Barings BDC, Inc. (BBDC) CEO Eric Lloyd on Q3 2021 Results - Earnings Call Transcript

Nov. 11, 2021 2:41 AM ETBarings BDC Inc (BBDC)
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Barings BDC Brands, Inc. (NYSE:BBDC) Q3 2021 Earnings Conference Call November 10, 2021 9:00 AM ET

Company Participants

Eric Lloyd - Chairman & CEO

Ian Fowler - President

Jonathan Bock - CFO

Conference Call Participants

Kyle Joseph - Jefferies

Ryan Lynch - KBW

Leon Cooperman - Omega Advisors

Robert Dodd - Raymond James & Associates

Operator

Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended September 30, 2021. [Operator Instructions]. Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section.

Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the company's annual report on Form 10-K for the fiscal year ended December 31, 2020, and quarterly report on Form 10-Q for the quarter ended September 30, 2021, each as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law.

At this time, I will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Eric Lloyd

Thank you, Hillary, and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our third quarter 2021 earnings presentation as posted on the Investor Relations section of our website. On the call today, I'm joined by Barings BDC's President and Barings' Co-Head of Global Private Finance, Ian Fowler; Bryan High, Barings' Head of U.S. Special Situations and Co-Portfolio Manager; and the BDC's Chief Financial Officer, Jonathan Bock.

Before Ian and John review details of our portfolio and third quarter results, I'll begin with some high-level comments about the quarter. Many of the themes we highlighted in the second quarter continued into the third most notably robust market activity in the U.S. and globally, with elevated deal volumes and increased competition. And this increased activity and associated portfolio velocity helped drive the stable earnings profile and dividend increase we will outline today.

Let's begin with the market backdrop shown on Slide 5 of the presentation. The backdrop remained largely the same in the third quarter with elevated broadly syndicated loan prices and strengthening BDC equity prices. Many BDC's trade at or above their pre-COVID highs and the competitive market for private credit assets drove associated BDC net asset values and valuation premiums higher. Barings BDC's steady and stable return performance continued with the highlights summarized on Slide 6 of the presentation. Net asset value per share was up $0.01 in the quarter to $11.40. Our net investment income increased to $0.23 per share, aided by accelerated OID from repayments as well as increased interest income associated with net portfolio growth.

Recall, the underlying stability of our net investment income is further enhanced by our incentive fee structure as our earnings continue to exceed our 8% hurdle rate and remain in the investment catch-up. As a result of these trends, our Board elected to increase our fourth quarter dividend to $0.22 per share, equating to a 7.7% yield on our net asset value of $11.40. Regarding new investments, we had originations of $276 million in the third quarter. This was offset by $232 million of sales and prepayments, $89 million of which were sold to the JV.

Our investment portfolio continued to perform well in the third quarter and remains valued at above original cost. We had 1 new nonaccrual investment from the acquired MDC portfolio, equating to 70 basis points of total portfolio fair value.

Slide 7 outlines summary financial highlights for the quarter. In the third quarter, increased investment activity and associated portfolio velocity continue to drive total investment income and net investment income higher, both on an absolute and on a per share basis. Net unrealized depreciation was $3.3 million, and this was offset by $3.8 million of net realized losses, with the majority of those moves due to a foreign currency hedging. Net leverage, which is leverage net of cash, short-term investments and unsettled transactions, was 1.19x and remained within our target range of 0.9x to 1.25x.

Additionally, many of you might recall our recent announcement related to the acquisition of Sierra Income Corporation on September 21. I will now outline details of that transaction on this call and would direct any interested investors to our proxy statement that was filed on October 29. That said, I do believe the transaction crystallizes the strong return and growth opportunities we have at Barings globally. We remain a leader in our core markets with an extremely wide investment frame of reference that allows us to be selective when competitive market forces increase. Our commitment to investor alignment exhibited by our incentive fee structure provides an earnings cushion against unforeseen events when our net investment income exceeds the 8% hurdle rate.

Recall, a decline in earnings caused by nonaccrual loans or having to refinance assets at lower yields would first result in a lower incentive fee insulating investors from those negative items.

I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.

Ian Fowler

Thanks, Eric, and good morning, everyone. If you turn to Slide 9, you can see additional details on the investment activity that Eric mentioned. Our middle market portfolio declined by $46 million on a net basis in the quarter, with gross fundings of $165 million, offset by sales and repayments of $211 million. New middle market investments include 16 new platform investments totaling $107 million and $58 million of follow-on investments and delayed draw term loan fundings.

We also had $106 million of net new cross-platform investments in the quarter, with the majority of that attributed to our closing of Eclipse Business Capital. We continue to believe portfolio repayments will remain elevated across the market. And in the third quarter, Barings BDC experienced an increase in repayments along with the associated fee income acceleration. Of our $211 million in middle market sales and repayments -- prepayments, $88 million was associated with full repayments this quarter, $4 million was from partial paydowns and the remaining $117 million were sales, predominantly to our joint venture.

Recall, joint venture sales enable us to increase portfolio diversification while maintaining a prudent leverage profile at Barings BDC.

Slide 10 updates the data we show you each quarter on middle market spreads across the capital structure as capital seeking private credit return enters the market at a rapid pace, market conditions become extremely competitive as evidenced by spread compression, loosening terms and higher leverage levels.

Turning to Slide 11. As we outlined last quarter, unitranche executions were expected to provide a level of pricing premium when compared to first lien, second lien structure as a one-stop financing solution provides private equity sponsors with ease of execution. Today, the spread differential between a unitranche transaction and a first lien, second lien execution is approaching all-time tights. Additionally, investors can see that covenant-lite issuance and unitranche transactions is at an all-time record.

A bridge of our investment portfolio from June 30 to September 30 is shown on Slide 12.

On Slide 13, you will see a breakdown of the key components of our investment portfolio on September 30. As we have discussed in the past, the goal of this slide is to provide details on the 3 key categories of our portfolio, which are our middle-market portfolio, the legacy MVC capital portfolio and our cross-platform investments. The middle-market portfolio remains our core focus and makes up 70% of our portfolio in terms of total investments and commitments and 67% of our portfolio in terms of revenue contribution. This portfolio is comprised of 133 portfolio companies with geographic diversification across the U.S., Europe and Australia regions.

Underlying yields on our middle-market investment portfolio of 6.7% remain reflective of our boring is beautiful approach to credit. For our middle market portfolio, weighted average first lien leverage was 5x consistent with our boring is beautiful investment approach. In addition to our middle market exposure, we continued to draw upon wide investment frame of reference and complement our core portfolio with 13 investments in the legacy MVC capital portfolio and 24 cross-platform investments, which have yields at fair value of 13.8% and 8.4%, respectively. We had 1 nonaccrual at core end accounting for 70 basis points of the fair value of the portfolio, which was associated with the acquired MVC portfolio. Quarter driven largely by our investment in Eclipse Business Capital. The MVC portfolio is comprised primarily of equity, second lien and mezzanine debt investments, which brings the first lien component of the total portfolio down to 73%.

With regard to the MVC assets, we saw an uptick in the repayment activity with 3 investments paying off in the quarter. Our top 10 investments are shown on Slide 15. Our largest investment is 5.9% of the total portfolio. And the top 10 investments represent 22.4% of the total portfolio. Recall our largest investment Eclipse Business Capital is backed by a large portfolio of asset-backed loans conservatively structured inside of the collateral net liquidation value.

Additionally, two investments acquired from MVC Capital are in our top 10 holdings. Remember, these are covered by the credit supported in place from Barings LLC, thus reducing potential downside risk. The overall portfolio remains diverse from an industry perspective as well with 170 investments spread across 29 industries.

I'll summarize my market comments by saying Barings' broad investment scope across geography and private asset classes allows Barings BDC to create an optimal and differentiated asset mix that is not reliant on any single investment product or channel.

Furthermore, we choose to look at alignment differently. And our focus on an aligned fee structure and hurdle rate gives us the latitude to ensure our investment teams make the right investment at the right price for the risk. Being unique is endemic to our culture and our platform, and I believe it's a key ingredient to achieving long-term success. I'll now turn the call over to John to provide additional color on our financial results.

Jonathan Bock

Thanks, Ian. And turning to Slide 17. Here's a full bridge of NAV per share movement in the third quarter. Our net investment income outpaced our dividend by $0.02 per share. Net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of $0.06 per share, while our unrealized depreciation on our investment portfolio and foreign currency transactions, primarily associated with our foreign exchange hedging drove an increase of $0.05 per share.

Additional details on this net unrealized appreciation are shown on Slide 18. And on the middle market portfolio, price appreciation and credit performance, both increased unrealized depreciation by $1.6 million and $700,000, respectively. However, there was a slight offset by roughly $6.1 million of unrealized depreciation associated with the foreign currency investments due to the weaker euro. This depreciation is offset by our foreign currency hedges on the portfolio.

Our cross-platform investments saw total depreciation of approximately $700,000, while the legacy MVC portfolio saw a total net unrealized depreciation of $1.6 million. Near the bottom of Slide 18, you can see that the credit support agreement with Barings was unchanged from last quarter.

Slides 19 and 20 show our income statement and balance sheet for the last 5 quarters. And as we've discussed, our net investment income per share increased to $0.23 for the quarter, driven by a $1.8 million increase in total investment income. Higher dividend income associated with our investment in Eclipse Business Capital and several of our joint venture investments as well as an increase in accelerated OID on repayments drove this increase. The increase in total investment income was partially offset by higher interest and financing fees, which rose as a result of increased borrowing levels.

The third quarter also saw the payment of an incentive fee to the manager as pre-incentive fee net investment income exceeded our 8% hurdle rate. Now from a balance sheet perspective on Slide 20, total debt to equity was 1.39x as of September 30. Although this level was artificially high given the timing of certain asset sales and was 1.19x after adjusting for cash, cash equivalents and unsettled transactions.

Turning to Slide 21, you can see how our funding mix ties to our asset mix, both in terms of seniority and asset class. Compared to the end of 2020, our reliance on senior debt has decreased as we have continued to diversify our balance sheet to match our diverse portfolio of assets. Details on each of our borrowings are shown on Slide 22. And which shows the evolution of our debt profile for over the last 3 quarters. We continue to have an additional commitment to raise up to $25 million of unsecured debt plus we have the available borrowing capacity under our $800 million senior secured credit facility.

Now furthermore, on November 1, Barings BDC received an investment-grade rating of BBB minus from Fitch, our second investment-grade rating following our Baa3 rating from Moody's received in 2020.

Jumping to Slide 23, you can see the impact to our net leverage using our available liquidity to fund our unused capital commitments. Barings BDC currently has $99 million of delayed draw term loan commitments to our portfolio companies as well as $36 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of these commitments have called upon, while maintaining cushion against our regulatory leverage limit.

Slide 24 updates our paid and announced dividends since Barings took over as the adviser to the BDC. And as Eric mentioned, we announced yesterday that our fourth quarter 2021 dividend will be $0.22 per share, an increase of $0.01 per share compared to the second quarter and a 7.7% distribution on current net asset value.

Turn with me now to Slide 26. This shows a graphical depiction of relative value across the BBB, BB and B asset classes. And with spreads across the liquid credit spectrum at or near their 3-year tights, investors rightly outlined that excess spread per unit of risk is increasingly hard to find. And so investors seek alternatives where they can, in effect, manufacture excess spread per unit of risk in the form of directly originated transactions, seizing on both illiquidity and complexity spread premium.

And we speak often of these pricing premiums relative to liquid credit and this translates into the actual results shown on Slide 27, which outlined the premium spread of our new investments relative to liquid credit benchmarks. Barings BDC deployed approximately $180 million at an all-in spread of 757 basis points, which represents a 327 basis point spread premium to the comparable liquid market indices at the same risk profile.

Now diving deeper into our core middle market segments across Europe and North America. We averaged a 308 basis points spread relative to the liquid market indices. And for cross-platform investments, the spread relative to liquid market indices was even greater at 574 basis points. And we continue to believe our ability to invest across platforms and generate excess shareholder return via illiquidity and complexity premium will be a key differentiator for Barings BDC in the current market cycle.

I'll wrap our prepared remarks with Slide 28, and this summarizes our new investment activity so far during the fourth quarter of 2021 and our investment pipeline. The pace of new investments remains steady compared to the last 2 quarters, with $239 million of new commitments, of which $164 million have closed and funded. Of these new commitments, 76% are first lien senior secured loans, 14% are in cross-platform investments and 21% are in European or Asia Pacific Australia investments. The weighted average origination margin or DM-3 was 7.8%. And we've also funded approximately $4 million of previously committed delayed draw term loans.

The current Barings Global Private Finance investment pipeline is approximately $3.1 billion on a probability-weighted basis and is predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline.

And with that, operator, we'd be happy to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Kyle Joseph of Jefferies.

Kyle Joseph

And congrats on another good quarter. Obviously, you guys had strong originations. But just going through the last couple of quarters of originations. I wanted to kind of pick your brain and see how we should expect this to impact the P&L, obviously, 2Q was highlighted by Eclipse, 3Q cross-platform was very strong. But can you walk us through, a, how you're sourcing those opportunities and b, how you anticipate those impacting the P&L?

Jonathan Bock

Sure, Kyle. So the question was centered in on cross-platform investments and how they're sourced, and then kind of the forward kind of rates that we're seeing on those types of investments on a go-forward basis?

Kyle Joseph

Yes, and also talk about incorporate Eclipse and the impact on the P&L and whether we should -- the mix between dividend income and interest income going forward.

Jonathan Bock

So Kyle, you're rightly pointing out, right? Dividend income increased materially this quarter with the Eclipse investment effectively paying an 8% distribution on the equity which is our largest position inside of BBDC. So that was effectively $1.7 million of the 2-plus that you see in the financials. And additionally, you can see our JV investments, in particular, on Thompson Rivers also paid another $1 million or so. These are expected to be ongoing, right, in terms of distributions. The business models are very stable and most importantly, very differentiated in terms of how they focus on asset-based lending and specific as well as a level of unique mortgage origination that come from our strong partnerships. I think it'd be best to lateral to Brian High when he thinks about the Head of our Special Situations practice in the U.S. to outline the return opportunities he's seeing in these cross-platform investments like Eclipse and the forward prospects. So if that's at a lateral TAM.

Eric Lloyd

Sure. Thanks, John. Kyle, I guess I would say our pipeline has shifted over the last couple of quarters, the opportunistic liquid bucket is relatively dry. There's not a lot of opportunity out there in the secondary markets. We've been primarily focused on Special Situations, one-off investments where we can provide financing solutions to storied credits, and we're sourcing those through both our sponsor networks as well as agencies that we have relationships with in the space that are representing some of these potential issuers and borrowers. So that's what our pipeline looks like today.

So it's -- as you think about types of income, a lot of this is what I would call primary issuance of opportunistic financings. So it would be primarily generated through interest income as opposed to buying something at a steep discount with a lot of OID. And in terms of Eclipse, I think partnering with them has been very fruitful for both, them originating new opportunities on the asset-based lending side as well as us looking at potential term loans in the markets that we otherwise weren't covering historically.

Kyle Joseph

Got it. Very helpful. And then my follow-up, probably more for Eric and Ian. I just want to pick your brain on kind of your macro perspective and how -- and the potential implications for credit. Obviously, we've kind of lapped the easiest COVID comps. There's some uncertainty out there, whether it's supply chain inflation, wage pressure, et cetera. But just walk us through how your companies and maybe focus on the middle market are doing in terms of REV and EBITDA growth versus expectations? And how you would expect those to trend, call it, intermediate term, just given your comments about the market remaining competitive?

Ian Fowler

Eric, do you want to cover the macro and then I could talk about the portfolio.

Eric Lloyd

Sure. Listen, I think you just -- you hit on it, right, which is all we know when we underwrite the illiquid credits is there's going to be something during the life of that credit, maybe multiple things that are, frankly, unforeseen and which is why we really stress those downside cases when we're underwriting deals. Right now, I'd say the biggest thing that we see kind of occurring is what's kind of now playing through and kind of what you saw, I think yesterday's news on the PPI index.

And then I think in this morning, there's already some more news on consumer. And I think it really is that combination of wage pressure commodity input increases that are creating basically margin compression. Depending on the company, some companies can pass through that, those increases better than some other companies. But I'd say in general, companies are still performing well, but I'd say they're more cautious based off of the inputs that you're seeing that are occurring through inflation basically and to your point, some of the supply chain stuff.

But Ian, I'll turn it over to you to talk about anything more specific.

Ian Fowler

Yes. And Kyle, just following along Eric's comments, I mean when we look at our portfolio, I mean, we're definitely seeing decent top line growth across the portfolio. But on the other hand, we are seeing some wage inflation and other cost input inflation. I think a lot of it is driven by the supply chain disruption, which I think has created a fair amount of inefficiencies.

And so like one of the analysis that we've done, for example, is you look at natural gas, as an example, and natural gas is, I think, almost doubled in price. And so we've looked at our portfolio and what companies are -- could be impacted heavily by increases in natural gas. And for example, we don't have a lot of paper, chemical or plastic businesses that would fall in that category. But that's kind of the work that we're doing from a portfolio perspective.

But we feel like, as Eric said, when you underwrite these deals, you expect certain things to happen. And so we do that in our underwriting, and we also make sure we pick the right partners on the equity side to work through any issues that occur.

Operator

Our next question is from Ryan Lynch of KBW.

Ryan Lynch

First off, Eric, congratulations on the promotion to President of Barings. And then my first question was, you guys have done a great job of overall, I think, really investing in some unique areas, particularly the cross-platform investments with the Eclipse and structured products, opportunistic, Special Situations, JVs and such. But as I looked at your portfolio currently, a lot of those investments are nonqualifying investments, and that's about 26% of your portfolio today. Now Sierra also has kind of a similar exposure so like that's really going to ease the non-qualifying bucket neither. So as that bucket starts to increase closer to that 30% level, doesn't that restrict your all's ability to continue to kind of source those really attractive unique investments in this environment?

Jonathan Bock

Great question, Ryan. The way I would try to look at it, too, is so included in that 26% is a level of exposure to European direct lending. And so depending on the market environment. And in terms of joint ventures, right, where things are establishing or things are running well, you can have a relative risk return trade-off, right? And with the ability to sell down and manage our nonqualified asset exposures for diversification purposes down with the joint ventures like our partners in Jocassee we have plenty of capacity to make the investments when we find the right investments to make.

So plenty of capacity to -- and then beyond that, many cross-platform investments, when you think about, Brian, on the Special Situations in the cross-platform side can be qualified, right? I think of some of the stress or distress either ABL or corporate style lending that kind of fits that bucket. So it still has a pretty wide birth. But at the same time, if we were to find something that was nonqualified, we do have plenty of levers to move around to ensure that that's the best possible use for our capital.

Ryan Lynch

Got it. That makes sense. And then just my follow-up, and maybe this is not the way you guys are looking at it, but I want to ask a question regarding sort of the earnings profile of BBDC. Because it looks like this quarter, you guys might have gotten above the upper end of your pre-incentive fee hurdle rate. And so now at this point, do you guys because you guys always talked about kind of generating kind of a stable sort of we've always thought about it as an 8% operating ROE. It looks like now you guys are really in the spot where that can actually increase higher. And of course, the hurdle rate is going to change when Sierra closes. So maybe this is kind of a moot point. But are you guys looking to continue to execute the way you are and actually grow the operating ROE higher? Or now that you guys have kind of hit that 8% ROE, is it more of a function of let's turn down risk and generate that stable operating ROE and continue to have the safest portfolio we can, generate that return?

Jonathan Bock

I'd probably start with kind of how we -- is the operating -- are the operating levers of the business likely to put you above the high hurdle steady state? And the answer is yes, right? There's a great origination premium coming from our private credit businesses as well as our cost platform investments. One item that we've always found from our study of BDC research would be that having both a steady and stable dividend, but at the same time increasing your net asset value, that's a very, very rare combination in the space. And so you'll probably see us continue to operate the way we will, where you'll see dividend distributions from our select investments in cross-platform strategies to satiate the yield profile. But then at the same time, the underlying earnings of those ventures are probably exceeding those dividend distributions, giving you a level of increase to the book.

So the goal will be to try to shoot right down the middle, ensure that we're paying exactly what we're paying at a very, very attractive risk profile, but at the same time, recognizing that there is still a level of earnings contribution that's inside these businesses that's accreting to your net asset value. That would be the proposition that we'd be looking to offer in this environment because trying to stress over distribution can come at the sake of sacrificing long-term return on NAV and you want both stable and growing NAV and a steady and stable and boring dividend distribution.

Operator

Our next question is from Lee Cooperman of Omega Family Office.

Leon Cooperman

I'm a relatively new shareholder as a result of your acquisition of MVC and I'm very pleased with your performance. I congratulate you. I'm curious if you could lay out your acquisition criteria because I assume there'll be more growth coming via acquisition.

Jonathan Bock

We look at it this way to where we like opportunities that are both good for BBDC shareholders, target shareholders as well as our manager complex, right? And you have to have the checks in all 3. Where that normally comes out is in situations where the shareholders of an underlying target or actually being able to be awarded for the benefit of the transfer of the management contract. So in the history of BDC right, you've seen a couple of transactions, think of it American Capital and a manager that purchased them as well as MVC Capital and then now recently, Sierra whether it's effectively cash offered to shareholders as a result of the merger for the contract.

That's a very important combination is that if we are able to use our manager resources to purchase an underlying portfolio at a discount for our shareholders, but the target shareholders are receiving that distribution as opposed to an individual manager that's something that we get excited about. And it's rare in this environment Lee, but it can and does happen. And so we think about that. And then also our view is Lee, its scale and growth by acquisition strategy is important, and there is always a benefit to being big. Our philosophy is one of big enough. And so when we have the opportunity to be accretive to your underlying dividends and net asset value, we make those decisions and allocate capital and mobilize our manager resources to bear. And in situations where we feel that price is too high, we won't.

Over time, we think corporate governance may create more opportunities in the BDC space. But we'll look at them episodically and always keep in mind that we want to make sure it wins for those shareholders as well as ours.

Eric Lloyd

Thank you, Lee. And I'll just add to what John said, too. I think that when we have seller boards that see that alignment and see the credit support agreement we put in place in the MVC deal, the one that we announced as part of the Sierra deal. I think those boards look at this as a way that we are -- we, as the manager, in this case, Barings LLC are insulating shareholders from potential downside risk in the portfolio. And then remember, to the extent that portfolio, you purchased it at a discount, if you refinance and get back par on those assets, all that benefit accrues to the shareholder. So that alignment where we're really putting our own money behind it, besides the cash payment, as John referenced, as well as the credit support agreement. I think when selling boards see that, they see us as an acquirer that will stay consistent with the shareholder alignment that we've talked about from day one.

Operator

Our next question is from Robert Dodd of Raymond James.

Robert Dodd

Congrats on the quarter. On the -- when I look at Slide 13, and I'm going to stick to Slide 13 for now and Slide 27 because it's a new here. The total portfolio average spread is about 80 bps higher than middle market. Obviously, it's considerably -- it's the spread over the liquid market is seeing higher than that. But even over just the middle market kind of sponsor back business, you're generating 80 bps more. Related to, obviously, allocation of capital across platform and acquired businesses. Do you think the market is conducive to you maintaining or even expanding that 80 basis point kind of excess spread and excess value creation beyond what's available in the core private credit middle market today?

Jonathan Bock

I'll start with a comment on cross-platform and then also kind of the discussion of the uniqueness of how we create risk return, which will go to Ian inside of middle market, right, because we stick to our knitting and finding attractive risk return.

On the cross-platform side, just given the level of complexity of premium that will access that's basically unique or bespoke to the Barings management complex, answer is you'll still see a level of yield maintenance above that spread that you see there, Robert, and it's likely to increase because even in periods where there's a flush capital, right? The level of human capital or intellectual -- just intellectual work that goes into making some of these investments, they're very, very difficult. And when they're very, very difficult, you can extract attractive pricing premium. We see opportunities where that can continue to increase, and Brian outlined that in some of our proprietary transactions on that side. But at the same time, right, just our focus and growth on the middle market side, it's a very -- it's a very large and wide market where we're attracting strong sponsors, but I'll turn it over to Ian on spread maintenance inside the middle market.

Ian Fowler

Robert, yes, a couple of things just to throw out there. I guess the first thing is again, as we look at the middle market, we see different components within the market, market segments. And there's definitely a differentiation between those market segments in terms of risk return. And so on a relative value basis, I think as we look at opportunities, we're always focused and we're bottoms up in credit fundamental investors, and we're always looking for good platforms, but we're also very much focused on the relative value, the illiquidity premium that we can generate in the market and pretty much every transaction that we do, we're looking at that sort of 200 to 300 basis points illiquidity premium. And then we really factor in this -- we look at the illiquidity premium on a per turn to leverage basis.

And so when you look at, for example, Refinitiv did an analysis in the large market, your spread return of leverage is around 74 basis points. In the middle market, it's about 124 basis points. So on a relative value, we see attractiveness there. But even within the middle market itself, we focus on segments that are more attractive than others. And then the other thing I would point out, which is beyond just the spread when you look at the private equity market, and this is another reason why we find this market so attractive is most of the transactions that we're doing are financing the original platform and then supporting that platform as it consolidates an industry and through delayed draw term loans.

And so every time you finance the growth of that platform, you're generating additional fees. You're putting more dollars at the work. And we've looked at transactions where the original platform of, call it, $15 million in EBITDA with an origination yield of 7.5% generated IRR of 13%, 14% after everything was said and done. As the sponsor grew that business, sold it to another sponsor. We financed that acquisition and then continue to finance the growth of that platform until it was ultimately sold to a strategic.

Robert Dodd

I appreciate that color. And just a follow-up, if I can, I mean, to the point, I mean, BDCs aren't just spread coupon investments, they are ROE investments, right? So the 3 tools that spread the management fee and the cost of capital in the sense and the management fee shifting that in shareholders' favor when Sierra closes. On the cost of capital, more specifically the cost of debt, do you think you can -- subject to how the treasury market -- do you think you can lower your blended cost of debt, obviously, now with 2 investment-grade ratings, you could increase unsecured, but you have always pretty cheap. How are you you're viewing the calculus on maybe shifting the mix secured and unsecured versus maybe being willing to take the blended cost up a little bit, given you have flexibility on your ROE and your levers above kind of the hurdle rate here?

Jonathan Bock

So Robert, our view would be that the unsecured marketplace, particularly public IG, both maximizes your ability to deploy capital efficiently across a wide spectrum of investments as opposed to we'll argue more restrictive bank line style financing. And you are seeing the pricing of those underlying -- on a spread basis of those underlying unsecured inside or certainly at where folks are borrowing on a secured basis. So you could expect that level of mix shift to continue. You're right in pointing out that the second investment grade rating also offers a very important point to access those public markets, and you could expect to see us do so as we outlined post the Sierra acquisition announcement.

So I'd expect more unsecured. They may arguably put a slight degree of pressure, right? As it relates to the fact of where treasuries have gone. That being said, the pickup that you get in the enhanced flexibility to make the right investment in the right structure at the right time probably gives you more enhancement on the top line, which makes the unsecured well worth the effort.

Operator

We have reached the end of the question-and-answer session. I will now turn the call over to Eric Lloyd for closing remarks.

Eric Lloyd

Thanks, Hillary. And again, thank you for everybody for your questions. thank you for taking the time to listen in to our conversation today and our earnings call and for your shareholders, thank you for your continued support. We hope you have followed through with what we committed to you over 3 years ago when we started this journey of alignment transparency and communication. And so thanks for everybody's time today. Everybody stay positive and stay healthy out there.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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