Morgan Stanley Direct Lending Fund 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands, except per share amounts, unless otherwise indicated) The discussion and analysis contained in this section refers to our financial condition, results of operations and cash flows. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto in Part II, Item 8 of this Form 10-K, “Consolidated Financial Statements and Supplementary Data.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of this Form 10-K, “Risk Factors.” Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-K. OVERVIEW We are a non-diversified, externally managed specialty finance company focused on lending to middle-market companies. We have elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated, and intend to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code. We are not a subsidiary of, or consolidated with, Morgan Stanley. Our investment objective is to achieve attractive risk-adjusted returns via current income and, to a lesser extent, capital appreciation by investing primarily in directly originated senior secured term loans issued by U.S. middle-market companies backed by private equity sponsors. For the purposes of this report, “middle-market companies” refers to companies that, in general, generate annual EBITDA in the range of approximately $15 million to $200 million, although not all of our portfolio companies will meet this criteria. We invest primarily in directly originated senior secured term loans including first lien senior secured term loans (including unitranche loans) and second lien senior secured term loans, with the balance of our investments expected to be in higher-yielding assets such as mezzanine debt, unsecured debt, equity investments and other opportunistic asset purchases. Typical middle-market senior loans may be issued by middle-market companies in the context of LBOs, acquisitions, debt refinancings, recapitalizations, and other similar transactions. We generally expect our debt investments to have a stated term of five to eight years and typically bear interest at a floating rate usually determined on the basis of a benchmark (historically, LIBOR and currently, SOFR). We generate revenues primarily in the form of interest income from investments we hold. In addition, we generate income from dividends or distributions of income on any direct equity investments, capital gains on the sale of loans and equity investments and various other loan origination and other fees, including commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees. Pursuant to the Order, we are able to enter into certain negotiated co-investment transactions alongside certain Regulated Funds and Affiliated Funds (each as defined in the Order) in a manner consistent with our investment objective, positions, policies, strategies, and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with the Order. Pursuant to the Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our eligible directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. Recent Market Developments The current inflationary environment and uncertainty as to the probability of, and length and depth of a global recession could affect our portfolio companies. Government spending, government policies, including recent increases in certain interest rates by the Federal Reserve and other global central banks, volatile energy prices and disruptions in supply chains in the United States and elsewhere, in conjunction with other factors, including those described elsewhere in this report and in other filings we have made with the SEC could affect our portfolio companies, our financial condition and our results of operations. We will continue to monitor the evolving market environment. In these circumstances, developments outside our control could require us to adjust our plan of operations and could impact our financial condition, results of operations or cash flows in the future. Despite these factors, we believe we and our portfolio are well positioned to manage the current environment. KEY COMPONENTS OF OUR RESULTS OF OPERATIONS Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt available to middle-market companies, the general economic environment and the competitive environment for the type of investments we make. Revenue We generate revenue primarily in the form of interest income on debt investments we hold. In addition, we generate income from dividends or distributions of income on direct equity investments, capital gains on the sales of loans and equity securities and various 67 Table of Contents loan origination and other fees. Our debt investments generally have a stated term of five to eight years and typically bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR or SOFR. Interest on these debt investments is generally paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we may receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees. Expenses Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to the Investment Advisory Agreement between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by our Administrator in performing its administrative obligations under the Administration Agreement between us and our Administrator; and (iii) other operating expenses as detailed below: • initial organization costs and offering costs incurred prior to the filing of our election to be regulated as a BDC (subject to the expense waiver described below) • costs associated with our initial private offering; • costs of any other offerings of our Common Stock and other securities; • calculating individual asset values and our net asset value (including the cost and expenses of any third-party valuation services); • out of pocket expenses, including travel expenses, incurred by the Investment Adviser, or members of its investment team or payable to third parties, performing due diligence on prospective portfolio companies and monitoring actual portfolio companies and, if necessary, enforcing our rights; • base management fee and any incentive fees payable under the Investment Advisory Agreement; • certain costs and expenses relating to distributions paid by us; • administration fees payable under the Administration Agreement and any sub-administration agreements, including related expenses; • debt service and other costs of borrowings or other financing arrangements; • the allocated costs incurred by the Investment Adviser in providing managerial assistance to those portfolio companies that request it; • amounts payable to third parties relating to, or associated with, making or holding investments; • the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments; • transfer agent and custodial fees; • costs of hedging; • commissions and other compensation payable to brokers or dealers; • any stock exchange listing fees and fees payable to rating agencies; • cost of effecting any sales and repurchases of our Common Stock and other securities; • federal and state registration fees; • U.S. federal, state and local taxes, including any excise taxes; • independent director fees and expenses; • costs of preparing consolidated financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with the SEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing; • the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings, and costs and expenses of preparation for the foregoing and related matters; • the costs of specialty and custom software for monitoring risk, compliance and overall investments; • any fidelity bond required by applicable law; • any necessary insurance premiums; • indemnification payments; • any extraordinary expenses (such as litigation or indemnification payments or amounts payable pursuant to any agreement to provide indemnification entered into by the Company); • direct fees and expenses associated with independent audits, agency, consulting and legal costs; • cost of winding up; and • all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement based upon our allocable portion of the compensation paid to our Chief Financial Officer and Chief Compliance Officer and reimbursing third-party expenses incurred by the Administrator in 68 Table of Contents carrying out its administrative services including, but not limited to, the fees and expenses associated with performing compliance functions. We reimburse the Administrator or its affiliates for amounts paid or costs borne that properly constitute Company expenses as set forth in the Administration Agreement or otherwise. We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. PORTFOLIO, INVESTMENT ACTIVITY AND RESULTS OF OPERATIONS As of December 31, 2022, we had investments in 150 portfolio companies across 30 industries. Based on fair value as of December 31, 2022, approximately 100% of our debt portfolio was invested in debt bearing a floating interest rate, which floating rate debt investments primarily are subject to interest rate floors. Approximately 99.4% of our debt portfolio at fair value had an interest rate floor denoted in LIBOR or SOFR. Our weighted average total yield of investments in debt securities at amortized cost was 10.9%. Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of December 31, 2022. Approximately 98.5% of our debt investments were in loans and other debt issued by middle market companies backed by private equity sponsors, approximately 79.2% of which were loans and other debt in support of LBOs and acquisitions. In addition, our debt portfolio displayed the following characteristics, as of the closing date of each of our investments 2,3 unless otherwise noted: Borrower Characteristics • Weighted average last 12-month EBITDA of approximately $124 million; • Weighted average of approximately 6.0x net leverage through tranche 4 ; • Weighted average of approximately 44% loan to value 5 ; Portfolio Characteristics as of December 31, 2022 • Weighted average yield on debt investments, at amortized cost, of 10.9% 6 ; • Approximately 78% of debt investments with one or more financial covenants; • Approximately 6.5% of our debt portfolio is in loans that the Investment Adviser believes may be subject to business cycle volatility; • No realized losses as a result of loan defaults and/or credit deterioration since January 31, 2020 (commencement of investment operations) through December 31, 2022; • One investment of $1.5 million, or approximately 0.1% of total investments at amortized cost on non-accrual; and • The average position size of our investments was approximately $19.2 million, or 0.7% of total fair value and our top ten portfolio companies represented approximately 22.0% of total fair value. As of December 31, 2021, we had investments in 98 portfolio companies across 27 industries. Based on fair value as of December 31, 2021, approximately 100% of our debt portfolio was invested in debt bearing a floating interest rate, which primarily are subject to interest rate floors. As of December 31, 2021 , approximately 99.3% of our debt portfolio at fair value had an interest rate floor denoted in LIBOR. The weighted average interest rate floor across our floating-rate portfolio was approximately 0.9% as of December 31, 2021. These floors allow us to mitigate (to a degree) any impact of spread widening on the valuation of our investments. As of December 31, 2021, our weighted average total yield of investments in debt securities at amortized cost was 7.2%. Weighted average 2 Calculated as a percentage of gross debt commitments (funds and unfunded). Weighted average EBITDA, net leverage and loan to value exclude recurring revenue investments, which are investments in portfolio companies in which the Company lends based on a multiple of recurring revenue generated by the portfolio company and not based on a multiple of EBITDA. 3 Amounts were derived from investment due diligence information provided by the portfolio company. Such amounts have not been independently estimated by us, and accordingly, we take no responsibility for such numbers and make no representation or warranty in respect of this information. 4 Net leverage is the ratio of total debt minus cash divided by EBITDA and taking into account leverage through the tranche that we are a lender, excluding recurring revenue investments. 5 Calculated using total outstanding debt through the tranche that the Company is a lender divided by enterprise value from the private equity sponsor or market comparables. 6 Weighted average yield includes the effect of accretion of discounts and amortization of premiums and are based on interest rates as of December 31, 2022. 69 Table of Contents yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of December 31, 2021. Our portfolio is presented below: December 31, 2022 December 31, 2021 Cost Fair Value % of Total Investments at Fair Value Cost Fair Value % of Total Investments at Fair Value First Lien Debt $ 2,753,620 $ 2,694,111 93.8 % $ 2,213,332 $ 2,224,100 93.2 % Second Lien Debt 136,620 128,350 4.5 120,124 121,550 5.1 Other Securities 49,406 51,127 1.7 39,979 41,724 1.7 Total $ 2,939,646 $ 2,873,588 100.0 % $ 2,373,435 $ 2,387,374 100.0 % Our investment activity was presented below (information presented herein is at amortized cost unless otherwise indicated): As of and For the Year Ended December 31, 2022 December 31, 2021 December 31, 2020 New Investments Committed/Purchased Gross Principal Balance (1) $ 809,313 $ 2,908,710 $ 948,731 Less: Syndications (69,477) (422,061) — Net New Investments Committed/Purchased $ 739,836 $ 2,486,649 $ 948,731 Investments, at Cost Investments, beginning of period $ 2,373,435 $ 631,473 $ — New investments purchased 945,209 2,113,463 714,658 Net accretion of discount on investments 11,418 10,133 3,606 Payment-in-kind 2,714 1,179 9 Net realized gain (loss) on investments 537 1,895 2,154 Investments sold or repaid (393,667) (384,708) (88,954) Investments, end of period $ 2,939,646 $ 2,373,435 $ 631,473 Amount of investments funded, at principal First lien debt investments $ 938,043 $ 2,002,574 $ 678,879 Second lien debt investments 16,033 102,632 55,000 Other securities (2) 8,315 38,184 2,959 Total $ 962,391 $ 2,143,390 $ 736,838 Amount of investments sold/fully repaid, at principal First lien debt investments $ 207,907 $ 305,942 $ 90,106 Second lien debt investments — 36,250 — Other securities (2) — 3,347 — Total $ 207,907 $ 345,539 $ 90,106 Weighted average yield on debt investments, at cost (3) 10.9 % 7.2 % 7.5 % Weighted average yield on debt investments, at fair value (3) 11.2 % 7.1 % 7.4 % Number of portfolio companies 150 98 36 Percentage of debt investments bearing a floating rate, at fair value 99.9 % 99.9 % 99.8 % Percentage of debt investments bearing a fixed rate, at fair value 0.1 % 0.1 % 0.2 % (1) Includes new investment commitments, excluding sale/repayments and including new unfunded investment commitments. (2) Represents dollar amount of other securities funded. (3) Computed as (a) the annual stated spread, plus reference rate, as applicable, plus the annual accretion of discounts, as applicable, on debt securities, divided by (b) total debt investments (at fair value or cost, as applicable) included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented herein. 70 Table of Contents As part of the monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of our debt investments. Our Investment Adviser has developed a classification system to group investments into four categories. The investments are evaluated regularly and assigned a category based on certain credit metrics. Our Investment Adviser’s ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments. Please see below for a description of the four categories of the Investment Adviser’s Internal Risk Rating system: Category 1 — In the opinion of our Investment Adviser, investments in Category 1 involve the least amount of risk relative to our initial cost basis at the time of origination or acquisition. Category 1 investments performance is above our initial underwriting expectations and the business trends and risk factors are generally favorable, which may include the performance of the portfolio company, or the likelihood of a potential exit. Category 2 — In the opinion of our Investment Adviser, investments in Category 2 involve a level of risk relative to our initial cost basis at the time of origination or acquisition. Category 2 investments are generally performing in line with our initial underwriting expectations and risk factors to ultimately recoup the cost of our principal investment are neutral to favorable. All new originated or acquired investments are initially included in Category 2. Category 3 — In the opinion of our Investment Adviser, investments in Category 3 indicate that the risk to our ability to recoup the initial cost basis at the time of origination or acquisition has increased materially since the origination or acquisition of the investment, such as declining financial performance and non-compliance with debt covenants; however, principal and interest payments are not more than 120 days past due. Category 4 — In the opinion of our Investment Adviser, investments in Category 4 involve a borrower performing substantially below expectations and indicate that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. For Category 4 investments, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis at the time of origination or acquisition upon exit. The distribution of our portfolio on the Investment Adviser’s Internal Risk Rating System was as follows: December 31, 2022 December 31, 2021 Fair Value % of Portfolio Number of Portfolio Companies Fair Value % of Portfolio Number of Portfolio Companies Risk rating 1 $ — — % — $ 44,355 1.9 % 1 Risk rating 2 2,844,451 99.0 148 2,343,019 98.1 97 Risk rating 3 29,137 1.0 2 — — — Risk rating 4 — — — — — — $ 2,873,588 100.0 % 150 $ 2,387,374 100.0 % 98 CONSOLIDATED RESULTS OF OPERATIONS The following table represents our operating results: For the Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Total investment income $ 230,593 $ 119,816 $ 21,903 Less: Net expenses 102,249 46,807 11,268 Net investment income 128,344 73,009 10,635 Less: Excise tax expense 334 80 — Net investment income (loss) after taxes 128,010 72,929 10,635 Net change in unrealized appreciation (depreciation) (80,005) 8,431 5,508 Net realized gain (loss) 537 1,895 2,154 Net increase (decrease) in net assets resulting from operations $ 48,542 $ 83,255 $ 18,297 71 Table of Contents Investment Income Investment income was as follows: For the Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Investment income: Interest income $ 223,119 $ 108,277 $ 20,269 Payment-in-kind interest income 1,626 1,021 9 Dividend income 1,488 409 — Other income 4,360 10,109 1,625 Total investment income $ 230,593 $ 119,816 $ 21,903 Total investment income increased from $119,816 for the year ended December 31, 2021 to $230,593 for the year ended December 31, 2022. The increase was primarily driven by our deployment of capital, increased invested balance of investments, and rising LIBOR and SOFR rates of our floating-rate debt investments particularly during the second half of the year ended December 31, 2022. The size of our investment portfolio at fair value increased from $2,387,374 as of December 31, 2021 to $2,873,588 as of December 31, 2022. Weighted average asset yield of debt investments at cost increased from 7.2% at December 31, 2021 to 10.9% at December 31, 2022. As of such dates, all of our senior secured debt investments were income-producing. The amortized cost of an unsecured debt investment on non-accrual status as of December 31, 2022 was $1,500. Total investment income increased from $21,903 for the year ended December 31, 2020 to $119,816 for the year ended December 31, 2021. The increase was primarily driven by our deployment of capital and invested balance of investments. The size of our investment portfolio at fair value increased from $636,981 as of December 31, 2020 to $2,387,374 as of December 31, 2021. Weighted average asset yield of debt investments at cost decreased from 7.5% at December 31, 2020 to 7.2% at December 31, 2021 largely due to spread tightening. As of such dates, all of our senior secured debt investments were income-producing. No debt investments were on non-accrual status as of December 31, 2021 and December 31, 2020. Interest income on our debt investments is dependent on the composition and credit quality of the portfolio. Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan’s credit agreement. As of December 31, 2022 and December 31, 2021, and for the periods then ended, all of our first and second lien secured debt investments were performing and current on their interest payments. Expenses The Company is responsible for investment expenses, professional fees, and other general and administrative expenses related to the Company’s operations. Expenses were as follows: For The Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Expenses: Interest expense and other financing expenses $ 67,182 $ 21,015 $ 3,725 Management fees 26,715 13,860 2,238 Income based incentive fees 26,635 15,852 2,517 Capital gains incentive fees (2,441) 1,809 1,341 Professional fees 3,206 2,440 1,654 Organization and offering costs — 42 676 Directors’ fees 362 336 349 Administrative service fees 72 212 183 General and other expenses 510 1,538 493 Total expenses 122,241 57,104 13,176 Expense support 44 98 (230) Management fees waiver (20,036) (10,395) (1,678) Net expenses $ 102,249 $ 46,807 $ 11,268 Excise tax expense $ 334 $ 80 $ — 72 Table of Contents Interest Expense Interest expense and other financing expenses, including unused commitment fees, amortization of debt issuance costs and deferred financing costs, were $67,182, $21,015 and $3,725 for the year ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively. The increases were primarily due to higher average borrowings outstanding over time, increased reference rates and higher cost of unsecured debt issued. For the year ended December 31, 2022, December 31, 2021 and December 31, 2020, average borrowings outstanding were $1,432,492, $796,272 and $114,431, respectively. The combined weighted average interest rate of the aggregate borrowings outstanding for the year ended December 31, 2022, December 31, 2021 and December 31, 2020 were 4.05%, 2.12% and 1.93%, respectively. For more information on our borrowings, including the terms thereof, see Note 6. Debt in the Notes to Consolidated Financial Statements. Base Management Fee The base management fees, net of waiver, were $6,679, $3,465 and $560 for the year ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively, the increase was primarily due to an increase in average gross assets. For more information on base management fee, including terms thereof, see Note 3. Related Party Transactions in the Notes to Consolidated Financial Statements. Incentive Fee The incentive fee consists of two components: (1) income based incentive fee and (2) capital gains incentive fee. The income based incentive fee were $26,635, $15,852 and $2,517 for the year ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively, the increase was primarily due to an increase in pre-incentive fee net investment income. The capital gains incentive fee accrued were $1,809 and $1,341 for the year ended December 31, 2021 and December 31, 2020, respectively, as a result of realized gains on investments sold and net unrealized appreciation of investments held. For the year ended December 31, 2022, $2,441 of previously accrued capital gains incentive fee were reversed due to net unrealized depreciation of investments. For more information on incentive fee, including terms thereof, see Note 3. Related Party Transactions in the Notes to Consolidated Financial Statements. Professional Fees, Administrative Service Fee and Other Expenses Professional fees include legal, audit, tax, and other professional fees incurred related to the management of our Company. Administrative service fee represents fees paid to the Administrator for our allocable portion of the cost of certain of our executive officers that perform duties for us. Other general and administrative expenses include insurance, filing, research, subscriptions and other costs. Organization costs and offering costs include expenses incurred in our initial formation and our offering of stock. For the year ended December 31, 2022, we incurred administrative service fee of $72, professional fees of $3,206, fees to Independent Directors of $362, other expenses of $510, and expense support recoupment of previously waived organization and offering costs by the Investment Adviser of $44, respectively. For the year ended December 31, 2021, we incurred administrative service fee of $212, professional fees of $2,440, fees to Independent Directors of $336, other expenses of $1,538, and expense support recoupment of previously waived organization and offering costs by the Investment Adviser of $98, respectively. For the year ended December 31, 2020, we incurred administrative service fee of $183, professional fees of $1,654, fees to Independent Directors of $349, and other expenses of $493; offset by expense support by the Investment Adviser of $230 of waived organization and offering costs, respectively. Income Taxes, Including Excise Taxes We have elected to be treated as a RIC under Subchapter M of the Code, and we intend to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, we must, among other things, distribute to our stockholders in each taxable year generally at least 90% of the sum of our ICTI, as defined by the Code (without regard to the deduction for dividends paid), and net tax-exempt income for that taxable year. To maintain our tax treatment as a RIC, we, among other things, intend to make the requisite distributions to our stockholders, which generally relieve us from corporate-level U.S. federal income taxes. For the year ended December 31, 2022 and December 31, 2021, we have accrued $334 and $80 of U.S. federal excise tax, respectively. For the year ended December 31, 2020, we did not incur any excise tax. 73 Table of Contents Net Realized Gain (Loss) and Unrealized Gain (Loss) on Investments For The Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net realized and unrealized gains (losses) on investment transactions: Net realized gain (loss): Non-controlled/non-affiliated investments $ 537 $ 1,895 $ 2,154 Net change in unrealized appreciation (depreciation): Non-controlled/non-affiliated investments (80,005) 8,431 5,508 Net realized and unrealized gains (losses) $ (79,468) $ 10,326 $ 7,662 For the year ended December 31, 2022, December 31, 2021 and December 31, 2020, net realized gain on our investments was $537, $1,895 and $2,154, respectively, driven by the sale of debt and equity investments in our portfolio. We determine the fair value of our portfolio investments quarterly and any changes in fair value are recorded as unrealized appreciation or depreciation. For the year ended December 31, 2022, net change in unrealized depreciation on our investments of $80,005 was primarily driven by the decreases of valuations of our debt and equity investments as a result of the volatile credit environment and spread widening in the primary and secondary markets. For the year ended December 31, 2021 and December 31, 2020, net change in unrealized appreciation on our investments of $8,431 and $5,508, respectively, were primarily driven by the net increases of valuations of our debt and equity investments in a largely tightening credit spread environment. See Note 5. Fair Value Measurement in the Notes to Consolidated Financial Statements. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES We generate cash from the net proceeds of offerings of our Common Stock, net borrowings from our Credit Facilities, and net proceeds of our unsecured debt issuances and through cash flows from operations, including investment sales and repayments as well as income earned on investments. Details of our Credit Facilities and unsecured debt issuance are described in “ —Debt ” below. We may from time to time enter into new credit facilities, increase the size of existing credit facilities or issue additional debt securities. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. As of December 31, 2022, we had approximately $81.2 million of cash, which taken together with our approximately $200.0 million and $538.5 million of availability under the BNP Funding Facility and the Truist Credit Facility (subject to borrowing base availability), respectively, and our approximately $220.3 million of uncalled capital commitments to purchase shares of Common Stock, or capital commitments, we expect will be sufficient for our investing activities and sufficient to conduct our operations in the near term. As of December 31, 2022, we believed we had adequate financial resources to satisfy our unfunded portfolio company commitments. Equity During the year ended December 31, 2022, we received new capital commitments of approximately $45.6 million. As of December 31, 2022, we had received aggregate capital commitments of approximately $1,629.4 million. In accordance with the terms of the Subscription Agreements entered into by investors and us, our Board of Directors approved a one-year extension of the Investment Period (as defined in the Subscription Agreements) such that the Investment Period will expire on December 23, 2023. For the year ended December 31, 2022, we made three capital calls and issued shares to our stockholders. The total shares issued and capital called pursuant to the Subscription Agreements for the year ended December 31, 2022 were as follows (dollar amounts in millions): Share Issuance Date Shares Issued Amount May 16, 2022 3,548,132 $ 74.9 July 28, 2022 3,903,231 79.8 December 23, 2022 4,775,721 94.6 Total 12,227,084 $ 249.3 For the year ended December 31, 2021, we received proceeds from eight capital calls and issued shares to our stockholders. The total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the year ended December 31, 2021 were as follows (dollar amounts in millions): 74 Table of Contents Share Issuance Date Shares Issued Amount January 20, 2021 1,726,689 $ 35.0 March 12, 2021 2,171,816 45.0 April 12, 2021 5,326,877 110.0 May 26, 2021 4,036,582 85.0 July 16, 2021 7,161,130 149.9 October 15, 2021 7,806,514 164.0 November 12, 2021 8,182,294 174.0 December 29, 2021 4,748,891 99.6 Total 41,160,793 $ 862.5 Distributions and Dividend Reinvestment The following tables summarize our distributions declared and payable for the year ended December 31, 2022 and December 31, 2021, respectively: Date Declared Record Date Payment Date Per Share Amount Dividend Yield (1) Total Amount March 25, 2022 March 25, 2022 April 27, 2022 $ 0.48 9.3 % $ 27,455 June 24, 2022 June 24, 2022 July 27, 2022 0.47 9.3 % 28,601 September 26, 2022 September 28, 2022 October 19, 2022 0.47 9.3 % 30,611 December 20, 2022 December 20, 2022 January 25, 2023 0.50 9.8 % 32,770 Total Distributions $ 1.92 $ 119,437 Date Declared Record Date Payment Date Per Share Amount Dividend Yield (1) Total Amount March 18, 2021 March 18, 2021 April 22, 2021 $ 0.45 10.1 % $ 8,570 June 23, 2021 June 23, 2021 July 22, 2021 0.49 10.7 % 13,974 September 23, 2021 September 23, 2021 October 27, 2021 0.56 11.1 % 20,080 December 21, 2021 December 21, 2021 January 25, 2022 0.57 (2) 11.9 % 29,691 Total Distributions $ 2.07 $ 72,315 (1) Dividend yield (annualized) is calculated by dividing the declared dividend by the weighted average of the net asset value at the beginning of the quarter, the capital called and dividend reinvested during the quarter and annualizing over 4 quarterly periods. (2) Includes a special distribution of $0.11 per share for the year ended December 31, 2021. We adopted an “opt in” DRIP. As a result, our stockholders who elect to “opt in” to the DRIP will have their cash dividends or distributions automatically reinvested in additional shares of Common Stock, rather than receiving cash. Stockholders who receive distributions in the form of shares of Common Stock will generally be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions; however, those stockholders will not receive cash with which to pay any applicable taxes. Shares issued under the DRIP will not reduce an investor’s outstanding capital commitment. The following tables summarize DRIP shares issued and amounts for the year ended December 31, 2022 and December 31, 2021, respectively: Payment Date DRIP Shares Value DRIP Shares Issued January 25, 2022 $ 7,540 358,891 April 27, 2022 6,964 332,212 July 27, 2022 7,614 372,338 October 19, 2022 8,204 408,126 Total $ 30,322 1,471,567 75 Table of Contents Payment Date DRIP Shares Value DRIP Shares Issued January 27, 2021 $ 2,462 121,484 April 22, 2021 2,276 110,191 July 22, 2021 3,733 178,345 October 27, 2021 5,101 242,789 Total $ 13,572 652,809 Debt Our outstanding debt obligations were as follows: December 31, 2022 December 31, 2021 Aggregate Principal Committed Outstanding Principal Unused Portion Aggregate Principal Committed Outstanding Principal Unused Portion CIBC Subscription Facility (1) $ — $ — $ — $ 400,000 $ 310,350 $ 89,650 BNP Funding Facility 600,000 400,000 200,000 600,000 463,500 136,500 Truist Credit Facility (2)(3) 975,000 432,254 538,521 975,000 476,000 499,000 2027 Notes (4) 425,000 425,000 — — — — 2025 Notes (4) 275,000 275,000 — — — — Total $ 2,275,000 $ 1,532,254 $ 738,521 $ 1,975,000 $ 1,249,850 $ 725,150 (1) The CIBC Subscription Facility matured on December 31, 2022 and was fully paid off. (2) As of December 31, 2022, $4,225 letter of credit was outstanding, which reduced the unused availability under the Truist Credit Facility of the same amount. As of December 31, 2021, no letter of credit was outstanding. (3) Under the Truist Credit Facility, the Company may borrow in U.S. dollars or certain other permitted currencies. As of December 31, 2022, the Company had borrowings denominated in Euros (EUR) of 238. As of December 31, 2021, the Company did not have any borrowings denominated in Euros (EUR) or other permitted currencies. (4) The carrying value of our 2027 Notes and 2025 Notes were presented on the Consolidated Statements of Assets and Liabilities net of unamortized debt issuance costs of $4,622 and $3,277, and unamortized original issuance discount of $881 and $—, respectively. RECENT DEVELOPMENTS Subsequent to December 31, 2022 through March 9, 2023, we have closed or the Investment Committee has committed/approved approximately $158.3 million of new/add-on investments. This includes transactions for which a formal mandate, letter of intent or a signed commitment have been issued, and therefore we believe are likely to close. Of these new commitments, approximately $158.3 million were first lien senior secured loans and $0.1 million were other securities. We remain highly focused on conducting extensive due diligence and leveraging the Morgan Stanley platform. We continue to seek to invest in companies that are led by strong management teams, generate substantial free cash flow, have leading market positions, benefit from sustainable business models, and are well positioned to perform well despite recent market volatility. We believe the current market environment offers opportunities to seek compelling risk adjusted returns. Our investment pace will depend on several factors including the market environment, deal flow and the impact of inflation on valuations and the operations of potential portfolio companies. On January 31, 2023, we entered into an amendment (the “Third Amendment”) to the Truist Credit Facility. The Third Amendment amended certain terms of the Truist Credit Facility, including, but not limited to (a) increase the maximum borrowing capacity of the Truist Credit Facility to $1,120,000,000, (b) revise the interest rate for borrowings under the Truist Credit Facility such that borrowings bear interest at a per annum rate equal to (x) for loans for which the Company elects the alternate base rate option, the “alternate base rate” (which is the highest of (A) the prime rate as publicly announced by Truist, (B) the sum of (i) the weighted average of the rates on overnight federal funds transactions, as published by the Federal Reserve Bank of New York plus (ii) 0.5%, and (C) one month Term SOFR (as defined in the Truist Credit Facility) plus 1% per annum) plus 0.875%, and (y) for loans for which the Company elects the term benchmark option, Term SOFR, for borrowings denominated in U.S. dollars, or the applicable term benchmark rate for borrowings denominated in certain foreign currencies, in each case for the related interest period for such borrowing plus 1.875% per annum or such other applicable margin as is applicable to such foreign currency borrowings, and (c) extend the maturity date of the Truist Credit Facility to January 31, 2028 with respect to the loans and commitments held by the lenders who consented to the maturity extension. CRITICAL ACCOUNTING ESTIMATES The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting estimates, including those relating to the valuation of our investment portfolio, are described below. The critical accounting estimates should be read in connection with “Risk Factors” in Part I, Item 1A of this Form 10-K. 76 Table of Contents Valuation We conduct the valuation of assets at all times consistent with U.S. GAAP and the 1940 Act. Our Board of Directors, with the assistance of our Audit Committee, determines the fair value of our assets, for assets with a daily public market, and for assets with no readily available public market, on at least a quarterly basis, in accordance with the terms of ASC 820. The Board of Directors has delegated to the Adviser as the Valuation Designee, the responsibility of determining the fair value of the Company’s investment portfolio, subject to oversight of the Board of Directors, pursuant to Rule 2a-5 under the 1940 Act. As such, the Valuation Designee is charged with determining the fair value of the Company’s investment portfolio, subject to oversight of the Board of Directors. Our valuation procedures are set forth in more detail below. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same-to estimate the price when an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). Securities that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Valuation Designee or our Board of Directors, does not represent fair value, each is valued as of the measurement date using all techniques appropriate under the circumstances and for which sufficient data is available. These valuation techniques may vary by investment but include comparable public market valuations, comparable precedent transaction valuations and discounted cash flow analyses. Debt investments are generally fair valued using discounted cash flow analyses technique. Expected cash flows are projected based on contractual terms and discounted back to the measurement date based on a discount rate. The discount rate is determined based upon an assessment of current and expected yields for similar investments and risk profiles. The process used to determine the applicable value is as follows: 1) each portfolio company or investment is initially valued using a standardized template designed to approximate fair market value based on observable market inputs and updated credit statistics and unobservable inputs; 2) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of our Adviser’s senior management; 3) our Board of Directors or Valuation Designee engages independent third-party valuation firms to provide positive assurance on a portion of our illiquid investments each quarter (such that each illiquid investment will be reviewed by an independent valuation firm at least once on a rolling twelve-month basis) including review of management’s preliminary valuation and conclusion of fair value; 4) our Audit Committee reviews the assessments of the Valuation Designee and the independent third-party valuation firms and provide our Board of Directors with recommendations with respect to the fair value of each investment in our portfolio; and 5) our Board of Directors discusses the valuation recommendations of our Audit Committee and determine the fair value of each investment in our portfolio in good faith based on the input of the Valuation Designee and, where applicable, the third-party valuation firms. The fair value is generally determined based on the assessment of the following factors, as relevant: • the nature and realizable value of any collateral; • call features, put features and other relevant terms of debt; • the portfolio company’s leverage and ability to make payments; • the portfolio company’s public or “private letter” credit ratings; • the portfolio company’s actual and expected earnings and cash flow; • prevailing interest rates for like securities and expected volatility in future interest rates; • the markets in which the issuer does business and recent economic and/or market events; and • comparisons to publicly traded securities. Investment performance data utilized will be the most recently available as of the measurement date which in many cases may reflect up to a one quarter lag in information. Our Board of Directors is ultimately responsible for the determination, in good faith, of the fair value of our portfolio investments. 77 Table of Contents Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements. For significant accounting policies on the fair value hierarchies, our framework for determining fair value, and the composition of our portfolio, see Note 5. Fair Value Measurements in the Notes to Consolidated Financial Statements . RELATED PARTY TRANSACTIONS Investment Advisory Agreement In October 2019, the Company’s Board of Directors, including a majority of the Independent Directors, approved the Investment Advisory Agreement between the Company and the Investment Adviser, which was effective November 25, 2019, in accordance with, and on the basis of an evaluation satisfactory to such directors as required by, Section 15(c) of the 1940 Act. The initial period of the Investment Advisory Agreement was two years. In August 2022, following approval by the Board of Directors, including a majority of the Independent Directors, we renewed the Investment Advisory Agreement for an additional one year term. See “Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3. Related Party Transactions.” Base Management Fee The base management fee is calculated at an annual rate of 1.0% of our average gross assets at the end of the two most recently completed calendar quarters, including assets purchased with borrowed funds or other forms of leverage but excluding cash and cash equivalents. Prior to an Exchange Listing, the Adviser has agreed to irrevocably waive the portion of the base management fee in excess of 0.25% of our average gross assets calculated in accordance with the Investment Advisory Agreement, which waived base management fees are not subject to recoupment by the Adviser. For services rendered under the Investment Advisory Agreement, the base management fee will be payable quarterly in arrears, and no management fee is charged on committed but undrawn Capital Commitments. Incentive Fee The incentive fee has two parts. The first part is determined and paid quarterly based on our pre-incentive fee net investment income and the second part is determined and payable in arrears based on net capital gains as of the end of each calendar year or upon termination of the Investment Advisory Agreement. Pre-incentive fee net investment income is defined as interest income, dividend income and any other income accrued during the calendar quarter, minus operating expenses for the quarter, including the base management fee, expenses payable under the Administration Agreement, any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as debt instruments with pay-in-kind interest and zero coupon securities), accrued income that Company has not yet received in cash. The Adviser is not obligated to return to us the incentive fee it receives on PIK interest that is later determined to be uncollectible in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pursuant to the Investment Advisory Agreement, the Company pays the Adviser an incentive fee with respect to our pre-incentive fee net investment income as follows: • No incentive fee based on pre-incentive fee net investment income in any calendar quarter in which our pre-incentive fee net investment income does not exceed a hurdle rate of 1.50% (6% annualized); • 100% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 1.8182% in any calendar quarter (7.2728% annualized). We refer to this portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 1.8182%) as the “catch-up.” The “catch-up” is meant to provide the Adviser with approximately 17.5% of our pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 1.8182% in any calendar quarter; and • 17.5% of the pre-incentive fee net investment income, if any, that exceeds 1.8182% in any calendar quarter (7.2728% annualized), which reflects that once the hurdle rate is reached and the catch-up is achieved, 17.5% of all pre-incentive fee net investment income is paid to the Adviser. The second part of the incentive fee is determined on realized capital gains calculated and payable in arrears in cash as of the end of each calendar year or upon the termination of the Investment Advisory Agreement in an amount equal to 17.5% of the realized capital gains, if any, on a cumulative basis from the date of our election to be regulated as a business development company through the end 78 Table of Contents of a given calendar year or upon the termination of the Investment Advisory Agreement, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees (the “Cumulative Capital Gains”). Administration Agreement On October 14, 2019, the Company’s Board of Directors approved the Administration Agreement. The initial period of the Administration Agreement was two years. In August 2022, following approval by the Board of Directors, including a majority of the Independent Directors, we renewed the Administration Agreement for an additional one-year term. Pursuant to the Administration Agreement, the Administrator provides services and receives reimbursements equal to an amount that reimburses the Administrator for its costs and expenses and the Company’s allocable portion of overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company’s allocable portion of the compensation paid to our Chief Compliance Officer and Chief Financial Officer. Reimbursement under the Administration Agreement occurs quarterly in arrears. See “ Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3. Related Party Transactions. ” Expense Support and Waiver Agreement On December 31, 2019, the Company entered into an expense support and waiver agreement (the “Expense Support and Waiver Agreement”) with the Investment Adviser. Under the terms of the Expense Support and Waiver Agreement, the Investment Adviser agreed to waive any reimbursement by the Company of offering and organizational expenses to be incurred by the Investment Adviser on behalf of the Company in excess of $1,000 or 0.10% of the aggregate Capital Commitments of the Company, whichever is greater. If actual organization and offering costs incurred exceed the greater of $1,000 or 0.10% of the Company’s total Capital Commitments, the Investment Adviser or its affiliate will bear the excess costs. As of December 31, 2022, the Company reimbursed the Investment Adviser organization and offering costs incurred and there was no organization and offering costs in payable to affiliates and accrued expenses and other liabilities in the Consolidated Statements of Assets and Liabilities. License Agreement The Company entered into the License Agreement under which Morgan Stanley has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Morgan Stanley” for specified purposes in the Company’s business. Under the License Agreement, the Company will have a right to use the “Morgan Stanley” name, subject to certain conditions, for so long as the Investment Adviser or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company will have no legal right to the “Morgan Stanley” name. Placement Fees On August 30, 2019, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Morgan Stanley Distribution Inc. (the “Paying Agent”), Morgan Stanley Smith Barney LLC (the “Placement Agent”) and the Investment Adviser. Under the terms of the Placement Agent Agreement, the Placement Agent and certain of its affiliates will assist in the placement of Common Stock in the Company’s private offering. The Company is not liable for any payments to the Placement Agent pursuant to the Placement Agent Agreement, which payments will be made by the Investment Adviser and, to the extent the Paying Agent receives any payments, from the Paying Agent. Indemnification Agreements We have entered into indemnification agreements with our directors and officers. The indemnification agreements are intended to provide our directors and officers the maximum indemnification permitted under Delaware law and the 1940 Act. Each indemnification agreement provides that we will indemnify the director or officer who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Delaware law and the 1940 Act. MS Credit Partners Holdings Investment MS Credit Partners Holdings, an indirect, wholly owned subsidiary of Morgan Stanley and an affiliate of the Investment Adviser, made an aggregate capital commitment of $200.0 million to us pursuant to a subscription agreement initially entered into in December 2019. As of December 31, 2022 and December 31, 2021, MS Credit Partners Holdings held approximately 11.9% and 12.5% of our outstanding shares of common stock, respectively. Morgan Stanley has no other obligation, contractual or otherwise, to financially support us beyond the equity commitment to purchase our common stock pursuant to a subscription agreement entered into by MS Credit Partners Holdings. Morgan Stanley has no history of financially supporting any of the BDCs on the MS Private Credit platform, even during periods of financial distress.