New York City, USA – Investors are keeping a close eye on the Morgan Stanley Direct Lending Fund (MSDL), which recently made its public debut following years as a private Business Development Company (BDC). With a 10.8% yield and trading at a 7% premium to its book value, MSDL is drawing attention in the financial market.

The fund, part of the $18 billion Morgan Stanley private credit platform under the $1.5 trillion Morgan Stanley Investment Management, primarily focuses its investments on less-cyclical sectors like Software, Insurance, and Commercial Services. Interestingly, MSDL avoids heavy allocations to the Healthcare sector, a common trend among BDCs.

MSDL’s portfolio is notably weighted towards first-lien loans, significantly higher than the sector average. Additionally, its exposure to non-secured assets is minimal at just 2%, one of the lowest levels in the sector, indicating a conservative investment approach.

With 172 investments in its portfolio, MSDL boasts a well-diversified holding, with the largest position making up 2.8% of the total investments. The fund targets middle-market companies with a median EBITDA of $80 million, positioning itself between upper and lower middle-market-focused BDCs.

Looking ahead, investors are monitoring several lock-up expiry dates for MSDL, scheduled in July, October, and January 2025. The fund has introduced a $100 million share repurchase program to support its share price as pre-IPO shareholders exit, along with post-lock-up special dividends.

In its latest quarter update, MSDL reported a net income of $0.67, slightly lower than the previous quarter but consistent with Q2 results. The fund issued a regular dividend of $0.50, accompanied by a $0.10 special dividend, with another special dividend planned for 2024. The net asset value (NAV) saw a modest 0.5% increase, primarily driven by retained net income.

Leverage for MSDL closed the year below its target range at 0.87x, with management aiming to raise leverage towards the midpoint in the medium term. Despite three investments on non-accrual, representing 0.6% of the portfolio’s value, MSDL maintains over 98% of its holdings in the top two risk rating categories.

As investors assess MSDL’s future performance, attention is drawn to the fund’s fee structure changes post-IPO. Historical performance must be adjusted to reflect the increased fees, signaling potential challenges ahead. With the fund trading at a premium and looming lock-up expiries, cautious investors are eyeing better entry points in the future.