compared to $8 million in the prior quarter. Other income was $1.1 million compared to $2.3 million in the prior quarter. In summary, the slowdown in portfolio turnover this quarter, and net portfolio growth allowed us to generate a higher quality of earnings from interest income. For reference, 95% of this quarter's total investment income was generated through interest and dividend income, compared to 79% across 2020 and 88% across 2019. Net expenses, excluding the impact of the non-cash accrual related to capital gains incentive fees were $29.7 million, up slightly from $29 million in the prior quarter. This was primarily due to higher interest expense from an increase in our average debt outstanding. Our weighted average interest rate on debt outstanding decreased slightly quarter-over-quarter by 4 basis points to 2.26%, as a result of a funding mix shift to greater usage of our secured revolver. Lastly on expenses, you'll notice that we applied for the first time a fee waiver on base management fees related to this quarter's portion of average gross assets financed with greater than one times leverage. Above that leverage level, base management fees are reduced to an annualized level of 1%. This is the first time since our stockholders approved the application of a 150% minimum asset coverage ratio in 2018, but we have reached this threshold. For the year-to-date period, we've generated an annualized return on equity on adjusted net investment income of 12.4%, and on adjusted net income of 22.2%. Our net income has benefited from both net realized and unrealized gains on investments from company-specific events, as well as the positive valuation impact of tightening risk premiums across asset classes. As portfolio repayments moderated in the first-half of the year, we've been able to generate greater interest income from investments while increasing our balance sheet leverage to support our ROEs. In the second-half, we expect some rebound in portfolio repayment activity, which would drive a more normalized level of activity-related fees for our business. Based on where we stand today, we believe we are on track to meet the high-end or exceed our previously stated guidance range of $1.82 to $1.90 of adjusted NII per share for full year 2021, which corresponds to return on equity of 11.5% to 12%. With that, I'd like to turn it back to Josh for concluding remarks.

Thank you, Ian. In the first-half of the year, the broader market sentiment has been mostly positive given the vaccine rollout, economic reopening and the promise of continued accommodative Fed policy. Given the health of the consumer and the health of financials, the aforementioned accommodative Fed, we remain constructive on the U.S. economy. Although, we do believe there's a myriad of factors including the impact of the Delta variant, the debate around transitory versus non-transitory inflation, that could create periods of volatility. As always, we've positioned our balance sheet, funding and liquidity such that we stand ready to operate across varying market environments. As of 2020 has shown through periods of uncertainty, we are a proven source of stability of capital for new and existing clients, while being a provider of strong risk-adjusted returns for our investors. To ensure that the Sixth Street platform continues to be a leading solutions provider and delivers superior results for our shareholders and LPs, we're working hard to expand our capabilities. Over the past year and a half, Sixth Street has focused on growing our capabilities in healthcare, growth in energy among other business verticals, and have grown our team by approximately 80 people, including 30 investment professionals across sectors and disciplines. Today, Sixth Street has more than 320 team members, including over 145 investment professionals operating across nine collaborative investment platforms, from nine locations around the world. We believe that the scale and resources of our platform will have our business to be well positioned and nimble across business cycles and market environments, which ultimately benefits the TSLX shareholder. With that, thank you for your time today. Operator, please open up the line for questions.

Thank you. And our first question comes from the line of Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Great. Good morning, everyone.

Good morning, Devin.

First question here, just given the strong economic backdrop and elevated transaction activity coupled with your meaningful available liquidity, just curious how you're thinking about leverage here, current leverage 1.08 times. Do you see an opportunity to take that higher than the current environment? And I actually think about the trajectory there, if anything you can share? Thanks.

That's a good question, Devin. This quarter saw very low activity-related fees reflected in our P&L. However, I believe this is our highest quarter on a per share basis for interest income, primarily due to our balance sheet leverage. On average, true interest income per share has been about $0.81, and this quarter it was $0.89, while activity fees typically around $0.10 dropped to $0.03 this quarter, driven by financial leverage. I expect us to continue to build on our financial leverage, as we are currently at the lower to middle end of our range. I anticipate that activity fees and portfolio turnover will increase in the second half of the year. We'll work hard to maintain a target in the one plus range, aiming to reach 1.15 to 1.25 given the economic backdrop. I hope I’ve answered your question. We definitely see a path to deploy capital, and we're expecting more activity in our portfolio concerning repayments in the latter half of the year.

Okay. That was perfect. Thank you. And then just a follow-up Josh, the competitive environment for capital allocation, how would you compare today versus other periods of your career? What you've seen? And clearly, there's a lot of deal flow right now and so that's good. How do you think that might evolve if deal flow slows from here?

I would characterize the current situation as one of the most competitive environments we've encountered. The industry has certainly undergone changes, with capital flowing into both fund formats and BDCs, as well as activity in the gray market for BDC. This is undoubtedly one of the toughest markets. However, from the perspective of risk-adjusted returns, it remains a favorable environment to deploy capital. I anticipate that default rates will remain low because corporations are in relatively good condition. Although the competition is intense, the overall risk-adjusted returns seem promising given the current economic cycle, which feels like it's just getting underway. While there might be some isolated challenges, we’re likely in the early stages of this cycle. It seems plausible that default rates and losses associated with defaults will not escalate significantly in this environment. Therefore, I believe there remains a viable path to achieve strong risk-adjusted returns for shareholders. Bo, do you have anything to add?

No, the only thing I would add is that while competition is intense, it's stable, it's been stable the last couple of quarters, and it doesn't seem to be intensifying. And I think the risk-adjusted return to Josh's point, is compelling given the economic backdrop.

Okay, great. Very helpful. Thank you guys. I'll leave it there.

Thank you. And our next question comes from the line of Finian O’Shea with Wells Fargo. Your line is open. Please go ahead.

Hi, everyone. Good morning. My first question is about the competition, specifically regarding venture. It seems you’ve been increasing your activities in this area over time. Could you discuss the advantages and disadvantages of engaging in venture? That market usually caters to those who are fully dedicated to it. What challenges do you face in acquiring quality deals when you’re not fully immersed in that space?

Thank you for your question, Fin. I understand this has been a recurring theme for you this quarter. I disagree with your premise. We do not engage in venture investing. When I consider venture, on the spectrum of investment strategies, it usually involves investing in companies with unknown or highly speculative business models that are either pre-revenue or not fully developed, which is not what we do at all. To clarify, we do none of that. Occasionally, we have financed companies with established business models, predictable unit economics, a diverse customer base, and that are experiencing growth and reinvesting in their businesses. In contrast, the venture debt model involves unknown business models and large total addressable markets but also comes with unclear unit economics or, if post-revenue, is dependent on a concentrated revenue source. Therefore, we do not participate in what is commonly perceived as venture debt. Bo, do you have anything to add?

I was just going to reiterate that the late-stage growth market that we play in, which is characterized by companies that have underwritten business models that you can underwrite, downside protection, and secondary forms of repayment. We've been doing that for 20-plus years. And, is that theme expanding over time, as you're seeing the digitization of the economy and more businesses fall into that late-stage market? Yes, I think that is a fair statement. But we've never done venture and the late-stage growth lending is something we’ve been doing for 20-plus years.

Yeah. And even the earlier stage, recurring revenue deals we do are tied directly to very high gross margins, recurring revenues that throw off cash flow, at the margin line they're just reinvesting those cash flows.

You can just scale businesses with revenue, no customer concentration. So, I would argue the premise now, there might be in the case of Passport, which is a company that went from a venture debt provider to a company that has now grown up and has real diversified contracts with municipalities. And they're in the payments business for municipalities and parking lot owners. That has transitioned as a credit and as a business model. But, that's how I would frame it for you.

That's very helpful. And then, I guess just sort of related question. I think Ian, you mentioned there should be an impact of yields coming down from the competition and such. There's obviously not a large pool of rescue or special set or oriented deals right now. Do you have any strategy to say like, increase your equity co-invest or engage in? Or, I'll just leave it at that anything to help sustain just the baseline deals you've been getting? I know, you'll get some pickup, you said from normalized activity. But, if this environment is protracted, what do you think on that matter?

I'll pass it over to Ian. I want to emphasize that when we examine our yields as of June 30, 2020, our yields and amortized costs have increased by 10 basis points year-over-year. We haven't indicated that yields are decreasing. To clarify, I believe that our yields for new investments in Q2 2021 are aligned with our average yield, which slightly exceeds the loans that have paid off. While it may be a trend in the industry, we have not experienced yield compression in our portfolio. We've actually seen an increase in net interest margin when LIBOR dropped significantly, and our yields have remained flat to stable, with a slight year-over-year increase. Additionally, yields on new investments are in line with those in our overall portfolio. I think part of this is due to our small, agile structure and the advantages of being part of the Sixth Street platform, which includes 150 people focused on solving issuers' problems and being flexible across sectors and, to a lesser extent, geographies. So, I don't think there's any magical change occurring in this area for Sixth Street Specialty Lending. Ian, do you have any additional thoughts?

No. With the second part of your question Fin, also getting to whether we're seeing more opportunity on equity co-invest? Is that where you're going with that?

Yes, and your plans to engage in it as well, I suppose.

We have always been strategic with our equity co-invest program. To give some context, we have invested around $160 million of equity over time, and we are currently seeing a return of approximately 1.7 times NOM. I expect this to grow as we still have many opportunities in our portfolio. This has been a reliable source of returns, with the average return on fully realized investments around 40%. We will continue to pursue these opportunities selectively. Our equity co-invest program does not seek equity co-investment in every deal, but rather in sectors where we have a strong understanding of the business, believe the prospects are favorable, and find the valuation attractive. Our approach is more targeted and actively managed, rather than a passive strategy aimed at obtaining private equity returns throughout the cycle. We take a thoughtful approach to our investments, considering the strengths of our platform.

Got it. Thanks so much.

Thanks, Fin.

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

Hi, guys. Firstly, a follow-up to Devin's question, obviously, you gave kind of an indication that you may be able to get towards the higher end of your leverage range by year-end, maybe. If that plan kind of plays out and there's a lot of variables, understood, would that change your bias on what to do with the convert in terms of how much cash, how much debt, how much equity, as we got into next year? I mean, is that the convert strategy or function of where leverage ends up at the end of the year is a good way to put it?

Yes, Robert, you're absolutely right. First, I want to clarify that we have the option to settle in all equity for the convertible notes. We are certainly prepared to explore the possibility of increasing our debt-to-equity ratio, which will provide us with some flexibility and is an important consideration regarding the convertible notes. I believe that the market environment will play a significant role in our approach, and we remain optimistic about the U.S. economy, which allows us to potentially increase our financial leverage. The ability to settle the convertible notes with equity also gives us flexibility and is definitely a key factor in our considerations.

Thank you for your insights. I have another question. You mentioned Josh in the prepared remarks about adding expertise, particularly related to energy. Could you clarify where you're adding this expertise? Additionally, should we anticipate an increase in energy exposure at the BDC? If so, could you specify which energy sectors you find appealing?

It's a great question. We've added expertise in both infrastructure and distributed energy, including solar and wind, to our platform. I believe we are among the largest owners of solar assets within our private funds and have also invested in wind projects. Traditionally, our involvement has ranged from upstream to midstream investments. Currently, there don't seem to be many opportunities in the energy sector, but that could change. We certainly have the expertise and are continuously enhancing it. We have been relatively active in the nano space. For instance, we publicly acquired a group of RBL loans with a partner involved in that business. We operate within an ESG framework, which we have initiated. I expect us to remain active and opportunistic in this sector. Our maximum exposure in energy within the BDC reached about 10%, primarily through reserve-based lending on hedged proven collateral. I'm not sure we will reach that 10% again, but we are willing to invest when we identify opportunities that align with our portfolio strategy. We're looking for assets that are favorable on the cost curve, carry minimal development risk, and include commodity price hedging. Overall, we've managed to achieve a positive P&L in this area. While Mississippi was a small misstep, our overall investment performance has been solid, and we will continue to be active in this space.

Got it. Thank you.

Thank you. And our next question comes from the line of Kenneth Lee with RBC Capital Markets. Your line is open. Please go ahead.

Hi, thanks for taking my question. Just one on the Sixth Street platform, on a broader level, wondering if you could expand upon your expectations for the platform, its potential contribution to originations over the near-term? Thanks.

Yeah. So we've touched on this a couple of times. But look, we – sorry is the question, the contribution of origination to the platform? Or, is it just where we're adding expertise, sorry?

Just the first part, just the contribution to potential originations.

I’m not sure if we track it specifically, as we operate with a one team mentality. I would say it varies over time. For instance, the healthcare team doesn't directly belong to the direct lending platform, but I estimate that around 50% of their activities are related to direct lending. They oversee all our initiatives in the biotech sector. In that area, we've invested a couple of hundred million, possibly even up to half a billion. However, considering the culture of our platform, which consists of approximately 145 to 150 investment professionals focused on being solution providers for our clients and safeguarding our investors’ capital, I don’t believe we keep specific track of it, but it shifts over time. The healthcare sector stands out to me; technically, it isn’t part of the direct lending team, but it has significantly contributed to our success for shareholders.

Got you. Very helpful. And just one follow-up, if I may. And this is related to the previous question about equity co-investments. Wondering if you could just refine your comments, would it be fair to say that the philosophy around equity co-investment is more around potential upside, versus mitigating potential losses over the cycle? Thanks.

The question is whether our equity co-investment program is an effective way to mitigate credit losses over the cycle, and the answer is no. Historically, we have seen positive net gains across our books and have not experienced significant credit losses for an extended period. There have been instances, like in Mississippi, but those have been balanced out by other factors. I would describe our strategy as more offensive, focusing on partnerships where we have the expertise to make informed investment decisions and conduct thorough underwriting rather than using a portfolio approach to offset losses in the credit book. Our strategy involves being specific, being a good partner, and having a solid thesis when we see opportunities based on a sector, company, management team, or valuation we like. Bo, do you have anything to add?

I think it's pretty straight.

Great. That's very helpful. Thank you.

Thank you. And our next question comes from the line of Ryan Lynch with KBW. Your line is open. Please go ahead.

Good morning. Thank you for taking my questions. You have always been significant investors in the software sector. It seems that over the past few years, especially in the last several quarters after COVID, direct lenders are increasingly entering the software space since it performed remarkably well during the pandemic. I would like to know, as you assess new opportunities today, what the biggest risks are that you identify in the software lending sector. Are these risks related to elevated valuations, uncertain markets, or technological challenges? Additionally, how are you managing this sector amidst the considerable influx of capital and your historical focus on it as part of your portfolio?

It's a good question. I'll start and then turn it over to Bo. First of all, there's definitely a greater focus on the software space, but there's also a larger universe to consider. Over the last 10 years, software has been increasingly integrated into our lives, both in businesses and for consumers. The opportunities in this area have expanded along with the available capital and interest from investors. I'm not overly concerned that the opportunities have diminished; rather, they have remained consistent while interest has grown significantly. I want to clarify that. That said, we believe we have a unique perspective and expertise that allows us to utilize the Sixth Street platform to analyze not just end markets, but also technology risks and overarching trends in technology. We have a solid framework for identifying companies that are highly integrated and capital efficient, which we have refined over the last 20 years. Bo, do you have anything to add?

The one thing I'd add is, we don't think of software as an industry, it's ubiquitous. We get very nuanced within technology itself and have sub themes that we focus on. And I think even part of your question was like with everybody piling into that sector, as their concerns about certain business models, et cetera, I think that's right. I think all business models within software are not created equally, all businesses aren't created equally. And you have to be very nuanced in your underwrite. I think the 20 years of pattern recognition that we have along the sector and seeing it evolve has allowed us to get very nuanced to attack sub-sectors, what we think return on invested capital is going to remain strong and the durability of those business models remains strong. So that's how we combat that. We're very nuanced. We're very fanatic focused, and continue to see very interesting opportunities in the sector. But, without a doubt, is it more crowded, for sure. But I do think there are folks that are being indiscriminate on how they look at businesses.

Yeah. You put a fine point on it indiscriminately. Look, not every dollar of “recurring revenue is created equal.” And, not every dollar of marketing spend is as efficient. And so, depending on customer life, gross margin, how embedded, do they control the customer, how stable the end markets, we continue to be very discriminating as investments we make in space. And then we always made the same underwriting.

That's really helpful color, and totally understand your thought process, not every software deal is created equal. The other question that I had was, obviously, the direct lending space, and the borrowers have been growing significantly over the last several years. Maybe I'm just curious, you guys have on Slide number 6, you guys show the average loan commitment that you guys are making. And over the last several quarters, it's in the $30 million to kind of $40 million commitment range at TSLX. I'm just curious, what would you say is the average commitment, if you guys are holding $30 million to $40 million at TSLX? What is the average commitment that you guys are making on kind of across the Sixth Street platform? And where would you guys feel kind of on a max level, feel comfortable committing because, today you're seeing multibillion dollar direct lending deals that are that are clogged up? But still, I'm just trying to get a sense of where you guys could kind of sit and play on the upper end, in the direct lending markets today, given the growth of your platform?

I appreciate your observation, but I would not equate the TSLX hold side with our ability to scale our capital. Being part of Sixth Street gives us the advantage of an exemptive order that allows us to move up market. As Bo mentioned, we have three deals totaling over a billion and a half dollars in capital, ranging from about $300 million to $950 million. We aim to strategically position ourselves in the up market, acting quickly and becoming a valued partner for our sponsors or issuers. I will follow up regarding the exact commitment sizes across the platform and their evolution over time. My instinct is that our commitments have increased, although we have kept the portfolio sizes relatively granular in TSLX to ensure our shareholders benefit from diversification, given that we won't always be right. Looking at our upcoming projects, we are acting as agents on deals valued at $900 million and $800 million, alongside several $350 million deals. We continue to move up market where our capital provides added value. It’s important to consider where we are on the cost curve to ensure that we deliver value to both our clients and shareholders. We cannot simply replace the high-yield market with significantly higher fees, as that is not a sustainable business model.

Okay. Understood. That's helpful. I appreciate the time this morning.

Great.

Thank you. And our next question comes from the line of Melissa Wedel with JP Morgan. Your line is open. Please go ahead.

Good morning. I think most of them have been asked but I have one follow up.

Sorry, Melissa, we've lost you.

No. So we can't hear you. You want to try to get into a better zone and obviously, we want everybody to get the benefit of your question and to be able to answer your question, but we can't. We can't hear you at the moment.

Our next question is going to be from the line of Mickey Schleien with Ladenburg. Your line is open. Please go ahead.

Good morning, everyone. Hope you're well. Josh, you have been historically very successful in using a thematic investment thesis in your portfolio management. And if we look back at 2020, and this year, I'd like to ask how has the pandemic affected the themes that you're pursuing, if there's been any change?

Thank you, Mickey. I appreciate the acknowledgment towards Josh, but it's really about the platform and the team we have in place. Themes do come and go in popularity. One theme that seems to be fading for us is retail. The pandemic has shifted things significantly. Generally, I believe that capitalism tends to eliminate inefficient companies during economic downturns. However, I don't think the pandemic did that effectively except in retail. We were already seeing challenges in that sector due to Amazon and direct-to-consumer models, which pushed out companies that didn't fit into established channel models. The pandemic accelerated this change in retail. The remaining retailers, combined with a healthy consumer base, are in a good position. However, we anticipate that earnings across the sector may peak, so we are less optimistic in the short term despite the strength of the U.S. consumer, who has about $1.7 trillion in excess savings. Retail now presents a stronger value proposition, which is a key change for us. Meanwhile, payments remain a strong focus. Passport aligns well within the software and payments landscape. Some areas of healthcare continue to be attractive for us, while others are less so. As a platform, we will keep discussing and focusing on our partnerships. Bo or Fish, do you have anything to add?

What I would add is, for direct lending there's generally 15 to 20 themes where we’re actively pursuing at any one time. That's constantly rotating. We spent a lot of time. We have weekly meetings, talking about thematic research and testing ideas, and pressure testing certain themes, and that's constantly rotating. That's been a practice since we started. We'll continue to do that in periods of dislocation and at the beginning or ends of cycles. We see that rotation generally speed up, so to your point, I think we've had a pretty healthy rotation of the themes that we're pursuing post-COVID. But that will continue as long as we're here managing money.

I'd say we also look at on software recurring revenue. The sub-themes would be the end markets that they're related to. So we spent a lot of time thinking about that. As we said before, not every recurring revenue deal or software deal is the same. And those that focus on specific sectors themselves, we have to look at that as effectively a sub-sector of our theme.

Josh, on the back of that, then, I haven't done the math. But if you were to look at the IRRs on some of your distressed retail deals, they were pretty exceptional, if I'm not mistaken. Is there a new theme that can sort of replace that? Or, when you and the board think about sort of target ROEs, are you considering a lower ROE target going forward, if there's no theme that can replace that distressed retail opportunity?

Thank you. This has been a recurring theme for us, but new themes will emerge. Our portfolios have remained fairly stable, and I believe our return on equity will be at the high end of expectations. As we discussed today, our average return on equity has been around 12%, and we anticipate it will stay above that level this year based on net investment income. Despite operating in a rate environment that is 200 basis points lower than before, we've seen significant growth in net income. On a risk-adjusted basis, we believe we're providing greater value to our shareholders. Our return on equity targets have not decreased; in fact, we are delivering more for our shareholders. This involves some financial leverage, but we can maintain portfolio yields. Overall, this has been and will likely continue to be one of our strongest years, particularly in this interest rate environment, allowing us to deliver value to our shareholders. This is evident not only in our net investment income but also in our net income and capital efficiency.

I appreciate that, Josh. But just one sort of more housekeeping sort of question. I realized it's a small portion of the portfolio. But could you review why you've invested in CLO debt, instead of CLO equity, given that CLO equity estimated yields are so much higher, and their cash flows have been really exceptional, pretty much since the second-half of last year?

Yeah. Look, I would say, first of all, CLO equity, we invested in the CLO I think in the middle of COVID, where, as you know, we don't try to lose capital where there was a decent amount of uncertainty on the false and recoveries. And, it wasn't clear that CLO equity is going to make the upside. We haven't added any new CLO depositions in the book. I generally think that, to your point of CLO equities, it has a decent value proposition at the moment. Although, it's how evolved, and I would say, as you know, you've lived through. And we've seen across the space, there is a significant difference between cash on cash returns, and ultimate IRRs. And so, current cash on cash returns and CLO is not only net interest margin, but it’s a return of – not only return on capital where we return off capital when you look at an entire kind of life span of a CLO investment. And so, I want to disagree that its worth at the time when we made investments as a structured credit land was, and we haven't made it since COVID. It was in a very different time with a whole lot of uncertainty around the false and losses. And given the nature of CLO equity, it's massively levered. We didn't think it was appropriate for the BDC.

Okay. I understand. That's it for me this morning. I appreciate your time. Thank you.

Great.

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Joshua Easterly for any further remarks.

Great. Thank you so much for people's interest and time. We look forward to chatting in the fall. I hope people have an easy and healthy rest of summer, and enjoy your Labor Day. Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.