Owl Rock Capital Corporation (ORCC) Q4 2019 Earnings Call Transcript

Owl Rock Capital Corporation (OBDC 1.21%)
Q4 2019 Earnings Call
Feb 20, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Owl Rock Capital Corporation's fourth-quarter and year-ended 2019 earnings call. I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Owl Rock Capital Corporation's filings with the Securities and Exchange Commission.

The company assumes no obligation to update any forward-looking statements. As a reminder, this call is being recorded for replay purposes. Yesterday, the company issued its earnings press release and posted an earnings presentation for the fourth quarter and year ended December 31, 2019. This presentation should be reviewed in conjunction with the company's Form 10-K filed on February 19 with the SEC.

The company will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on the company's website. I will now turn the call over to Craig Packer, chief executive officer of Owl Rock Capital Corporation.

Craig Packer -- Chief Executive Officer

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth-quarter earnings call. This is Craig Packer, and I'm CEO of Owl Rock Capital Corporation and co-founder of Owl Rock Capital Partners. Joining me today is Alan Kirshenbaum, our chief financial officer and chief operating officer; and Dana Sclafani, our head of investor relations.

Welcome to everyone who is joining us on the call today. I'd like to start by highlighting our fourth-quarter results and providing an overview of our investing activities in the quarter. Alan will then provide more detail on our financial results and an update on our financing activities before I return some closing comments. Heading to the fourth-quarter results.

Today, we are pleased to report another strong quarter of performance. Net investment income per share was $0.37 for the quarter. We saw another quarter of robust origination activity and continue to maintain our strong track record for credit quality. We ended the quarter with a net asset value per share of $15.24, up $0.02 from the third quarter as we continue to over-earn our dividend.

Our net investment income covered our dividend this quarter by approximately 106%. Looking forward, for the first quarter, our board has declared a dividend of $0.31 per share in addition to the previously declared special dividend of $0.08 per share, for a total first-quarter dividend of $0.39 per share which equates to an annualized dividend yield of 10.2% on book value. Last quarter, we began the call by highlighting a public investment-grade bond issuance we executed in October. In line with our continued focus on expanding our unsecured liabilities, we are pleased to again access the public bond market last month, issuing $500 million of senior notes with a five and a half year maturity.

Alan will cover this in more detail later, but we continue to see improved financing costs as the public credit markets become more familiar with our story and expect to continue to tap these markets over time at attractive rates. I'd also like to cover an important milestone that took place after quarter end, which was the first release of the share lockup. As a reminder, we issued 11.5 million primary shares at our IPO last July and 100% of our pre-IPO shareholders were subject to a lockup on about 375 million shares outstanding. This lockup provided for the release of one-third of these shares at six, nine and 12 months post the IPO.

Approximately 125 million shares became freely tradable on January 15, increasing ORCC's float to 146 million shares or approximately $2.3 billion at today's stock price. Another 125 million shares will be released from lockup on April 14 and the last one-third will be released on July 18. As expected, following the lock-up release, we saw increased trading activity in our stock and believe it is positive for our shareholders to have a larger public float. Our IPO also included a number of shareholder-friendly features, which remain in effect.

These features include a $150 million 10b5-1 buyback program, which starts buying a share of the average daily trading volume when the stock trades below net asset value and which will run through February 2021. To date, we have not utilized this buyback and not a single share has been purchased as we have traded above NAV each day since our IPO. We also announced at the time of our IPO that the board had approved a series of six consecutive quarterly special dividends, which began in the third quarter of 2019 and will run through the fourth quarter of 2020. Alan will remind you of the details later in the call.

Moving on to our investment activity. The fourth quarter was another active one from an originations perspective, with $1 billion of new investment commitments, $795 million of new investment fundings and $526 million of net funded investment activity, which was net of $269 million of sales and repayments. We added seven new portfolio companies this quarter and served as administrative agent on most of this origination volume. We also provided additional capital to three of our existing portfolio companies who are pursuing add-on acquisitions.

We continue to be excited to support our portfolio companies as they seek additional capital for growth and are pleased to have a growing roster of incumbent lending relationships, which can drive future investment activity. While repayments remain modest this quarter, we expect to see them pick up in 2020. Of note, 100% of our new origination activity this quarter was first-lien or unitranche term loans. You may recall that last quarter, we saw increased second-lien activity.

As we noted then, our conservative investment posture to focus on first-lien lending has not changed, even though we may see a shift in market opportunities from quarter to quarter. This quarter, we saw attractive unitranche opportunities and five of the seven new investments this quarter were unitranches. As we've highlighted previously, we like unitranche loans as they are first-lien loans with attractive spreads and the protection of $1.01 attachment point. As the size of deals and borrower demand for unitranches increases, given our scale and available capital, we believe we are well-positioned to take advantage of these trends.

This quarter, we continued to see the benefits of our strategy. We are focused on the upper middle market and on primarily sponsor-backed companies. We believe our scale is a differentiating factor as we are able to lead or anchor deals between $200 million and $600 million in size. We remain highly focused on the quality of the book we are building.

Our portfolio now stands at $8.8 billion of high-quality, directly originated senior-secured floating rate loans across 98 portfolio companies. Consistent with historical quarters, the portfolio ended the quarter with approximately 81% first-lien positions, of which unitranche positions accounted for 36% of the total portfolio. We continue to focus on large, stable recession-resistant businesses. A weighted average EBITDA of our borrowers was approximately $79 million at quarter end, remaining squarely on the upper end of middle market companies.

We remain well diversified across the 27 industries in our portfolio. This quarter, our exposure to the distribution sector increased to 8.6%, making it our largest industry. We expect to see some movement among our largest sectors each quarter, depending upon deal flow. I note the breadth of our industry groups for this quarter as we executed deals across six different industries.

Further, no individual investment represents greater than 3% of the fully invested portfolio, and our top 10 positions now represent 24% of the current portfolio. The asset yield of our portfolio was 8.6% for the quarter versus 8.9% in the third quarter, which reflected the drop in LIBOR that we saw as a result of the Fed cutting rates. Although the lower rates reduced our asset yield, we are focused on minimizing the impact by seeking wider spreads. Weaker market conditions in the syndicated market helped us to successfully obtain wider spreads.

The weighted average spread on new investments this quarter was 5.9%, which was very attractive, given all investments were first-lien or unitranche, and we did no second-liens, which typically carry a higher spread. The weighted average spread of our portfolio is 6.3% overall, the highest of the last four quarters. To give you a sense of the deals we've done this quarter, I wanted to highlight two of our new investments. The first was a unitranche loan to support Kelso's acquisition of Individual FoodService or IFS.

IFS is a distributor of foodservice and janitorial products and supplies. Across the Owl Rock platform, we committed to the whole $250 million acquisition facility, serving as administrative agent. We like the company, given the attractive noncyclical nature of the foodservice end market, leading share in the markets they serve and revenue stability, driven by the highly reoccurring product purchases. This quarter, we were also pleased to support Harvest Partners' acquisition of Lazer Spot via $325 million acquisition facility.

Owl Rock led and structured the first new financing and served as administrative agent. Lazer Spot provides transportation services within distribution centers and manufacturing facilities. As the only national player, the company benefits from economies of scale versus smaller competitors and exposure to largely economically resilient end markets such as food and beverage and consumer products. Both IFS and Lazer Spot had the attributes we like in our investments: businesses with attractive market positions, in recession-resistant areas, structured with attractive spreads, maintenance covenants and a reasonable loan-to-value ratio.

In addition to our strong origination activity, we are pleased to report that we continue to have no investments on nonaccrual status, and since our inception in 2016, have not had any principal losses or defaults. We continue to closely monitor our portfolio companies for any signs of change in credit performance. As you'll see on Page 13 of the earnings presentation, across our 5-point internal performance rating scale, portfolio mix remains consistent with that of previous quarters. We continue to see solid performance across our bars, with growth in line with a modestly growing U.S.

economy, which reflects our focus on recession-resistant sectors that we believe help mitigate economic cyclicality. Once again, we are very pleased with our investment activity and portfolio performance this quarter. I will now turn the presentation over to Alan to cover additional detail on our financings and our quarterly results.

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Thank you, Craig. Good morning, everyone. To start off, and you can follow along, starting on Slide 6 of our earnings presentation. We ended the fourth quarter with total portfolio investments of $8.8 billion, outstanding debt of $3 billion and total net assets of $6 billion.

Our net asset value per share was $15.24 as of December 31, compared to $15.22 as of September 30. Our dividend for the fourth quarter was $0.31 per share plus a $0.04 per share special dividend, and our net investment income was $0.37 per share, over-earning our dividend again. On the next slide, Slide 7, you can see total investment income for the fourth quarter was $202 million. This is up $14 million from the previous quarter or approximately 7%.

We should generally expect to continue to see revenue increases for the next several quarters as we ramp back to our target leverage, building up to approximately $10 billion in total investments when the portfolio is fully invested. As for expenses, total expenses net of our fee waivers for the fourth quarter was $57 million. This is up $7 million from the previous quarter or about 13%, which was almost entirely due to higher interest expense in connection with increasing leverage quarter over quarter. Our net asset value saw an increase of $0.02 per share this quarter.

You can see a NAV bridge on Slide 8 of our earnings presentation. As you can see on this slide, the increase in net asset value was driven by over-earning our dividend this quarter. As a reminder, in connection with our IPO, we waived our best-in-class public BDC fee structure for five quarters to keep our industry-low, private phase fee structure of 75-basis-points management fee and 0 performance fee. The way you will see this flow through the income statement is our management and incentive fee expense lines in our 10-K will represent the 1.5% and 17.5% fee structure and the waiver line, effectively a contra expense shown just under our total operating expenses in our 10-K, reflects a portion of our fees that we are waiving.

For the fourth quarter, we waived $41.7 million of fees. In total, so far, since going public, we have waived $73.4 million of fees. We are passing this fee waiver on to our shareholders in the form of the special dividends our board has previously declared. For the first quarter of 2020, our board approved a dividend of $0.31 per share, which we think of as our long-term dividend.

As a reminder, our board set this dividend with a long-term view at a level which we felt was an achievable, conservative dividend level. In connection with our IPO, our board also approved a series of six consecutive quarterly special dividends. You can see a picture of our dividend structure for the rest of 2020 on Slide 15 of our earnings presentation. These special dividends, effectively the fee waiver I just mentioned, is the shaded portion of each bar at the top of this slide.

Fees started in the third quarter of 2019 and run through and include the fourth quarter of 2020. As you can see, for each quarter this year, the special dividend is $0.08 per share per quarter. So in 2020 alone, the total special dividends add up to $0.32 per share. This is effectively an additional full quarter's dividend that we're paying throughout 2020 on top of our regular dividends.

As you can also see on this slide, we provided ourselves a ramp with our special dividends from the third quarter of 2019 through the first quarter of 2020 as we ramp back to our target leverage ratio. Again, all of these special dividends have already been approved by our board of directors for shareholders of record as of the last day of each respective quarter. On the back of another strong quarter of origination activity, we were able to continue to progress toward ramping back to our target leverage. As a reminder, leading up to our IPO, we were operating at a 0.75 times debt-to-equity level.

And just prior to our IPO, we delevered to 0.24 times debt-to-equity, as we call the remaining capital commitments from our private phase investors. We increased leverage to 0.39 times debt-to-equity by the end of the third quarter and ended the fourth quarter at 0.46 times debt-to-equity. Based on our progress this quarter, we currently expect to get back to our 0.75 times debt-to-equity target in approximately six months. As it relates to our financings, we were very active again this quarter.

You can see an overview of all of our financings on Slide 14 of our earnings presentation. To sum up our activity here, we did another CLO takeout from one of our drop-down SPV facilities, and we did two unsecured public bond issuances in October and January. We will continue to remain very active in both of these areas. As a quick overview, our initial public bond issuance we priced at 312.5 over five-year treasuries, and our most recent deal last month, we priced at 220 over five-year treasuries, almost 100 basis points of spread tightening.

We are clearly very pleased with this execution but think there is still room for some further tightening in future issuances. These public bond issuances priced at 5.25% fixed coupon, 4% fixed coupon and 3.75% fixed coupon. As a reminder, we swapped the first issuance to floating rate but have not swapped either of the last two deals due to the unattractive level of economics. There continues to be a negative carry to enter into swaps.

We made the decision to not swap if the economics are not attractive and if the fixed rates are low enough. So under current market conditions, you should expect to see us to keep a portion of our balance sheet as fixed rate. I had commented a few quarters ago that our cost of debt would go up a little before coming down since we paid down our inexpensive capital call facility in connection with our IPO. Due to the recent financings I just mentioned, the CLO takeouts and unsecured issuances, our cost of debt has gone down, as you can see on Slide 12 of our earnings presentation.

The decrease in LIBOR, of course, has also added to our lower funding costs. So to wrap up here with two closing points. First, as it relates to the build-out of our financing landscape, we feel very good about where we are today and what we've achieved to date. We have a diversified set of financings in place that are well matched from a duration perspective with the left side of our balance sheet.

We are diversified across lenders, and we are off to an initial good balance of unsecured bond issuances of about $1.5 billion and secured lending facilities of about $3.5 billion, which include our corporate revolver, drop-down SPV facilities and have now completed two CLO financings, which are a very efficient way to finance the right side of our balance sheet. We will continue to focus on issuing more unsecured bonds and doing more CLO takeouts from our drop-down SPV facilities. Over time, we expect that 50% or more of our financings could be in unsecured bonds. The overall financing conditions are strong, so we believe we can continue to execute efficiently on this plan.

Second, we put in place a number of shareholder-friendly, structural features in connection with our IPO that are all working well. These include our fee waiver, the special dividends, the lockups and the 10b5-1 buyback program. Thank you all very much for your support and for joining us on today's call. Craig, back to you.

Craig Packer -- Chief Executive Officer

Thanks, Alan. In closing I thought I would touch on the current direct lending market environment. In the fourth quarter, market conditions in the broadly syndicated loan market were weak as the market experienced a risk-off sentiment and investor appetite weakened for new issues due to global macroeconomic concerns. One benefit of the weakness in the public markets is that in the fourth quarter, we saw some high-quality investment opportunities shift away from the syndicated market to the direct lending market and also saw the direct lending market, as a whole, move toward improved spreads and documentation terms which we were able to capture on our new investments in the quarter.

We hope this trend would continue into the new year. However, the central banks have continued to signal a commitment to low rates and the economy continues to grow modestly. The broadly syndicated loan market has strengthened alongside most other markets. In the short term, we expect this to remove some of the tailwind from market conditions we had experienced in the fourth quarter.

In Alan's earlier comments, he highlighted we expect to be back to our target leverage level of 0.75 times in approximately six months for the end of the second quarter. We have previously indicated that we would achieve this target at either the end of the first or second quarter, but are now trending to the wider end of that range, given our current visibility on our deal pipeline. This reflects several factors, the first being a generally slower activity level among financial sponsors. Although sponsors are flush with cash, activity in the first quarter has been subdued.

Additionally, we continue to be, as we have always been, highly selective on credit. However, as we move closer to being fully invested, we're even more focused on the return profile for incremental new deals and expect to pursue fewer lower-yielding opportunities. Finally, we expect to see increased repayments as the portfolio continues to season. So for these reasons, we expect to get to our target leverage level on the longer end of our original estimate.

As most of you are aware, we've been quite successful in finding attractive new investments over the last few years in scaling our portfolio, and we believe our franchise and capabilities are stronger than ever. We've been very successful competitively at finding deals we like and are confident we will continue to find high-quality opportunities at attractive returns. We're equally comfortable that at this point in cycle, it is prudent to be highly cautious on credit selection and discipline on capital deployment. In closing, while we don't want to be complacent, we feel we are operating from a position of strength.

We've built a very strong franchise with a demonstrated track record of originating high-quality, middle and upper-middle market deals typically backed by premier financial sponsors. We continue to grow and invest in our investment team and portfolio management capabilities. We are just beginning to see the benefits of having a large number of incumbent lending positions, which should lead to incremental portfolio company growth. We believe we are a lender of choice for the private equity community, and that was on display again this quarter.

We are pleased with both our origination activity and financial results, are excited to continue to deliver strong returns for our shareholders. We are proud of what we have accomplished, but remain focused by maintaining our credit discipline and the overall quality of the portfolio as we look to further build on our progress. On behalf of myself, Alan and the entire Owl Rock team, I want to close by thanking everyone again for your time today and for your interest in Owl Rock. We look forward to maintaining an ongoing dialogue and keeping you apprised of our progress.

With that, operator, please open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Mickey Schleien from Ladenburg. Please go ahead. Your line is open.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Good morning, Craig and Alan. One question I want to ask is about fee and other income, which climbed quarter to quarter. Could you give us a little more background on what drove that increase?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Sure. We had some paydowns this quarter. And if you look back to 2Q, we also had a decent level of fee income coming through. As you can appreciate, it's a bit idiosyncratic.

But we had a paydown with a couple of our portfolio companies, Hillstone, City Brewing and on a smaller extent, ConnectWise.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Is there prepayment fees then, Alan?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

The acceleration of OID and prepayment fees from Hillstone, and then we took in the syndication fees on selling down some pieces of City Brewing and ConnectWise.

Craig Packer -- Chief Executive Officer

It's pretty much split evenly between OID and call protection.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

All right. I appreciate that. And could you discuss a little bit the outlook of Feradyne Outdoors and Give and Go? I noticed that their valuations are down quarter to quarter and I understand they're private companies, but any background you can give us on what's going on there?

Craig Packer -- Chief Executive Officer

Sure. Feradyne is a manufacturer of hunting products. It's owned by a private equity firm, Snow Phipps. It's an investment we made in May of 2017.

The company has struggled a bit. It hasn't certainly hit our expectations or Snow Phipps' expectations. They continue to be very supportive of it and put additional capital in. We've had some amendments.

We still feel, ultimately, expect to get a par recovery on it. But based on this performance, have felt it appropriate to mark it where it is. So it's about all I can say on that one, and Give and Go, I believe that one actually marked up this quarter. It has a low mark.

So I understand why you might have crossed the radar screen. That's a company in the food space. It's controlled by TH Lee, a buyout firm. They've had some operational issues and some cost structure issues.

It has a fairly large publicly traded first-lien term loan. We're a fairly modest part of a smaller second-lien term loan and I think there's probably folks you could tap into to get a broader view on how the company is doing. But this past quarter, its condition, I would say, had improved modestly and so we marked it up a little bit. Similarly, we expect to ultimately get a part recovery there, but I feel like it's marked appropriately.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

[Technical difficulty]

Craig Packer -- Chief Executive Officer

Sorry. I think someone's talking. I can't hear.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

[Inaudible]

Craig Packer -- Chief Executive Officer

Mickey, we can't hear you.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

[Inaudible] a lot of cash. And I realize [Inaudible].

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

No, you're fading out now, Mickey.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Hello?

Craig Packer -- Chief Executive Officer

We can barely hear you. Why don't we switch to the next question, and maybe you could figure out a way.

Operator

[Operator instructions] Our next question comes from the line of Casey Alexander with Compass Point. Please go ahead. Your line is open.

Casey Alexander -- Compass Point -- Analyst

Hi, good morning. I have a couple of questions. First of all, have you guys been pulling your portfolio companies to determine exposure to and potential supply chain issues from China? And how do you feel about that, looking through your portfolio?

Craig Packer -- Chief Executive Officer

The answer is yes. And while it's still early, for sure, I would say we feel fine about where we are. We don't feel like we have any great degree of exposure. Our businesses are primarily U.S.-oriented businesses, and we finance a lot of services businesses.

If you look at some of our biggest sectors, healthcare, software, distribution, they're generally not businesses that have big global industrial supply chains. We have a few that we are going to pay close attention to. So I don't want to say there's no exposure or that we're complacent on it, but I would say one of the virtues of lending a BDC is it's primarily U.S. businesses, and we particularly are more oriented toward service businesses which we generally think are more recession-resistant than big industrial businesses that are going to cycle.

Casey Alexander -- Compass Point -- Analyst

All right. Well, thank you for that and then I'm sure you could appreciate that's probably a question that we're going to have to ask almost every BDC, just a matter of course, given what the current conditions are. On your cost of debt, does that cost of debt at 4.6%, does that include the unused fees?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Yeah, it does.

Casey Alexander -- Compass Point -- Analyst

OK, terrific. Well, I mean, it appears as though you guys are controlling everything that you can control, except for LIBOR, which we realize is out of your control. But Craig, you discussed that you like unitranche and you kind of characterized it as first-lien, whereas I've always thought that kind of the definition of unitranche is something that combines first-lien and second-lien exposure. So when you describe it as first-lien, are you talking about its location in the capital stack or in your unitranche, it's kind of the attachment point that doesn't actually reach into the land of second-lien?

Craig Packer -- Chief Executive Officer

Sure. So I'll be as clear as I can. Look, unitranche is a term of art. Different lenders will call difference from its unitranche.

There's no universal definition. When we describe unitranche, we're describing an instrument that has the following characteristics: it's a first-lien term loan. However, the leverage level for that loan extends to a point which is more typical of second-lien or something beyond a typical first-lien. So as a contractual matter, it's first-lien debt.

There's no debt ahead of it. It's got first claim on the company's assets. However, we acknowledged by calling unitranche that it's at a higher leverage level than would be typically the case of a first-lien loan. Historically, in the space, folks would do unitranches and then in an effort to boost the return on that loan, they would sell, let's call the first out position or an additional loan within the unitranche itself to another lender at a lower spread so they would boost the return on the remaining last out piece.

At Owl Rock, we typically have not done that. We've done it once or maybe twice because we prefer to just control the entire loan. And so for us, it is a first-lien. We call out the percentage because I know you and others find it helpful to know exactly how much unitranche there is, and so we call that percentage out.

As I said a moment ago, we like it because you're getting the blended rate between a first and second-lien. However, you're attaching $1.01. So to the extent that there's an issue with the credit, you have all the downside protection of being a first-lien lender. And as I said a moment ago, we don't typically have a first out lender in there.

So we don't have any lingering inter-creditor issues that I know some folks have concern on. So we're not trying to be cute at all with the words. It is first-lien. But we also make a point of highlighting what percentage.

We also disclosed in our 10-K exactly how much unitranche we have so you can check that number every quarter. We do it quarterly?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

We do it quarterly. So every quarter, you can see exactly how much we have. Different lenders may characterize the same loan as a unitranche or not a unitranche, because the judgment of how up the leverage point is it's just subjective.

Craig Packer -- Chief Executive Officer

Does that help?

Casey Alexander -- Compass Point -- Analyst

That's perfect. Thank you very much, and I appreciate you taking my questions.

Operator

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

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Can everyone hear me?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

We can, Mickey.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Yeah, terrific. So I just wanted to follow-up, Alan. You're carrying a pretty good amount of cash on the balance sheet, over $300 million. So I understand there's a lot of moving pieces there and there could be a timing issue, but obviously, that's not optimally efficient, Alan.

What kind of run rate can you expect in terms of the cash balance?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Sure. And you're right, Mickey. It is a bit idiosyncratic. It gets driven largely by two factors.

One, we have a series, as you know, of drop-down SPV financing facilities in place and we run quarterly waterfalls that release the cash from those facilities. And that happens, I think, shortly after quarter end. And the other part of that is just idiosyncratic based on what the timing of when deals are funding. And we could always have a little more or a little less if we're closing a deal immediately after quarter end.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

OK. Fair enough. And my last question. Curious how disposed the board is to consider raising the target leverage, given the portfolio structure and current market conditions.

And obviously, your relationships with your stakeholders, including the credit rating agencies.

Craig Packer -- Chief Executive Officer

Sure. Candidly, management has not engaged the board with that discussion. As we've outlined here today, we are still working our way back to our target leverage level. We've got some work to do to get to that level, much less considering an increase.

This is a topic we talked about a lot in the context of our IPO where we delevered quite significantly. We have very much placed a strategic priority at keeping access to the investment-grade bond market. We were very fortunate to be able to get investment-grade ratings very early in our life cycle as a private BDC before we went public. And we very much value those ratings.

And as we've highlighted, we've tapped that IG bond market on multiple occasions. And so it's strategically important that we not do anything to disrupt on that ratings profile, given where we are, given the return profile we were able to generate. We feel like we've got the right balance with our current leverage targets. So it's not something we've even discussed with the board.

So I certainly wouldn't want to characterize their disposition to it. We feel like we're in the right place right now.

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

OK, that's helpful and I understand. Thank you for your time. That's it for me.

Operator

Our next question comes from the line of Chris York from JMP Securities. Please go ahead. Your line is open.

Chris York -- JMP Securities -- Analyst

Good morning, guys, and thanks for taking my questions. So Craig, we often hear from peer BDCs that both terms and deals are growing more borrower-friendly. Now some of these peers tend to attribute this to make new entrants. So how should investors reconcile this comment with your growth as a big new entrant with the fact that other BDCs tend to continue to seek your deal flow, and they're often clubbing with you on many deals?

Craig Packer -- Chief Executive Officer

Good. Well, that's a great question. Look, I guess, what I would say, rather than really answering your question, you're making an observation, which I would share. But I'd rather talk about what our competitors are saying -- I guess, I'll just tell you what we're seeing.

What I think has been happening over the last few years is the private equity community is becoming more and more comfortable with direct lending solutions, in part because there are much bigger pools of capital available to provide them from firms like ours that have trusted relationships with those sponsors, really big investment and investment team, the ability to provide solutions that are not only competitive with, but in many ways, have attractive features relative to the syndicated market. And so they're doing more and more deals with direct lenders like Owl Rock. And yes, I think we are a leader in that because we've built a business around being a great partner for financial sponsors. Every investment we make has to pass our credit spectrum, first and foremost.

We continue to close on less than 5% of the deals we look at. We care deeply about documentation. We're quite experienced at that. We negotiate our documents bilaterally with the sponsors.

There's no bank in the middle. We almost always lead our deals, and we care about leading our deals because we get to control that documentation. The vast majority of our first-lien term loans have maintenance covenants and the return profile, you can see for yourself, we just reported our results. And we think our returns for the risk in our portfolio, we think offers are very attractive, our risk reward for our shareholders.

As for our competitors and what we're saying, you'll have to ask them. I think as a new entrant, I understand that we've come in to a market and there may be some jealousy or frustration around that and maybe that reflects itself in some folks' comments. But as you noted, many of those competitors are coming into our deals. So you have to ask them how they reconcile that.

Chris York -- JMP Securities -- Analyst

Fair enough. I wanted to switch gears. So you recently -- or the manager recently received investment by Dyal. So does that recent investment provide the external manager with the opportunity to grow the platform, which could allow you to potentially increase the origination team, maybe even expand into specialty niches? So could you just comment on that potential opportunity and what those growth opportunities could be?

Craig Packer -- Chief Executive Officer

Sure. And the answer is yes. And the reason we took the investment from Dyal, all that capital is going to be used to help grow the Owl Rock platform. As folks know, we really bootstrapped Owl Rock, my partners and I, with our own capital.

We didn't take outside investors to start the firm. We have, today, still $112 million personally invested in ORCC and more than $200 million invested in the various Owl Rock funds. So we have tremendous personal commitment. We've had great success at growing our platform and we continue to find investors that want to invest with us and borrowers that want to borrow from us.

And so we intend to use the Dyal proceeds to continue to grow our platform. What we've talked about generally is additional investment in direct lending product. We like the direct lending space. So I would expect new funds that we were to launch to be in the direct lending arena, leveraging the relationships we have in our underwriting process and not get into much more far-flung areas but you should absolutely expect to see us continue to invest in our team, both the investment team, origination, credit, underwriting, portfolio management, and we'll continue to do that.

So I think it's a positive. We've highlighted here, and then on other cases, we've highlighted that our size of our platform and ability to write a large check we think is a huge competitive advantage. So I think all the investors and all of our funds will continue to benefit as we grow.

Chris York -- JMP Securities -- Analyst

Makes a lot of sense. Could you elaborate maybe and just let us know what the FTE number, full-time employees, were at the platform at the end of '19 and then maybe the year-over-year growth?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Sure, Chris. We're at about 140 employees today. And a year ago, we were probably in the 80 to 90, 95.

Chris York -- JMP Securities -- Analyst

Awesome. Next question is on your second-lien. So the portfolio mix hasn't moved materially over the last year, but I do know that you guys are comfortable taking that mix as high as 40%. So how should investors think about the expectation for any changes in the portfolio mix going forward in today's environment?

Craig Packer -- Chief Executive Officer

Sure. So just to remind folks of the history here, when we started investing in 2016, obviously the portfolio at that point was not scaled. But in that first year or so, you'll recall, we were as high as 40% second-lien. Today, it's really low, second-lien is sub-20%.

I think at this point in the credit cycle, we are very focused on being defensive and doing only loans that we're extremely confident are good loans and that will withstand the cycle. And so that has led us to drive our first-lien up to north of 80%. And we don't have an expectation that that will change in the near term, given where we are in the economic cycle. Second-liens offer an attractive spread.

When we do second-liens, we typically only do them in very large upper middle-market companies that have significant equity cushion beneath us and typically, in businesses that we don't expect to cycle or have any volatility so that we don't find ourselves in a disadvantaged position. If we found those in this environment, and we could get an attractive spread, we would do them. But we haven't seen that many of those. In the third quarter, we happened to see three.

We did them. In the fourth quarter, we didn't see any, we didn't do any. I think in the near term, I would expect us to be in the low 20s, high teens. But I don't want to -- well, I don't have a crystal ball.

And so if the market cracked in the middle of this year, and we saw bigger opportunities, and we thought it was prudent for our shareholders to take that percentage up to the high-20s, we would do that. But I don't expect that to happen. But I wouldn't rule it out, if market conditions allowed us to do it. We don't imagine any time soon we'll get to 40%.

So I think in the 20s is probably where we'll live. Certainly we'll have update calls between now and when we might get to 30%, given we're at only 18%, 19% today.

Chris York -- JMP Securities -- Analyst

Got it. That context and insight is very helpful. Last question, just housekeeping. Interest coverage was 2.5 times at year-end 2018 for the portfolio.

What was the year-end interest coverage for 2019?

Craig Packer -- Chief Executive Officer

I think we're going to have to -- we have a lot of folks here, but nobody's reaching to answer that question. We'll be happy to give you a call offline and provide that to you. Sorry.

Chris York -- JMP Securities -- Analyst

Sounds good. That's it for me. Thanks, guys.

Operator

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

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Good morning. Craig, one of your comments in the prepared remarks at the beginning was you expect repayment activity to pick up in 2020. Generally, we know about repayment activity accelerates in periods where spreads are compressing and given that -- some of the other typically, right? And given some of the other color you gave about less low-yield loans, etc, I mean, is that the right way to think about it, that repayments could accompany compressing yields? And how far are you willing to go on -- and by yields, I mean, spreads, really.

You don't control LIBOR. How far are you willing to go on that spread? I mean, this quarter, obviously, portfolio spreads were up, new investment spreads were down slightly. So your repays were on some of the lower spread investments. But can you reconcile all that for us?

Craig Packer -- Chief Executive Officer

Sure. I guess I would gently adjust the supposition of the way you asked the question. While certainly the rate environment will impact the company's ability to refinance us, there are a lot of other factors that drive that decision. Oftentimes, we get repaid when the portfolio company gets sold.

It may get sold to another financial sponsor. Maybe it gets sold for strategic, maybe it'll go public. There'll be some corporate catalyst where the company's revisiting its capital structure. Oftentimes, that's driven by the company's success.

The company and sponsor might have done an LBL, we financed it. It's grown. And so its credit profile has improved. So regardless of market conditions, it may get a lower cost of financing just by virtue of the fact that the credit environment is -- the credit has improved.

Maybe the company has grown large enough to go to the -- got a syndicated market to take us out. Maybe it's a second-lien and they decided to do all first-lien structure because the leverage has improved. There's just a lot more that goes into it than purely the rate. Obviously, rates can help the companies refinance but I would say -- and I don't -- this isn't scientific at all.

But I think generally speaking, that is not what's been happening. It's improvement in the credit or sell the company that's driving refinancings. So I guess, that's what I think will drive. The reason why I comment, ours will increase is because our portfolio is still relatively young, and our repayments are still relatively modest.

As you know, our loans are typically five to seven years. We assume, on average, they're a three-year life. We start investing in 2016 but obviously, our pace of investment has picked up considerably in '17, '18 and '19. And so it's natural.

And we would expect to have our repayments increase just as companies go to refinance. Even if their business hasn't improved and the rate environment hasn't improved, companies generally don't like to wait until their maturity to refinance their debt. And so companies in our portfolio that have done just fine and are going to just refinance at the same exact spreads, we'll do that early, and we would expect to, obviously, be well-positioned to do that given our incumbencies. So I don't know if that answers any of your questions, but I think that's how I think about it.

Robert Dodd -- Raymond James -- Analyst

Got it. No, that does answer the question. I appreciate it. And then one follow-up to Chris' question on Dyal and your answer to that.

I mean, you said that all investors, all funds could benefit from expanding the platform into tangential areas of private credit, which sounds good. In the event if you do add another vertical, for lack of a better term, to the platform as a whole, if that's eligible from your thought process to go into ORCC, how much kind of a heads-up would you give to investors about any change in type of assets? I mean, even if they're high security, there might be different kinds. So can you give us any color on how much notice investors and shareholders would get about changes in any kind of mix concept at the BDC, even if it's the same security level or whatever?

Craig Packer -- Chief Executive Officer

Well, I'm not sure I'm totally following your question. What I would say is ORCC is a public company. We take our responsibility about disclosure on our strategy and what we intend to put in the fund quite seriously. We have these calls, and obviously, we speak to you and the research analysts and our investors on a regular basis.

And our strategy is sort of well-defined and laid out. To the extent that we have additional funds underneath the Owl Rock and the Owl Rock platform, we today, and we'll continue to invest deals across funds, subject to our SEC exemptive relief. We have a very, very thorough and detailed allocation policy that governs that, but we think it's an advantage of our platform to be able to put fields across the different funds. And I don't want to spend too much time talking about what other funds might be or what the strategy might be, but just to say, to the extent that we have a fund that had a different strategy than ORCC, those investments would go in that fund.

And we're not going to alter ORCC's strategy just because there's a different fund under the Owl Rock platform that might have a different flavor to it. So I certainly wouldn't want to raise any concern for folks on our call that because we're going to grow our platform that it would change our strategy. Our strategy at ORCC is very clear, and we're executing on it.

Robert Dodd -- Raymond James -- Analyst

Got it. Appreciate it.

Operator

Our next question comes from the line of Ryan Lynch with KBW. Please go ahead. Your line is open.

Ryan Lynch -- KBW -- Analyst

Hey, good morning, guys. First one, you guys kind of talked about some opportunities in the fourth quarter coming from the broadly syndicated loan market as those guys that are now taking the direct lending route. I'm just curious. Of those borrowers that are maybe choosing the direct lending route versus the broad syndicated loan route, are they bringing over kind of the terms, covenants and structures of the broadly syndicated loan market to the direct lending market? Or are you able to negotiate slightly better terms and structures on those crossover loans?

Craig Packer -- Chief Executive Officer

Sure. I'm glad that you asked that because I think this is a topic that there's some confusion on. When we make a loan, regardless of what the borrowers' alternatives are, we structured that loan to our satisfaction. The vast majority of our first-lien term loans have maintenance covenants.

As you know, the broadly syndicated market, almost all of it is covenant-light. In addition to the maintenance covenants, our documents are quite extensive and govern everything about the company. How much they can borrow, whether it means they can put on, dividends they can pay out, everything. They're 100-plus page documents, and we spent incredible amounts of time negotiating every aspect of it.

When a borrower chooses a direct lending solution, they are agreeing to a much tighter document than they would have in the broadly syndicated market, but they're getting some benefits from that. We provide certainty. Broadly syndicated market doesn't provide certainty. Their deal execution depends upon market conditions.

We hold the paper. Broadly syndicated market doesn't hold the papers. You don't know who your lenders are. So sponsors are choosing to live with tighter documents and higher spreads in exchange for the certainty and the direct lending relationship that they value.

Again, our economics are clear. You can see what they are. We get a premium, not only in terms of the spread versus where an issuer could potentially borrow in the broadly syndicated market, but we also get OID, which typically would be given to the banks that are arranging the financing. The combination of that additional spread plus the OID, we think is very attractive, and it's one of this core virtues of direct lending along with the improved documentation.

And lastly and maybe most importantly, the much more detailed level of due diligence we get to do on the borrowers versus the broadly syndicated. So as a package, I feel really good. We're delivering to our investors a much more attractive package than they could otherwise get investments in the broadly syndicated market. The sponsors are finding that trade-off attractive.

Again, this is at a time where markets are generally quite strong. We've gotten a period where markets were more volatile. They find it even more attractive.

Ryan Lynch -- KBW -- Analyst

OK. Yeah, that makes sense. And then in your prepared comments, you had mentioned you guys are trying to seek some wider spread loans to help offset the decline in LIBOR. Can you just provide a little color on how you're doing that just because it doesn't seem as overall spreads in the market are changing meaningfully.

So how do you guys intend to seek wider spreads? How do you accomplish that?

Craig Packer -- Chief Executive Officer

It's like anything else. You've got to find the credits that you like, and you've got to find an economic package that you're willing to do. In the fourth quarter, we were able to do that. As I signaled, in the first quarter, it's harder.

But it's going to move up and down based on market conditions. Not only the public markets, but general amount of capital, general amount of fuel, the supply demand for deals and financing. We want to get properly compensated for our capital. Our first and foremost is credit, but we want to also make sure as we put dollars out, we're getting properly compensated for it.

We had good success in the fourth quarter in pushing for additional spread. As the market has heated up in the first quarter, that's harder. It's going to move up and down quarterly, monthly, depending upon market conditions. There's all sorts of things that disrupt the market.

Again, it's all on the margin. When the sponsors are buying a company, another 25 or 50 basis points, generally speaking, is not going to have a profound impact on our IRRs. We think it's important for our shareholders that we push to get the most attractive spread that we can. And so we'll continue to do it.

It's a battle on a deal-by-deal basis. So I guess that's the best I can characterize it for you.

Ryan Lynch -- KBW -- Analyst

OK. That's all for me. I appreciate the time today.

Operator

Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please go ahead. Your line is open.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi, guys. Good morning. Thanks for taking my question. Been a lot talked about today, which we appreciate.

Just on a portfolio company, ConnectWise. You recapitalized, upsized that this quarter. Just a question on the spread there. It's 600 versus 550.

Can you break that down for us in terms of how much was the market widening in the fourth versus anything on leverage attachment point, structure and so forth?

Craig Packer -- Chief Executive Officer

I don't think it's appropriate to get into too much detail on any one deal. I'll just say, generally, there are things that happen in our portfolio companies. Sponsor may come to us in the context of an acquisition or doing additional financing, and similar to pricing a new deal, we may from time to time adjust the spread up or down based on what they're doing. Without getting into anything on ConnectWise, I don't think anything market-driven was happening there that was specific to the credit.

And we've reached an adjustment in the rate with the sponsor, and it is what it is.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Got it. And you mentioned there was some syndication and fee income related to that. Was the BDC able to retain all of the upfront fees on this circumstance? Was there a split with the advisor?

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

So I think, Finian, I might go back to my comments. I was referring to income that the BDC took in, in the current quarter and my comments were accelerated OID and prepayment fees when companies pay down in part or in full. And also from time to time, we will sell down positions from a risk perspective. And from time to time, the BDC warrants syndication fees on those sell downs.

And we saw a little of everything I just mentioned in the current quarter.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK. That's helpful. And just on the matter of the upfront fee. As you have scaled up materially now and soon you'll sort of revert to the market fee structure, can you give us an update on how you look at the capital structuring fee, whether that goes to the advisor or the BDC?

Craig Packer -- Chief Executive Officer

Sure. I mean, as we've talked about with you in past quarters, I mean, there's no relationship between the fee structure we're charging on the fund and how we might handle fees on an individual deal. They're just not related to each other. As we've disclosed and as we've talked about on this call with you, we, from time to time, will take fees to the advisor for certain services the advisor performs for the companies.

We've talked about that as a practice that we have. It's only done in selected circumstances. Certainly not done in every deal or anywhere close to every deal but we do, do it on a selected basis. That process has been in place.

We talked about it. It's going to be ongoing. It's nothing to do with our fee structure, and there's nothing new really to talk about there.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK. That's all for me. Thanks for taking my questions.

Operator

[Operator instructions] Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead. Your line is open.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. Wondering if you could elaborate on your prepared remarks on seeing slower activity among sponsors. Wondering how much is due to seasonality and whether you expect to see some kind of pickup as the year goes through.

Craig Packer -- Chief Executive Officer

Sure. The sponsor activity will go up and down. Maybe different views even in this room on this. I don't think it's seasonality.

I just think it's a little bit of a slowdown in sponsor activity. Sponsor out a tremendous amount of capital, and they would like to be deploying that capital. So I don't think there's any change in their disposition but they can only put capital out when they find new opportunities. And I think that what you're seeing in the first quarter is just less deal flow.

It could change quickly. It could change on a dime. But we thought, based on what we're seeing, and again, we're midway through the quarter, we thought it was appropriate to flag that it has been slower this quarter. I think that's consistent with what other of our peers are seeing as well.

I don't expect that to be a prolonged period of time because they have capital they've raised that they want to deploy, and the economic environment is still attractive, valuation is still attractive. I think it's just idiosyncratic for where we happen to find ourselves in the first quarter of 2020.

Kenneth Lee -- RBC Capital Markets -- Analyst

Understood. That's all I have. Thank you very much.

Operator

There are no further telephone questions at this time. I'll now turn the call back to Craig Parker for closing remarks.

Craig Packer -- Chief Executive Officer

Great. All right. Well, thanks, everyone, for dialing in. Thanks for your questions.

We're always available. If you have additional questions, just reach out to us separately. We appreciate your time and look forward to seeing and speaking with you soon.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Craig Packer -- Chief Executive Officer

Alan Kirshenbaum -- Chief Financial Officer and Chief Operating Officer

Mickey Schleien -- Ladenburg Thalmann Financial Services Inc. -- Analyst

Casey Alexander -- Compass Point -- Analyst

Chris York -- JMP Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Ryan Lynch -- KBW -- Analyst

Finian O'Shea -- Wells Fargo Securities -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

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