Goldman Sachs BDC (GSBD) has consistently delivered for its shareholders, maintaining a steady $0.45 per share dividend for 37 consecutive quarters. The recent Q1 2024 earnings call reinforced this narrative, highlighting the company's robust performance, a revitalized deal pipeline, and the advantages of its integration within the broader Goldman Sachs private credit platform. But beneath this seemingly familiar story, there might be a subtle shift in GSBD's approach that has flown under the radar of most analysts.

The transcript reveals a fascinating tension. On one hand, Alex Chi, Co-CEO of GSBD, explicitly states the company will remain focused on the core middle market, targeting businesses with EBITDA up to $200 million. He emphasizes that larger deals are handled by other pockets of capital within the Goldman Sachs ecosystem. Yet, there's a counterpoint. Chi repeatedly showcases instances where GSBD is leveraging the platform's scale to secure larger, more competitive deals. The Harrington deal, a prime example, saw GSBD, with the backing of other Goldman Sachs funds, commit to the entire financing package, enabling the sponsor to win the auction.

This begs the question: is GSBD inching towards a strategic evolution, gradually expanding its appetite for larger deals? The evidence suggests this might be the case. Consider the Skyway deal. GSBD, drawing on Goldman Sachs' longstanding relationship with the wireless tower operator and its own enhanced origination capabilities, participated in a senior secured facility for a company with a portfolio of 445 towers. While financial details weren't disclosed, it's likely this transaction represents a larger enterprise value than GSBD's historical comfort zone.

Furthermore, the transcript hints at a proactive effort to enhance GSBD's portfolio quality, potentially paving the way for larger commitments. Chi proudly points to the significant reduction in second lien loans within the portfolio, from 8.2% in Q4 2021 to just 1.9% in Q4 2023. This "cleaning house," coupled with a focus on securing first lien positions in new deals, could be interpreted as a deliberate strategy to improve risk profile and leverage capacity.

The numbers paint a suggestive picture. The weighted average net debt-to-EBITDA of GSBD's portfolio increased slightly to 6.1x in Q4 2023, up from 5.9x the previous quarter. While this increase is attributed to a single position, it's worth noting that excluding this anomaly, the ratio would have remained flat. This suggests that even without a deliberate shift, GSBD's portfolio is naturally gravitating towards slightly larger companies.

Hypothetical Scenario: Impact of Larger Deals on GSBD's Portfolio

Let's delve into a hypothetical scenario. Assume GSBD's target leverage remains at 1.25x. If the company seeks to maintain a weighted average net debt-to-EBITDA of 6x, and the average EBITDA of its portfolio companies increases to $75 million (up from roughly $55 million), GSBD's average deal size would rise to $562.5 million. This represents a substantial increase from its historical average deal size, potentially indicating a shift towards larger commitments.

Of course, it's crucial to acknowledge that this is a hypothesis, not a definitive statement. GSBD hasn't explicitly announced a change in strategy. However, the breadcrumbs scattered throughout the transcript, coupled with the observed portfolio trends, point to a possible evolution. The company, empowered by its integration within the Goldman Sachs platform, is demonstrably accessing larger and more competitive deals, all while diligently upgrading its portfolio quality.

The ramifications of this potential shift are significant. Larger deals, while potentially presenting higher individual risk, also offer greater economies of scale and potentially enhanced returns. GSBD, already a leading player in the middle market, could leverage this strategic evolution to further solidify its position and attract a broader spectrum of investment opportunities. This whisper of change, if it materializes, could be a game-changer for GSBD and its investors, warranting close attention in the quarters ahead.

Company Information

Q4 2023 Earnings Call Transcript

Q1 2024 Earnings Call Transcript

"The term "Business Development Company (BDC)" was introduced in the 1980s as part of the Small Business Investment Incentive Act. This legislation aimed to stimulate investment in small and mid-sized businesses by creating a new type of investment vehicle with tax advantages."