Owl Rock Capital Corporation
Q2 2021 Earnings Call Transcript

Published: 5 Aug 2021

[Operator:]

Good morning and welcome to Owl Rock Capital Corporation's Second Quarter 2021 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 guarantee 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 first quarter ended June 30, 2021. This presentation should be reviewed in conjunction with the Company's Form 10-Q filed on August 4 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 Mr. Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

[Craig Packer:]

Thank you, operator. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. This is Craig Packer, and I'm CEO of Owl Rock Capital Corporation and a co-founder of Blue Owl. Joining me today is Alan Kirshenbaum, our CFO and COO; Jonathan Lamm, a recent addition to our senior management team and Dana Sclafani, our Head of Investor Relations. I'll start today's call by briefly discussing our financial results for the second quarter, before providing an update on the portfolio and the quarters deal activity. Afterwards, Alan and Jonathan will cover our financial results in more detail and then I will discuss our outlook and make some closing remarks. Turning to our second quarter financial highlights, net investment income for the quarter was $0.30 up from $0.26 per share in the first quarter. We made substantial progress towards covering our $0.31 quarterly dividend and remain on track to cover it in the second half of the year. This was driven by a significant increase in both originations and repayments and continued strong credit performance. Our board has approved the third quarter dividend of $0.31 per share. We ended the second quarter with net asset value per share of $14.90 up $0.08 from the first quarter. Credit quality remains strong with an average fair value of 98 consistent with prior quarters. We were very pleased with the origination activity we saw this quarter which represents our third largest quarter since inception. As a result of this activity our net leverage increased to 1.0 times approaching the midpoint of our target ranges of 0.09 to 1.25 times. We also saw our pace of sales repayments accelerate to 743 million with repayment levels now approaching fully ramp levels. Finally, I would like to take the opportunity to formally introduce Jonathan Lamm who many of you already know. Jonathan will become the CFO and CEO of ORCC effective September 1. Jonathan brings a wealth of knowledge and more than 20 years of experience most recently as the CFO of Goldman Sachs SBDC. We are excited to have him on board and he will be discussing our second quarter financial results in greater depth shortly. Turning to originations, we were extremely pleased with our activity this quarter, both in terms of volume and quality. Originations were up significantly from last quarter and exceeding Q4 driven by the strong performance of our investment team and a pickup in M&A activity as a result of the continued strong economic backdrop. Gross originations for the quarter were 1.6 billion with 1.4 billion of funded activity and net funded originations of 663 million. Our average spread on new commitments was approximately 670 basis points, up from 640 basis points last quarter. Our overall spread increased as a result of our ability to originate some higher spread unit tranches particularly in the software sector, as well as an increase in second lien investments and a new preferred investment. We're pleased with our success at increasing the average spread on our investments over the last year which is now roughly 20 basis points higher than it was a year ago. We believe this reflects the strength of our origination capabilities and relationships and the continued attractiveness of our direct lending solutions. Along those same lines, we've talked in prior quarters about how we have not yet reached a normalized pace of repayments. The payment volume was up meaningfully this quarter, and we are quickly progressing towards our expected fully ramped pace of repayments, which will positively impact earnings. We finished the quarter with an investment portfolio of 11.9 billion across 129 portfolio companies and we are pleased with our strong credit performance. The overwhelming majority of the portfolio continues to perform very well with 93% of debt investments marked above 95% of par. Most of our borrowers have returned to normalize operating levels and many experienced strong performance in Q2. While we are closely monitoring COVID developments, we have a positive outlook for the overall economy in the second half of the year as consumer demand further rebounds. We believe this will continue to drive good results for our borrowers. We continue to see sequential improvement in the engine our lowest rating category, those names rated four or five. These have decreased from 1.9% to 0.5% of the portfolio quarter-over-quarter. While we continue to have a small number of challenge credits, our non accruals remain extremely low with only two investments on nonaccrual status at the end of the quarter representing less than point 0.5% of the portfolio based on fair value, one of the lowest levels in the BDC sector. Before I turn it over to Jonathan to discuss our financial results, I'd like to take a moment to discuss two recent announcements we made. A few weeks ago we announced an increase in capital commitments towards joint venture loan funds so they've awake. The fund has generated an attractive average quarterly ROI over the past three years of approximately 10%. ORCC increased its commitment to 325 million, and in addition increased its economic ownership to 87.5% from 50%. We're also excited to bring a nationwide life insurance as a new partner in the JV. Nationwide, it's been a meaningful ORCC shareholders since inception, and purchase the remaining 12.5% economic interest from UC regions effective June 30. Regions remain a very significant or ORCC shareholder and a valued long term partner across the broader Blue Owl platform. In conjunction with these changes, the joint venture will be referred to as ORCC senior loan fund going forward in our disclosures. I also want to touch on the CFO transition we announced this week. Effective September 1 Jonathan will become the CFO and CEO of ORCC. Alan will remain an officer of the company as an Executive Vice President and serves as the CFO of Blue Owl, the parent of ORCC's advisor. Jonathan comes to us with tremendous experience as a BDC CFO, and I'm excited to work closely with him going forward. I would also like to thank Alan for his extraordinary contributions to ORCC since inception. Alan has played a critical role in the great success we've enjoyed today by building it best in class, operational and financial infrastructure for ORCC which we believe to be one of our key competitive advantages. Alan will now say a few words before turning it over to Jonathan.

[Alan Kirshenbaum:]

Thank you, Craig. Good morning, everyone. To begin, I echo your comments Craig, we are thrilled to have Jonathan on board with us and know that his deep experience and wealth of knowledge will serve ORCC very well. Before I turn it over to Jonathan to go through the results, I'd like to briefly reflect on how we strategically approached the construction of ORCC balance sheet. ORCC now benefits from what we believe are one of the strongest funding profiles in the industry. Given ORCC's scale since inception, we knew it was critical to have a diversified financing landscape and we embarked on building a balance sheet that would provide financial flexibility and ample liquidity from multiple financing sources. In addition to developing a large diverse bank group that provides us with a billion and a half of revolving credit capacity we have also issued almost $4 billion across eight unsecured bond deals, and over $1.5 billion across six CLOs to efficiently finance our balance sheet. We have been able to meaningfully improve pricing since our first issuances in both cases. I am confident with Jonathan as CFO and CEO ORCC will continue to optimize its financing profile, and deliver strong risk adjusted results for our shareholders. With that, I'll turn it over to Jonathan.

[Jonathan Lamm:]

Thank you, Craig and Alan for the kind words. I'm excited to be part of the team and look forward to talking more with all of our investors and our other stakeholders. We ended the second quarter with total portfolio investments of 11.9 billion in outstanding debt of 6.4 billion and total net assets of 5.8. Billion. Net asset value per share increased to $14.90 as of June 30 compared to $14.82 as of March 31. We ended the quarter with net leverage of 1.0 times debt to equity, approaching the midpoint of our target range of 0.09 to 1.25 times with 2.2 billion in available liquidity. Our dividend for the second quarter was $0.31 per share, and our net investment income was $0.30 per share. Total investment income for the second quarter was 249 million, up from 222 million in the first quarter as a result of a 22 million increase in interest income reflecting the progress we made a net portfolio deployment as well as from an increase in prepayment related income. On the expense side, management and incentive fees were 69 million reflecting continued growth in the portfolio and interest expenses 54 million up from the prior quarter as we modestly grew our leverage. I would highlight that we had $1.8 million of non-recurring interest expense related to the acceleration of upfront deferred financing fees as we continue to optimize our financing costs through the restructuring of one of our CLOs. Turning to balance sheet, we're pleased with the continued growth of our unsecured financing while we continue our efforts to reduce our borrowing costs. We capitalized on strong conditions in the unsecured bond market during the quarter, raising 950 million across two deals of attractive spreads. In addition to the long five year that we issued in April, we raised an additional 450 million in a seven year bond which priced at a fixed coupon of 278. This is our first seven year bond and should help us to enhance the laddering of our debt maturity profile. As of June 30, more than 60% of our outstanding borrowings were from unsecured debt. We will continue to look for opportunities to optimize our liabilities which may contribute to positive NII growth in the future. For context, our unsecured bond pricing levels have improved over 100 basis points since we've been accessing the unsecured market and we believe there is additional improvement we can capture on future issuances. With that I'll turn it back to Craig for closing comments.

[Craig Packer:]

Thanks, Jonathan. To close I'd like to touch on the market environment and discuss our outlook for ORCC in the second half of the year. We're really pleased to have delivered on a number of the objectives we have talked about in prior quarters. We are now well within our target leverage range and continue to grow the portfolio, which has allowed us to make substantial progress towards covering our dividend. Despite a competitive market backdrop, we're able to deploy capital into attractive investments and drive incremental yield in the portfolio. The pace of repayments also picked up resulting in a meaningful increase of prepayment related income. Our credit performance remains extremely strong and is amongst the best in the sector. And opportunistic financings and improving financing spreads have allowed us to continue to lower our overall cost of funding. We are encouraged by our visibility on the third quarter and expect another very solid quarter of originations. In terms of repayments, we also expect another strong quarter which should again generate meaningful prepayment income in Q3. Given our strong origination activity, we are confident we will be able to offset repayments by deploying the capital into new originations at attractive spreads. In terms of portfolio construction we will continue to be primarily a first name lender, and we will also participate in other opportunities across the capital structure that offer attractive risk adjusted returns. This includes continued second lien investments, investments in funds like our senior loan fund, or equity investments in companies like Wings Fire, as well as select structured capital and equity co investment opportunities. However, protecting our principal is paramount to everything we do. In terms of the market opportunity, while we have seen some increased competition and result in spread pressure we are very pleased by the continued growth in demand for large direct lending solutions in particular unit tranches. Private equity firms are choosing direct loans for more of their large deals, which plays to our strengths since we generally favor bigger companies for our portfolio. This year, we have already evaluated more than 20 opportunities over $1 billion in size, and invested in or committed to eight of these and continue to evaluate others. This trend continues to accelerate and is creating exciting opportunities for large direct lenders like Owl Rock. We believe we are especially well-positioned for this due to our scale platform with a full suite of financing solutions, large, deeply experienced team with strong relationships in the financial sponsor community. Before I wrap up, I want to touch briefly on the Blue Owl transaction which closed on May 20. Owl Rock now operates as a division of Blue Owl. And we're excited about the growth of the platform and the opportunities that the extended business will provide over time. We will continue to use the Own Rock name and we'll maintain the same focus that we've had since inception which is providing customized financing solutions to borrowers and financial sponsors. We look forward to continue to execute on our long term plan, optimize ORCC's portfolio and balance sheet to achieve compelling risk adjusted returns and a stable attractive dividend for our shareholders. Thank you for joining us today. We appreciate your interest in ORCC and look forward to speaking to you again next quarter. Operator please opens the line for questions.

[Operator:]

Thank you. Your first question comes from the line of Devin Ryan from JPM Securities. Your line is open.

[Devin Ryan:]

Great Good morning, Craig and Alan and welcome, Jonathan. First question here. So clearly, another very strong quarter of portfolio great growth. You're now at one times leverage within reach of covering the dividend now that you're at one time and I'm sure has a little bit of a clearer picture on earnings power the portfolio, can you maybe share your thoughts around intermediate term leverage range? Do you consider optimal in the current environment?

[Craig Packer:]

Sure, Devin. Look, we arranged 0.09 to 1.25. I think we're comfortable operating, anywhere within that range. As we're now at one time on the next day. We think we're comfortable being there and frankly, I would expect that we would operate somewhere between there and 1.1 in sort of center of gravity. We look around the portfolios can certainly support that. We're very focused on keeping really strong ratings for the rating agencies. We're in constant communication with the agencies and believe that will continue to have good investment grade ratings in that that range. It's obviously very dependent upon flows in any one quarter. So could dip a little higher, dip a little lower, depending upon one deal plan within a quarter. But I 1 to 1.1 is probably the right range for folks to be modeling in again be could be a bit higher or lower.

[Devin Ryan:]

It's a follow up, maybe touching on prepayment activity. And the outlook I know it's episodic. So bit hard to predict. And I heard the quarter today comment, but are you seeing any change in some of the factors have been driving elevated activity is there?

[Craig Packer:]

Sure. So we get repaid the most typical reasons we're getting repaid, our company is getting sold. And the buyer redoes the capital structure, company goes public and uses IPO proceeds to repay that, company grows through acquisition and gets to a size where it makes sense to refinance. And then occasionally we get refinanced either in the direct market or in the syndicated market to just lower costs. That's the mix. I would say right now and I haven't I'd have to go back and study it. But my sense, just from my seat is there's a lot of M&A activity. We're sponsors the velocity of companies, the velocity of the sponsors, or buying and selling companies has picked up in part because of those much stronger economic conditions. And so as the economy has picked up M&A spirits are kindled and by sellers are thinking its good time to sell buyers think is good time to buy. And so we're just seeing a really nice pace of M&A activity that results in the companies getting bought and sold from oftentimes from one sponsor to another or certainly companies get sold from financial sponsors to strategic buyers as well. But the sponsors that got properties that, during COVID, M&A activity slowed, we're still, I think, feeling the, the catch up effect of that as the economy has recovered, and sellers are finding the businesses have recovered. So it's a good time to sell. So I don't know if that gives you a flavor for it. So a little more M&A oriented, obviously, the financing markets are strong. So financing activities, good. The IPO market? No, it's a mix of all those things, but probably a little more weighted to M&A velocity rates, right at this moment.

[Devin Ryan:]

Yes, that is helpful. Appreciate it. And I will leave it there. Thanks so much.

[Operator:]

Your next question comes from the line of Robert Dodd from Raymond James. Your line is open.

[Robert Dodd:]

Hi, guys, and congrats on the quarter and if it hadn't been for that 1.8 million I think you would have earned the dividend this quarter not just for the second half. So on just on portfolio, you gave some comments obviously you get focused on personally that you're willing to add more secondly, that goes all the way back to the IPO you've always said that with smothering. So, how what kind of mix, what could firstly go down to I guess sometimes it would you be happy at 80 or you would you be willing to go a little bit lower than that if you have secondly, inter good borrowers and more of the fun type structures I mean any color on what you're kind of not quite target mix, but comfort mix would be first now versus the other big categories.

[Craig Packer:]

Sure. So we are running in the high 70s now, close to 80%. We would be like we make decisions one deal at a time as you can appreciate your reminding folks, but we've said for a while now that we live second liens, and we like doing them but we just have a very high credit bar. Our second lien exposure is around 17%. I'd be very comfortable taking that number into the 20s and mid 20s and then even high 20s in this in a certain kind of deal environment. We get shown a lot of second lien opportunities, we just say no to almost all of them. And, the other piece which I touched on in my comments you didn't ask about it, but I'll bring up is that I do think the other part of our portfolio the equity preferred investments and Wings Fires that all approximates give or take 5% now I think that that number could go up as well. We were it's very, there's only a handful investments that comprise that primarily our investments and Wings Fire, a couple of equity and that one PLT which we took over, but we're seeing some interesting structured capital opportunities. We did one this quarter for a company called Mavis, which was previously in our portfolio where we did a structured preferred, and so that 5%, I think, could grow over time to high single digits maybe even approaching 10. So just to come back to if we took our second lien over time for the low 20s and took the others to the high single digits that would get your first lien down to something 70% down from close to 80% today something like that over time. We're not targeting that. But if you want a sense of where it might go, I think that might get your sense.

[Robert Dodd:]

I really appreciate that and just kind of touching on I mean, obviously, when you do a second lien deal to point your credit buyer side you're typically not doing the second deal for the $50 million EBITDA they tend to be much bigger companies. On that side on the equity, I mean, beyond the funds of this different that where you're willing to do that is that same kind of thing characteristic that you'd only be willing to do that on larger businesses or any color on that front?

[Craig Packer:]

Yes. I think that's right. I think even larger obviously, even that much higher for anything that's structured capital. That might be again, I don't want to overstate this, we did that. We're doing these like, one a quarter. It's not I don't want to make it seem like we're doing lots of these what's happened is that what valuations are quite high right now. Financial sponsors are having to pay very significant prices to buy companies. And leverage is not going up that much that. That gap is being filled by more and more equity from the financial sponsors. And so we're seeing we're getting approached for companies we like maybe we're doing as we're doing a second lien, the sponsors are running an even bigger equity track beneath us and they're saying, can you structure something where we think we're getting downside protection for preferred structure and we're getting low to mid teens type rates of return. Now, those are interesting, but our bar is extraordinarily high on those even beyond the second lien for obvious reason. We won't do you won't see us do a lot for smaller companies and you touched on our second lien bar if our average EBITDA across portfolio is 100 million of EBITDA our second liens are closer to 200 million of EBITDA and so the bar for preferred will be even that much higher.

[Robert Dodd:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Mickey Schleien from Ladenburg. Your line is open.

[Mickey Schleien:]

Good morning, Craig and hello to Jonathan. Craig, I don't want to beat a dead horse. But I want to follow up on the second lien and unitrans question. I do appreciate that Owl Rock is still somewhat transitioning from its pre IPO portfolio, but I'd like to ask you how we should think about the additional credit risk you might be introducing by a higher allocation to those two segments and what's the Delta in spreads today for those deals versus first lien?

[Craig Packer:]

Sure. Look there's nothing new here. We've been doing unit tranche since inception. We've been doing second lien since inception. Our unit tranche gets depending upon where on our disclosure it gets included as first lien. Today it's about a third of the overall portfolio is unit tranche but we have done and maybe this is what you're alluding to is as we built the portfolio we wanted to scale relatively quickly but we wanted to do it safely and so we put a lot of high quality but lower spread firstly paper in the book. We still have a billion dollars of called true first lien and L 550 or less than the book and we've been looking to cycle out of that and put it into higher spread unit tranche on paper. Unit tranche so I just use L550 as a dividing line, unit tranche today is anywhere from 550 to 700 depending upon the credit. There has been some spread compression there. A lot of our unit tranche is in our book is kind of L600 to 625, 650. But new unit tranche are coming more with a handle. Second liens today are coming anywhere from L650 to L800 depending upon the credit. But again, I don't view this as new for those of you who have followed us when we started five years ago; we had 35% - 40% of the book a second lien. We've been wrong extremely low at 17%. So it's really I'd say just been adding at a very low level and we're talking about moderating that backup. We have stayed, we've stayed flat second lien in the last couple quarters, so it hasn't gone up, but the question I was asked was, what would you be comfortable taking it up too. And obviously we want to give folks a flavor for that. But most of our activity continues to be first lien most of it continues to be unit tranche. But if we find chunky second liens to do we will happily do them through our credits.

[Mickey Schleien:]

And to follow up on that, Greg, do you, given the current market conditions would you be comfortable with a majority of the portfolio in unit tranche, as opposed to pure first lien?

[Craig Packer:]

Well, again, a third of the portfolio today is unit tranche. So yes, I'd be comfortable taking having all of our first lien of unit tranche. We think unit tranche is really ideal for BDC and the reason is because you get a higher spread, but you attach $1 so there's great downside protection by but again with a high credit bar we just we find we wind up having a max and by the way some of our first lien is it's a first lien from a credit standpoint from a leverage standpoint from a loan to value standpoint, but it's more, we're able to get higher yield, because the credit might be a trickier underwrite. And so it's more of a stretch first lien if you will. But unit tranche is a core to what we do. It's a core offering for direct lending, and particularly in the tech sector, we're seeing some really attractive, very large unit tranche says that we continue to be very active.

[Mickey Schleien:]

And Craig, my last question, just considering your deep relationships across the financial community how actively does Blue Owl or Owl Rock specifically, sell first out pieces of the unit tranche? Do you prefer to hold the entire deal on your balance sheet?

[Craig Packer:]

We hold the whole deal. The construct that you're describing where a lender does a unit tranche and sells a first out when we started Owl Rock I would say that was the that was often the predominant method that lenders used and sold the first out to try to boost returns. I think there's been a real change there Mickey that that's not often done, and that most lenders in the market and certainly we typically just hold it all. And part of that is the borrowers prefer to just have one counterparty and even though that financial engineering is being done behind the scenes, the borrowers are aware of it and don't particularly welcome having that uncertainty introduced into the equation. So we hold it all I mean there, there may be one deal in our book that's structured for a particular way, but almost all of them we hold it all. And I'd say that's the trend across the industry now most certainly in the upper middle market, most lenders just hold it all and rather than slice it up.

[Mickey Schleien:]

I appreciate that, Craig, that's it for me. I just want to thank Alan for our relationship and all the hard work he did to put together Owl Rock and ORCC. Much appreciated. Thanks for your time.

[Operator:]

Your next question comes from the line of Casey Alexander from Compass Point. Your line is open.

[Casey Alexander:]

Hi, good morning. I'd like to echo Mickey's comments, thanking Alan for a great work and very definitive information flow in our work and trying to cover this company and welcome Jonathan to the platform. Most of my questions have been asked and answered. But I would ask that generally in a quarter that is active and deployments and repayments, such as this one, there is almost some immediate activity that also tended to slip over the quarter into the third quarter. So I'm just wondering, were there any deals that pushed out into the third quarter that might give you some insight into deployment activity in the third quarter and also some view as to how repayments are shaping up in this quarter?

[Craig Packer:]

Sure. So I mentioned this briefly and in the comments. I'm happy to underscore it. We have visibility on our third quarter. It's going to be a very active one from an origination standpoint I would say. Again it depends on when everything winds up closing and you just even when you have high visibility until it closes, you're not sure, but I would expect it to be in line with the second quarter possible possibly exceed it. But in line with it. Repayments also we have really nice visibility on and similar comments at least in line if not exceed. There are I won't get into specific deals. Yes, there were a deal. There's a couple of deals that closed in the beginning part of the third quarter, but my comments are more driven by just our near term pipeline which we're seeing and map out on a daily weekly basis and what we expect to have close over the next month or so. It's quite active.

[Operator:]

Your next question comes from the line of Kenneth Lee from RBC Capital Markets. Your line is open.

[Kenneth Lee:]

Hi, thanks for taking my question. Just one on the senior loan fund JV. I am wondering if you could just remind us again, the potential benefits of ORCC and how you think about potential allocation towards that JV. Thanks.

[Craig Packer:]

Well, I'm not sure, well, I'll try to answer the question. I may be missing some nuance to it. Our JV we changed the name. I'll use that's the name everybody's familiar with. It's been a wonderful partnership we had for UC regions. So terrific partners in it. And it's really a first lien strategy, not unit tranche, all first lien direct and syndicated first lien term loans. We've earned about a 10% ROI at that JV. And we think that growing it's a great investment for ORCC that benefits from ORCC's sourcing capabilities. And we had a desire to grow it and think it's just a terrific return opportunity for our investors. And in discussions with UC and what their strategy and what they had going on it's just I think we mutually agree and they're wonderful partners, that this would be a good time for us to essentially bring in a new partner. So we were able to grow increase the size of the JV and increase, ORCC's exposure to it quite significantly to 325 million. It's going to, that's not, that's our commitment, it's going to take time for us to fully invest that and get all that money working and then as part of it we brought in nationwide life insurance. And we also know extremely well, as a new partner, they're going forward. So no change to how we operate the JV. It's primarily in this environment, primarily doing syndicated first lien term loans that we have identified as a part of our underwriting process and deals we've worked at. And so we'll just be able to increase over time the amount of money ORCC has working and grow that. I think in the most recent quarter, we had about $4 million of dividends over time, that number, when we get all that working it's going to take some time should be we $7 million a quarter, which is I think terrific.

[Kenneth Lee:]

Got you. Very helpful. And then just one follow up, if I may, on the liability side. I am wondering if you could elaborate on any specific further optimizations you see in the funding mix. Thanks.

[Craig Packer:]

Well, we were definitely quite active this quarter. We feel really good about where we are from we'll call it the three legs of the stool in terms of having the corporate revolver having dropped down SPVs as well as CLO financings and our unsecured. So we are quite happy with the mix there. The $1.8 million of accelerated expense that we took those because we were reducing pricing in our CLOs. So we continue to actively look at those and find ways to and we'll be looking to find ways to optimize there. And then in addition on the unsecured side certainly as we mentioned spreads have continued to come in. Our spreads have continued to come in and we certainly will look to be active over time there. But we feel really good about our liquidity position. So it's more about an optimization game right now.

[Kenneth Lee:]

Got you. Great, very helpful. Thanks again.

[Operator:]

Your next question comes from the line of Finian O'Shea from Wells Fargo Securities. Your line is open.

[Finian O'Shea:]

Hi, good morning. First question on the yields this quarter, Craig and team I think you all guided that we would see the improvement from repays and looks like we of course saw that -- is this about what you expected in terms of the portfolio yield, or was there a little extra from higher, more juicy repays? Any color there on what we should sort of model out?

[Craig Packer:]

We are very pleased with the yields on new investments this quarter. And the increase in spreads. The comparison spreads we were able to put on this quarter versus the first quarter was a nice pickup, which was driven by getting some really high quality, particularly software unit tranches and really nice spreads. And we did some second liens and one preferred and the mix of that. First quarter we knew any second lien. So the mix was helped on the spread basis, but the unit tranches were higher. And I was pleased. We're seeing others report. And I think that we're, outperforming on that regard in terms of where we're adding new deals and able to increase the overall spread and the overall yield in the portfolio over the last year, over the last quarter. We've talked about our desire to rotate a bit and get a little more spread in the portfolio without sacrificing credit quality. And I think what you're seeing tangible evidence that we're succeeding on that. So I'm pleased with that. In terms of the outlook, that'll get, that'll be more challenging. The spread of the market is competitive, and there is some spread pressure and we're seeing that, and I touched on that a couple questions ago but I'll sort of repeat it here given how strong all the credit markets are the public markets, private markets, capital, raising private markets, they're spread pressure and so we're seeing that and I don't, I think it'll be more challenging in the next quarter to also increase and maybe we'll see a reduction in spread for new deal activity. We'll have to see how it all lands. Obviously, any one quarter doesn't move the needle for the overall portfolio. But I would say our second quarter was an unusually strong one just feels we were able to sign up and pick our spots and probably a little more pressure across the industry now in the third quarter.

[Finian O'Shea:]

Very well, that's helpful. And can you talk about beyond these? I guess let's call them mega units or something you're involved in the pipeline that's in front of the market or at the market. Can you talk about the nature of these deals? I know you often go into the advantages of private credit, the certainty and the privacy and so forth. But is there any sort of pocket of where these are coming from? Are they middle market companies graduating and just sticking with the private credit solution? Because that's what they know and like or is it syndicated names kind of dipping down for the advantages of private execution? Is there any sort of clear area where we're seeing this pipeline come from?

[Craig Packer:]

Sure. I think that the single biggest driver is the continued success and growth of software and software's use throughout all the economy. And all the different companies that have been formed in the last 5 to 10 years to help companies, governments, people, schools, run their lives, run their businesses. The modern life runs on software and these companies have theirs, there are many really terrific businesses that have been developed to serve that need. And these companies have grown rapidly as all those constituencies have adopted software more and more to run their activities. And those companies can be controlled by venture capital firms, private equity firms, but there are also a number of them that are public and so we're seeing one of the drivers for unit tranches have been several very large take privates of company things in the software space by financial sponsors. And so they're coming from just the growth and need for those companies and they desire for financial sponsors to own them. It's the most active area for financial sponsors to invest in and they are firms that spent all their time in the software space that I would say most private equity firms at this point where we spend some of their time. And these businesses take real skill to underwrite now. You need industry expertise to understand the business models. They are not simple and straightforward. We've invested heavily in our team and our team's expertise. We think is really best in the industry and so we find ourselves in a really great competitive position. And valuations are very high and I think the sponsors like the ease of using a unit tranche to help finance that deal. The apparatus of doing a syndicated deal it's cumbersome, it doesn't, it takes time, the constituencies in that space, don't always understand software in the same manner. And the loan to value on these software loans as often actually quite modest and I say that one because they're good highlights attractive loans but two tract of loans, but to, frankly, ease of use and execution and simplicity, and knowing who your lender is and having certainty are really important. And given it's actually a modest amount of the overall capital structure the fact that it costs more, which it does, potentially, versus syndicated deal doesn't necessarily move the needle for the sponsor either. And they're growing rapidly and so they just want to get stuff done quickly with lenders they trust. And I think that the transformational thing that's happened in the last handful of years, and we've been a part of this, and we're not the only one is much bigger pools of capital now are available where you can do a $1 billion , $2 billion, $3 billion direct lending deal. And you can do it with a very small group of lenders that well and trust and move quickly. And so with that big pool of capital, it's creating even more desire for sponsors to use them for their buyouts. And so I think this trend is accelerating and we're really well positioned for it.

[Finian O'Shea:]

Great, thank you, Craig. And congratulations, Mr. Lamm for the new appointment.

[Operator:]

There are no further questions at this time. Now I'll turn it back over to Mr. Craig Packer.

[Craig Packer:]

Great. Well in closing, I'm going to add my own thank you to Alan. He is not going very far. It's still going to be obviously working very closely with us but Alan's been an incredible partner to me and to our whole team and really deserve a lot of credit for everything that we've built at ORCC and Owl Rock and we will still be interacting with him all the time. But really his imprint on what we've built will be felt for many years to come. So thanks to Alan, thanks to all of you for joining and we look forward to talking to you soon.

[Operator:]

This does conclude today's conference call. Thank you for your participation. You may now disconnect.