At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter and year-ended December 31st, 2018. All participants are on a listen-only mode. A question and answer session will follow the company's formal remarks. You may press star zero on your telephone keypad if you need assistance at any time during the conference. Today's call is being recorded, and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the investor relations section. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results, and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements.
These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-looking Statements in the company's annual report on Form 10-K for the fiscal year ended December 31st, 2018, as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I would like to turn the call over to Eric Lloyd, Chief Executive Officer, Barings BDC.
Thank you, Donna. Good morning to everybody who joined us for the call. We appreciate everyone joining us for the call. Please note that throughout this call, we'll be referring to our fourth quarter 2018 earnings presentation that is posted on the investor relations section of our website. On the call today, I'm joined by Barings BDC Chairman and Barings Head of Global Markets, Mike Freno, the BDC's President and Barings Co-head of North America Private Finance, Ian Fowler, the BDC's Chief Financial Officer, John Bock, and Tom McDonald, who's the liquid credit PM for the BDC. On our call today, we're going to review our fourth quarter results and market trends. However, I'd like to start with a few comments about the fourth quarter volatility.
As you see on slide five, in the fourth quarter, the liquid credit markets and the BDC stock prices experienced their worst quarter since the financial crisis, falling roughly four and a half and 15%, respectively. The reasons for the market sell-off range from heightened fears of a global economic slowdown to indiscriminate ETF selling of leveraged loans and high yield bonds. Notably, this year-end market decline appears less correlated to corporate fundamentals as the underlying performance of our portfolio companies remains strong. I'll let Ian discuss that at that point in a minute. Still, there's a broader takeaway I'd like to outline, and that ties to the high correlation of liquid credit spreads to that of BDC stock prices. As you see on this slide, BDC stock price movements correlated to liquid credit spreads in the fourth quarter.
Price declines amongst the BDCs were surprisingly consistent at a roughly 15% decline, that was regardless of whether one held middle market collateral or liquid collateral. In our view, just as the equity markets revalued risk in the BDC space in the fourth quarter, we, too, should be reflective of those price movements in our net asset value. On slide six, you'll see our fourth quarter highlights. At the top left, you'll notice that we marked the Barings BDC NAV down 7.8% to $10.98 per share, primarily due to unrealized marks as a result in the fourth quarter spread movements. Our view on this mark to market is simple. First, it's technical. The NAV decline is predominantly driven by the movement in credit spreads and not a result of deteriorating fundamentals. Second, it's inclusive.
As you look through our schedule of investments, you'll see write-downs across our books of liquid and illiquid directly originated middle market loans. Third, it's intuitive. Like all credit investors, Barings invest in a wide array of credit assets across our $300 billion platform. As such, we have an extremely wide frame of reference on asset pricing. Thus, to us, it's intuitive that if the prices of risk assets fall, BDC NAV should fall as well. Our NAV should be no exception. This gives our investors an opportunity to invest at a technically lower NAV, more importantly, it allows the manager to build NAV through share repurchases. Turning to the operating results for the quarter. I'm very proud to say we continue to gather momentum in our middle market ramp.
In the fourth quarter, net investment income was $0.16 a share, an increase over the $0.06 per share earned during the third quarter, also in excess of our fourth quarter dividend of $0.10 per share. During the quarter, we made 13 new and one follow-on middle market investments totaling $162 million, bringing the total value of our middle market portfolio to over $230 million at year-end. Note that these are predominantly lead managed, directly originated loans sourced with highly respected private market sponsors. Slide seven shows some additional financial highlights for the fourth quarter compared to the third quarter. Here you will see the $52 million of net unrealized losses that drove the net income and NAV declines. While the fourth quarter was challenging based on widening credit spreads, prices have recovered, roughly 60% of the unrealized losses have been recouped so far in 2019.
Our $1.1 billion investment portfolio was partially supported by $570 million in borrowings under our broadly syndicated loan facility. In addition, we recently entered into an $800 million corporate revolving credit facility with a syndicate of 17 banks. Suffice it to say, this facility fits well with our predominantly first lien floating rate senior secured debt strategy. I'd now like to turn the call over to Ian to provide some additional information on our investment portfolio and investing in the middle market.
Thank you, Eric, and good morning, everyone. Slide nine summarizes our new investments and repayments for both the third and fourth quarters. As Eric mentioned, the fourth quarter was active for a middle market portfolio with $162 million of new opportunistic, directly originated following $75 million in the third quarter. The increase in funding reflected heavier middle market activity in the fourth quarter. Additionally, we had net sales of broadly syndicated loan portfolio investments of $56 million, as we were able to opportunistically exit certain investments during what was a challenging quarter for BSL prices. Turning to our portfolio composition on slide 10, as of December 31st, the BDC was invested in roughly $846 million of liquid broadly syndicated loans and $249 million in private middle market loans, including delayed draw term loans.
As we have previously discussed, we are currently going through a transition period during which the company is primarily invested in liquid broadly syndicated loans as we build our private middle market loan portfolio. These BSLs are a diverse portfolio of 120 investments across multiple industries and are all first lien loans with a weighted average spread of 327 basis points and a yield at fair value of 6.1%. Senior leverage for this portfolio remains consistent with last quarter, with a weighted average of 4.9x debt EBITDA. Focusing on the middle market column on slide 10, as of December 31st, the BDC had approximately $249 million of middle market assets spread across 19 portfolio companies, as compared to $86 million across six portfolio companies at the end of third quarter. Over 20% of our total portfolio is now comprised of middle market loans.
Company fundamentals remain relatively consistent with last quarter, with weighted average senior leverage of 4.6x and a median EBITDA size of $38 million. Of the 19 middle market investments, 17 are first lien investments and two are second lien term loans that we feel provide good risk-adjusted returns. Our diversification theme continues with our middle market portfolio as the 19 investments are spread across 12 industries and no investment exceeds 2.5% of the total portfolio. Our top 10 investments are shown on slide 11, and I'll point out that our top three investments were all originated in the fourth quarter. Turning to slide 13, let me outline a few market trends we saw in the fourth quarter and how these trends affect our portfolio.
This slide is an update of a slide we shared last quarter with a third-party data from Refinitiv showing middle market spreads across the capital structure. Senior and unitranche spreads were relatively flat during the quarter, with the biggest moves in mezzanine and second lien structures, albeit in opposite directions, as mezzanine continued to tighten and second lien spreads widened. For additional color on this divergence, we believe volatility in the liquid market had a spillover effect on middle market second liens, causing second lien spreads to widen as a result. Mezzanine debt is most prevalent in the lower end of the middle market and is thus more insulated from volatility in the liquid market. Mezzanine is competing against unitranche structures with further pressure mezzanine spreads as the unitranche market remains competitive.
Slide 14 shows that leverage has been trending upward over the last few years, and the fourth quarter saw very slight upticks in the unitranche and first lien, second lien categories. Additionally, on slide 15, we outline leverage across industries. We continue to believe that investors should be careful when looking at technology companies as leverage levels in the industry were by far the highest during 2018. We like credit characteristics of software deals but are cautious chasing enterprise value through a cycle. As opposed to deep unitranche, our preference is to structure levered deals in a bifurcated, traditional first lien, second lien structure where the risk-adjusted return is more attractive. Importantly, this allows us to consider where true value sits. Taken as a whole, I would say our overall view of the middle market has not changed materially since last quarter.
Given yield trends and leverage levels, investment discipline and patience is critical, but we believe quality investments can still be found. We continue to focus on finding these quality transactions with appropriate risk-adjusted returns and not focus on specific investment targets or deployment timelines. I'll now turn the call over to John to provide additional color on our financial results for the quarter.
Thanks, Ian. Guys, turning to slide 17, you're going to see a bridge of the company's net asset value per share from September 30th to December 31st. The primary component of the NAV decline was unrealized depreciation on our investment portfolio of about $1.02 share. This decrease in NAV was partially offset by our net investment income for the fourth quarter, exceeding our quarterly dividend by $0.06 a share. As Eric mentioned, roughly 60% of this decline is already recovered in 2019. On slide 18, you'll see our income statement for the fourth quarter, as well as a third quarter pro forma income statement. Slide 19 shows our balance sheet as of both December 31st and September 30th. We ended the year with an investment portfolio of over $1.1 billion.
With borrowings of $570 million under the company's BSL facility, year-end leverage was 1.01 times or 0.92 times debt to equity after adjusting for cash, short-term investments and net unsettled transactions. This $750 million BSL funding facility was reduced to a total commitment size of $600 million following the closing of the company's new $800 million senior secured middle market credit facility just last week. Details regarding both credit facilities are shown on slide 20. Our new five-year credit facility will be the primary borrowing mechanism for the company on a go-forward basis, but we will continue to leverage the BSL facility near term as we transition from a portfolio of primarily BSL investments to middle market investments.
Locking up this $800 million long-term source of liquidity was a critical step for our middle market portfolio expansion, and we are excited to work with such a diverse group of quality lenders, including two partners, both a sizable commitment that made Barings BDC their inaugural BDC investment. Slide 21 shows our paid and announced dividends since the closing of the externalization transaction. The increase in dividends is consistent with our desire to align our dividend policy with the earnings power of the business of the investment portfolio. We announced yesterday that our first quarter dividend of $0.12 is going to be paid on March 20th. I'd like to turn to our investment activity subsequent to year-end and our pipeline on slide 23. We started 2019 with roughly $44 million of new middle market investment commitments at an average three-year discount margin of 5.8%.
Of those 44, $16 million have already funded, suffice to say, it was an active fourth quarter of middle market closings, that really pulled forward demand and led to a slow origination start for the entirety of the middle market for the first quarter. That said, we're seeing the investment pipeline build meaningfully that brings us to slide 24. Slide 24 shows our North America Private Finance investment pipeline probability weighted on deals that we would believe could close. That's at roughly $543 million and growing. Our pipeline remains heavily first lien senior secured across a variety of diversified industries.
Additionally, I think it's important to outline that in addition to our middle market loans, what we're looking to do is also drive shareholder returns, not just through traditional middle market investments, but through effective use of our non-qualified asset bucket via a joint venture with a respected institutional investor in 2019. The joint venture will be structured similar to those JVs currently outstanding in the BDC space, we'd expect that to have a wide investment mandate. It's our intention that the BDC's investment of JV would be approximately 4%-6% of our asset base over time. Look, there's no assurance that a JV materializes in 2019. It's our point so that we believe these programs can offer very compelling, differentiated investor returns to shareholders.
With that, I'll now turn the call over to Mike Freno, Chairman of the Board of Barings BDC as well as the Head of Global Markets of all of Barings.
Thanks, John, and good morning, everyone. Please turn to slide 26 of the presentation. Hopefully, as most of you are now familiar with the Barings organization, you are taking away an appreciation for our distinct competitive advantages that exist in the credit asset management space. First, we are global with the unique ability to drive risk-adjusted returns in both liquid and illiquid credit across geographies. Second, we are highly diverse in our approach and ability to provide capital solutions across the stack to core sponsors. Our sizable capital base with both captive and third-party capital, as well as various investment mandates, allow us to serve our sponsors needs, from revolvers to mezzanine debt and everything in between. This generates greater looks and deal flow from sponsor community. Finally, we are aligned.
As many may know, Barings is wholly owned by a Fortune 100 mutual life insurance company, this unique ownership structure allows Barings to truly manage to the long-term benefit of our clients. Taking those differentiators into account, jump to slide 27. On this slide, you are seeing Barings BDC price to NAV. Notice that as the portfolio remains in the ramp phase, the stock trades at a discount to NAV. In our view, the stock price trading below NAV creates an opportunity to drive shareholder returns at BBDC via share repurchase. As a result, we are proud to announce that we have received board approval for a share repurchase plan in 2019, where Barings BDC aims to repurchase 2.5% of the outstanding shares when its stock trades at prices below NAV.
Additionally, Barings BDC aims to purchase 5% of the outstanding shares in the event its stocks trade at prices below 0.9 NAV, subject to liquidity and regulatory constraints. Moreover, we will be sure to assess this each year to determine the most effective level of buybacks to drive long-term shareholder value. At Barings, we believe share repurchases are an important part of any long-term capital allocation philosophy. Slide 28 summarizes four core beliefs that drive this view. First, there is clear shareholder benefit to purchasing shares below net asset value as it is accreted to all shareholders. This is even more impactful when net asset value is under technical pressures due to market forces. Second, repurchases demonstrate belief in underwriting. Third, we believe that repurchases need to be consistent. Repurchases at a current discount to book value is the tangible equivalent of investing in a loan yielding mid-teens type returns.
To the extent these opportunities exist, Barings should consider repurchases as part of its capital allocation in a given year. Finally, repurchases need to be long-term. Permanent capital vehicles require a permanent view towards generating shareholder value. As we navigate 2019, we look forward to reporting our progress on this buyback each quarter. I will end with slide 29, a slide that is familiar to many of you to give investors a sense of the totality of the approach to alignment. Since becoming manager of the BDC in August of 2018, Barings now owns more than 26% of BBDC shares through a combination of $100 million investment in NAV and $50 million in open purchases via a 10b5-1 plan. We operate under a market-leading fee structure with a high hurdle rate.
We outlined on this call a long-term share repurchase philosophy designed to drive shareholder returns and demonstrate a belief in our ability to underwrite credit over market cycles. I'll wrap up our prepared remarks by saying that while a tremendous amount has been accomplished since we became the advisor to the BDC seven months ago, we continue to maintain a long-term focus that leverages the capability of Barings while aligning with the interest of our shareholders. We hope that the actions we have taken over the last seven months demonstrate this commitment, and we will strive to continue what we have started during 2019. With that, operator, we will open the line for questions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and one follow-up. Again, that is star one to register questions at this time. Our first question is coming from Finian O'Shea of Wells Fargo. Please go ahead.
Hi, guys. Good morning. Thanks for taking my question. I'll start with the new buyback just outlined, which I'll first say is refreshing in its high-level approach and with the detail you offered on the 10b5-1 parameters. That said, what we see in the market today is that even with these 10b5-1s, the algorithms will tend to shut off when the wind blows. The question I'll pose, Mr. Bock and Freno, is appreciating the detail that you buy back more below 90, how can we view the program in terms of the actual teeth it will have in, say, another market dislocation?
Fin, this is Bock. I'll start with a commentary on some of the mechanics and then just if Mike can finish with a philosophical point on how we're kind of approaching this. We're going to utilize both 10b5-1, which is the programmatic means, as well as 10b-18, which is the one that's subject to blackouts. Our point is this, is we always want to create a moment where we're going to be in the market for our shares to the extent the market gives us an opportunity to purchase them at attractive discounts. You can see that we have it weighted where to the extent it trades at a deeper discount, that more shares would be bought. That being said, the major concern of folks announcing share buybacks and not using them, our point just gets to putting out the target and allowing you to judge us.
That kind of comes from the philosophy that Mike and others have imparted on us at Barings to always make sure that we're considering this as part of a holistic capital allocation policy, and we have no problem putting out kind of our intentions.
Yeah. I think I would agree with John on the mechanics of it. Again, what we want to highlight here is this is a philosophy that we believe we should be long-term buyers of our stock price to the extent it trades below NAV. In full transparency, we'll be reporting each quarter how effective we are in executing on those share repurchases.
Thank you. I'll follow with a question to Mr. Fowler on the market. Noticing in your slides with the Refinitiv data by industry, what we notice here is that tech deals are being leveraged to much higher attachment points, and this is seemingly a growing part of the private credit index. Can you give us any color on, aside from these leverage levels, any potential degradation in term structure for the industry, and then perhaps ways that you therefore can protect downside given your higher attachment points for these issuers?
Yeah. A couple of things. I think what we're saying just in general terms is that when it comes to technology, and we do like the credit fundamentals of technology companies, the recurring revenue, embedded sticky software businesses, steady cash flow, high retention, low churn, all those things, that fundamentally it's an attractive business. I think what we're saying at the end of the day is as you look at these deals and you look at where purchase price multiples have gone.
We are seeing purchase price multiples as high as 20 times. There just is a point in time when a unitranche deal is so deep in the capital structure that it's really not senior debt anymore. You're really taking fundamental junior capital risk. All we're saying is when it gets to that inflection point, you need to bifurcate the structure into a first lien, second lien deal, then you can look at the risk-adjusted return on the first lien and the second lien and decide where you want to play.
Okay. Thank you.
Thank you. Our next question is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead with your question.
Yes. Good morning, everyone. I apologize if you've covered the following issue in your prepared remarks, but I'm juggling two earnings calls. Just curious, given the breadth of your platform, I'd like to ask about your thesis on the economy in your underwriting. Most of the market seems to be lending based on the assumption that we're late in the credit cycle. Frankly, that assumption's been in place for many years, and it's been wrong. Folks have been leaving money on the table. Obviously, your BDC is new to the market. We understand that. It seems that you're underwriting also based on this assumption. My question is, how wide would second lien spreads have to get for you to see good risk-adjusted returns in that market and perhaps improve portfolio yield?
Okay. Mickey, this is Eric. I'll take that, I'll try and address, I think there's kind of maybe two questions in there as far as the ramp of the middle market versus where we are in the cycle then also second lien spreads. Focusing on the middle market and the illiquid deals that we directly originate, typically they're five to seven years state of maturity. Whether it be in 2019 or 2015, we underwrite every deal assuming that there's an economic and credit cycle during the life of that asset. We do not try and time the market as far as we're going to be more involved or less involved depending on our views of the economic cycle or the credit cycle. We don't know when that next cycle will happen.
Obviously, we're closer to it people have been predicting it for a while, we don't try and market time that way. That's the first thing on our directly originated deals. As far as second lien spreads, I think it's really two elements within second lien. It's both the attachment point that you're in the second lien, i.e., how deep is the first lien in front of you as well as your leverage, in addition to the return profile of that. The third element is really the documentation of that second lien. Does that second lien documentation look a lot more like mezzanine, or does it look a lot more like traditional second lien? For us, it's really all of those components. It's the absolute return.
It is the leverage of where you are in the asset, also how deep the first lien is in front of you, as well as the documentation component. I can't give you a clear spread answer of what they need to do to get there because we literally look at all three of those components when we're evaluating any type of second lien opportunity.
Okay. I appreciate that. My follow-up question. For some time we've been concerned about how portfolios will behave and how borrowers will behave as LIBOR increases. Taking into account what you just said, the eventuality of a decline in the economy, I'm curious how you're managing the downside risk to LIBOR and to portfolio yield, apart from LIBOR floors.
Yep. Great question. This is Eric again. I would say as we think of kind of LIBOR, I think there is an element of that's occurring in the market where the all-in return is staying maybe consistent because you've seen an increase in LIBOR and therefore potentially a decrease in spreads. I think there's kind of two questions in there, again, as I think of it. The first one is portfolio construction. I should have addressed that when you asked your first question. As we get deeper into a credit cycle or an economic cycle, portfolio diversification becomes ever more important. If you look at our traditional vehicles, as we referenced here, I think the largest position we have is right around 2% of our outstanding's. You should expect to see that stay consistent with us.
That would tell you that's a minimum of a 50-name type of portfolio. I think you'll expect it over time to be larger than that. That diversification's important. Specifically as it relates to LIBOR, we do maintain LIBOR floors in our deals, but it is true that if LIBOR were to decrease from current levels back down to levels we saw two or three years ago, the yield on the portfolio will also decrease. The offset to that is our leverage that we've locked in is also LIBOR-based. It's not a fixed-rate liability that we have. Therefore, you should see some offset to that decrease of asset level return by the liability cost also decreasing.
Thank you for that. Those are all my questions. I appreciate your time this morning.
Thank you. Our next question is coming from Christopher Testa of National Securities Corporation. Please go ahead with your question.
Hi. Good morning. Thank you for taking my questions today. Wanted to discuss, obviously you guys got the approval for reduced asset coverage. Wondering, as you're now over one to one, although not on a net basis, should we look at you to go over one to one just opportunistically in times of severe dislocation? Are you potentially maybe looking at reducing fees over one to one?
Yeah. Chris, this is Bock. Thanks for the question. What I'd start with is how we kind of look at leverage. I'd start first pointing in by when you look at the portfolio that we're developing, our job and our alignment kind of allows us to focus on super senior portions of the capital stack. Our view is that you can bring up leverage slightly on those lower risk investments to generate a superlative return. You target about an 8% return over time, if you kind of go back to our investor deck. That's step one. As you look kind of the bifurcated, what you do going above one-to-one, et cetera, I'd ask you to kind of take a step back, and you have to look at really what incentives force managers to do.
Starting with point A, the hurdle rate, that's kind of what matters the most, right? Before you start diving into individuals of what's the base above a certain amount, you'll find that a hurdle rate at six is entirely different than a hurdle rate set at eight. Our view on the fee is pretty simple, right? We set a hurdle rate at eight. We'll have leverage kind of moving up slightly over time, that leverage can go up two ways: through additional investment, through rotation, and through stock repurchase. You'll kind of find that the all-in fee structure itself still allows for us to, even at the current set fee rate, to originate the type of risk-adjusted return that we want in the most senior portion of the stack in true first lien senior secured debt.
It's really a function of starting with what primarily drives return as opposed to looking about what it does on the edges. In terms of leverage, I think in prior calls, we've talked about the over, what, 1.25 times, which is in par with what a lot of other folks have done. The difference is just how we choose to get there and what our current fee structure and hurdle rate is in order to generate those set returns. Does that help, Chris?
Absolutely. I know you guys have mentioned the JV, although it might initially be a small portion of the assets. To the extent that you get a good partner and you're looking to make that a bigger portion of the 30% bucket, would that make you actually kind of go well under the 1.25 as the JV, if it grows meaningfully, could take your economic leverage significantly above one-to-one?
Another good question. Our view on JVs is they're good return diversifiers. The job isn't to own something with a partner and move in a direction of significant risk on a low spread asset. Kind of the view is, there are a number of great verticals that exist within this very large, very sophisticated asset manager. Our job is to make sure that we design mechanisms that bring those all to bear for the BDC. JV is a way to do that and a way to do that smart and in a diversified return manner. If you think about what Barings is really, really great and capable at, whether it's global private loans, global liquid loans, securitized product, real estate debt, you name it, and that kind of comes to the point of our JV intention is something with a wide mandate. Let's be clear.
We're not here to design something to allow the tail to wag the dog. It's core return. It's first lien, senior secured. I hate saying it this way, but it's extremely boring.
Right. Okay. Just one more, if I may. Looking at your funding sources, I know you guys added the additional credit facility. Given Barings is a brand name in the market and certainly in the syndicated and CLO market, are there any thoughts on doing a securitization where you guys would probably be able to drive a very low cost of liabilities and obviously have more flexibility than you otherwise would with a bank revolver?
Yes.
Okay, great. Those are all my questions. Appreciate your time today.
Thanks, Chris. We appreciate it.
Thank you. Our next question is coming from Casey Alexander of Compass Point. Please go ahead with your question.
Yeah. You just answered my question on the JV, I'll step back out. Thank you.
Thanks, Casey.
Thank you. Our next question is coming from Robert Dodd of Raymond James. Please go ahead.
Hi, guys. Going to portfolio structure. Obviously, like you said, a couple of second liens in the portfolio now. Global trends and what is it? SmartBear, L plus eight. Presumably, my guess is maybe the first lien underneath is kind of an L plus four. For middle market borrower, probably a higher credit quality borrower than the average middle market. Obviously, maybe more risk with a second lien. You mentioned the risk reward, obviously. The view on could we see second lien grow as a portion of the portfolio as we get later in the credit cycle? Precisely because perhaps the underlying borrower, the first lien tier borrower is a higher credit quality business. I guess the ultimate question is, what's better to be in later in a credit cycle?
Is it a higher credit quality business even if you're taking a little bit more structural risk or a little weaker credit quality, but with more structural protection?
Hey, Robert. This is Eric. I'll start with that and then turn it over to Ian for any specifics. We're always going to evaluate where the best risk-adjusted return is, in our opinion, in the market. We also want to stay very true to the strategy that we've communicated to all of our shareholders, which is a predominantly, first lien, senior secured, focused strategy. When we see pockets of opportunity, like we saw in these two specific credits, where we think between the size of the company, the relative value, how deep you are as a total leverage, but also where the first lien attachment point is. We will opportunistically put some of those assets into the BDC. Our strategy, as we sit here today, is not to have some rotation going forward where you would see a significant portion of the assets be second lien.
Yes, they could generate a little higher pure dividend return, but our real focus is a consistent dividend performance over time that will grow. Ian can address anything specific.
I'll just point out a couple things on these two specific deals that are in the portfolio. One, as we've mentioned, we comp to the liquid market to focus on the illiquidity premium. We saw in the fourth quarter, the widening of second lien spreads over the spillover from the BSL. So we saw an opportunity to take advantage of the widening spreads. Second, both of these deals are strong and attractive credit profiles. In the case of the 3PL logistics business, we have a lot of expertise in our team in that space, and we're very comfortable with that credit. Both those opportunities, we were co-lead, and we were able to finance an add-on acquisition, so we could actually see the performance of that company historically under that sponsor. Finally, from a portfolio construction perspective, these were pretty small positions.
Got it. I appreciate that color. The third one, also on portfolio construction, but from a different angle. You've talked about tech and the higher attachment points and credit characteristics. I mean, obviously, we go back a decade, tech was a relatively smaller part of the lending market. Now it's maybe 20% of new originations across the board. If you and obviously, we don't have a portfolio mix, industry mix for you guys in the last recession because you weren't running a BDC. If you were to you were running credit, obviously. If you were to take a view on how you think the industry mix this time or at this point in the market, because the market mix has shifted, versus where it, say, was 10 years ago. How do you think you're going to adjust that?
Do you think that industry mix has embedded materially higher risk across the board?
Great question, Robert. I'll start, and I'll pass it over to Eric. You point out something that if we look at the last 10 plus years, there really wasn't a lot of financing of tech businesses prior to the last cycle. Again, I think you can look at these companies, especially the SaaS model, and get very comfortable with the fundamental characteristics of those businesses. I think when you're a senior debt lender, you really need to think about, especially in the context of portfolio construction, is you're focused on not overweighting that industry. We just don't have the historical perspective that you're referring to. That, and Eric, I don't know if you want to.
No. I think the only thing I would add to that, Robert, is that, as we think of industry diversification within a portfolio, it's not just the industries that are highlighted as far as on the page, but it's also the correlation across multiple industries, right? As we saw in the last downturn, building products, home building, you name it, were highly correlated. What you might have thought was 10% of your portfolio really was correlated at a much higher percentage. We do believe asset level diversification as well as industry level diversification is a critical element of proactive portfolio construction.
I guess I would just point out, as we look at our tech, and I'm talking about the broader platform here, it is a mix of first lien and second lien, right? It's not all 7x unitranche.
Right. Yeah. I appreciate that. No question, but thumbs up on the buyback. Obviously, I think that can generate incremental value to shareholders. Thanks for your approach on that. Thank you.
Thanks, Robert.
Thank you. Our next question is coming from Ryan Lynch of KBW. Please go ahead with your question.
Hey, good morning. I was looking at slide number 11, which has your top 10 investments you guys outlined. Obviously, the three largest investments in your portfolio today are all brand new investments you originated in the fourth quarter that are middle market investments, kind of part of your core strategy going forward. Obviously, all of those three investments are all in different industries. I was wondering, are there any common characteristics of those underlying investments that can maybe just give us some insight into why you chose to provide capital to these borrowers in this environment, and that will just help us get some insight into your investment philosophies.
First of all, as we look at any opportunity, we're really focused on fundamental bottom-up credit. We're not benchmark investors. In each three of these deals, as we look at any credit, we focus on three things. We focus on the equity. We underwrite the private equity firms that we target. We focus obviously on the company and the credit fundamentals of the company, and then we focus on the third leg of the stool, which is the structure. It's the combination of those three things that determines through a probability default and loss given default lens, whether we're comfortable. If we're comfortable, where's the relative value in those deals? Just at a high level, in the first one, it was a space that I think I just mentioned. We have a lot of expertise in that space.
We know the industry really well. We were able to move quickly in that deal, we were able to provide a leadership role in the financing there because of our industry knowledge and our ability to basically provide all the capital in that transaction. Even though at the end of the day, we're never going to be able to invest all the capital because they're going to want to bring in other lenders into the mix. The second deal, the sponsor is an expert in the industry. This company has a differentiated product, fundamental reason to exist. It's a niche market leader. Very attractive company, very attractive structure, and the sponsor focuses on that industry.
The third was an opportunity where it says automotive, this is a business that is more of a hobbyist type of business tied to racing and hobby goers in the auto space in terms of carburetors and fuel injection and things like that. We don't really see that as a cyclical business. It's with a great sponsor and a very attractive deal.
Okay. That's really helpful color. Thanks for that. My follow-up question would be on portfolio growth and leverage utilization. When you guys took over this BDC, the plan was to deploy capital into broadly syndicated loans, increase leverage, start rotating out into more core middle market credit. Obviously, there's been a lot of volatility in the credit markets. Leveraged loan prices and broadly syndicated loans have traded down. I'm wondering, does that affect or change your thoughts on portfolio rotation? Does it make it harder? Should we expect further portfolio growth to just come from further leverage utilization versus maybe selling off broadly syndicated loans? Any color on the portfolio rotation plan from here given the market volatility and potentially further leverage utilization would be helpful.
Sure. Ryan, this is Bock. I'd say in terms of rotating out of the broadly syndicated loans, believe it or not given the rally back, that's a great source of liquidity for us, and you're going to see us sell that down. Really when we approach the middle market portfolio, our view is to always provide a levered return on those highly secure first-lien, very boring type assets. The answer really is, Ryan, you're going to start to see a mix of both. Not all middle market fundings are going to come from BSL sales because we want to deliver a levered return. You'll see a mix shift of both go over time, and our focus will just be on properly ensuring that the broadly syndicated loans are levered to an extent that deliver a good return.
Then we've kind of bought ourselves additional optionality to move out of them over time if things even get really, really frothy, which they haven't yet. It's all a function of time. The answer is they'll be both. No, nothing that's put our growth agenda in any way, shape, or form different. Remember, this is a big platform, and while folks like to focus singularly on a BDC over $15 billion across a variety of investment mandates. We're always in the market with sponsors, and the BDC will always be a part of those activities.
Hey, Ryan, it's Eric. I'd add to John's comments, too. If you look at what Tom McDonald and the team have done on the liquid side from the time we closed the transaction in August to today, our actual realized impact and NAV on our liquid portfolio by sales is actually a positive number. I think that's just a testament that when the market did have that volatility, we managed our leverage in a way that we were not having to be a forced seller for newly originated middle market loans. The integration between the two teams, I think really kind of speaks to that. I think the realized NAV destruction is really the core of what we want to prevent. Then Tom and his team have done a fantastic job of avoiding that.
Okay. I appreciate the time today.
Thanks, Ryan.
Thank you. Our next question is coming from David Miyazaki of Confluence Investment. Please go ahead with your question.
Good morning. Thanks for taking my questions. First, just to begin with, a comment that I really applaud the buyback approach that you're putting in place here. I think that considering buybacks versus new loans, really reflects thoughtfulness around the incremental use of capital. That to me is the essence of real capital allocation discipline. I think that the transparency and the commitment that you're outlining here, it basically allows the public market to sort of frontline your program. I think that's going to accrue a lot of potency to the buyback program over time.
With that, Eric, one of the comments that you made early on was that. I appreciate you marking your book to market, even though the fourth quarter was not a great time to do that. A skeptic of investing in BDCs could say, well, if the correlation between net asset value of a BDC is very high relative to the broadly syndicated loan market, why wouldn't I just take a leveraged position in leveraged loans, get the same kind of volatility or correlation to BDCs, and I could just leverage things up however I saw fit. What is the value add for the BDC industry or more specifically for Barings versus that approach?
Right. David, if I don't answer your question, please come back and make sure I do answer it, because I think it's kind of a broad question comparing the two asset classes. The reality is, here we manage leverage vehicles that are focused exclusively on liquid collateral. We manage vehicles that are leveraged, that focus exclusively on illiquid middle market collateral. We manage vehicles that are a hybrid of those two, as the BDC is currently today. I think at any one point in time, in isolation, one of those different three buckets could be more attractive or less attractive relative to the other ones. They each, frankly, can have some different strategies.
I think what Bock was trying to point out in the correlation there was that what we saw in the fourth quarter, as we have predominantly a liquid portfolio as we went into the fourth quarter, it is very natural that our mark on our liquid collateral would be highly correlated to spread widening or prices falling on those broadly syndicated loans. Different managers have different valuation policies within their illiquid collateral. We take a market input into our illiquid collateral as we then look at valuing that. If you booked an asset today at LIBOR plus 550 and the broadly syndicated loan market went to an L550 type of asset, it's hard to argue that illiquidity premium, let's say it went from 400 over to 550 over, it's hard to argue you still have the same value of that asset.
It doesn't mean you don't believe you won't get par eventually, right? Which is why I said really realized impact to NAV is the key thing as opposed to unrealized impact to NAV. That's where I hope and I believe that you'll see the differentiation is realized impact to NAV. We're looking forward to it. I think it will lead to some shakeout of managers because I think in that next down scenario, that's really where the manager will prove themselves and their ability to manage risk.
Okay, great. I have my own views on that, I think it has a lot to do with the value add that the manager is delivering through underwriting, through asset selection, and capital allocation. Just interested to hear your perspective on that. My follow-up question is related to what all of your thoughts might be on the regulatory frame landscape with regard to comments on AFFE and the 3% rule. Do you have any thoughts or observations on the regulatory front?
AFFE constrains capital. It eliminates the BDC's participation in the larger indices that we all know help drive institutional capital formation. Extremely supportive of adjustments as it relates to AFFE in order to kind of break the logjam of, shall we say, kind of less sophisticated investment and more importantly, some of the perils that come around not having a really good institutional core group given some of the issues put out by AFFE and the restrictions that come out from the SEC. Those were unintended consequences, to be clear. The second, as it relates to the 3% rule, also very attractive. One that kind of allows folks to think about activism in a different light. That will be, shall we say, over time, a very transformative event to the extent it occurs. Our job is not to predict.
Our job is to manage a really boring book of assets, to deliver a pretty set return, and to know what we are and say what we do and do what we say. At the end of the day, happy to see all those transitions and happy to see the space move in a better direction. Our focus is really on our own portfolio and ourselves.
Okay. Thank you very much. Appreciate it.
Thank you. We're showing time for one last questioner today. Our last question will be coming from Jim Young of West Family Investments. Please go ahead, sir.
Hi. You alluded to the global nature of the Barings platform. My question is, what percentage of your assets today are coming from outside of the U.S., and what do you expect to trend going forward in that regard? Thank you.
Barings overall, if you think of it, we manage a little over $300 billion. I can answer that either the firm overall or within the private asset part. Is there a specific area you want me to focus?
For the BDC.
From the BDC perspective? Today the BDC is U.S. assets, is what we have in the BDC. As far as our global private finance platform, we do have a similar. Ian Fowler, who's on the phone here, who co-heads our North America business, has a peer, Adam Wheeler, who runs a business for us in Europe and Australia. If you look at the mix of our assets, we really run some strategies that are exclusively Europe, exclusively U.S., and we run some that are global or basically integrate those two businesses. Currently, Europe would represent around a little over 20% of our actual invested AUM within our global private finance business. That's a very similar strategy to what we've articulated here. It's almost exclusively first lien, senior secured floating rate investments to companies of similar size to what we do in the U.S.
I'm hearing that the BBDC structure will retain and keep its 100% U.S.-focused orientation.
No. I said currently, that's what it is. We do have the opportunity, if you think through the JV, I think Bock referenced that the JV could have liquid or illiquid collateral, U.S., Europe, mentioned structured credit, mentioned real estate debt. I don't want to represent that the 30% basket or the JV. It is currently, but that it will stay at 100% U.S. going forward. What we'll do, similar to as Mike answered the share repurchase, is each quarter you'll have transparency on that, right? If we see value, if for some reason we make an investment in that 30% basket that's different than what it is today, again, primarily U.S. first lien, senior secured, we'll articulate the logic we had behind that on each quarterly call.
Okay, great. My other question is that regarding the shareholder-friendly management fee structure that you alluded to in the press release, could you just further delineate and quantify how you would define that for us, please?
If I were to think about fee structures and kind of where friendliness sits, right? I mean, at the end of the day, it always starts with appropriate capital allocation management, right? Always look at what the incentives to an individual manager are and kind of where that drives their investment. Hurdle rate starts as one of the largest differentiators of risk return, largely because 100% of pre-incentive fee net investment income gets captured between the low hurdle and then the high hurdle rate, right? Which means that if you are setting a low hurdle, to the extent that you have a loan that generates a, let's say, mid-ish, eight-ish, 9% return, a good majority of those economics get eaten up by the catch-up, which means you have to invest at an even higher rate in order to deliver a return that's promised to an investor.
I always kind of look at it in simple terms. Hurdle rates are extremely important and drive it because 100% of the economics on the incentive fee get caught up. That's really important. It falls down to the base fee. How reasonable is the base? Finally, you go down to the incentive fee and the capture, right? That 20 or 17 and a half, et cetera. If I were to rank it that way. We can walk through individual math. There's a lot of analysts that do it out there. Our view is it starts with the hurdle rate, and then you back in to really what a manager needs to invest at to deliver on their returns promised to you, Jim.
Great. Thank you.
Thank you. At this time, I would like to turn the floor back over to Mr. Lloyd for any closing comments.
I just want to wrap up by thanking everybody for the trust you've put in us to manage your capital, the time you take today to ask questions and listen to what we've had to say, and we look forward to any follow-up that anybody has.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.