Hello everyone, and welcome to GBDC's earnings call for the quarter ended March 31st. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements that are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com, and click on the Events Presentations link.
As a reminder, this call is being recorded for repeat purposes. I'll now turn the call over to David Golub, Chief Executive Officer of GBDC. David?
Thanks, John. Hello, everybody. Thanks for joining us today. I'm joined here by Chris Ericson, our Chief Financial Officer, Greg Robbins, Senior Managing Director, and Jon Simmons, Managing Director here at Golub Capital. Yesterday, we issued our earnings press release for the quarter ended March 31st, and we posted an earnings presentation on our website. We're going to be referring to this presentation throughout the call today. For those of you who are not familiar with GBDC, our investment strategy is to focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. The headline for this quarter is that GBDC had another strong, consistent performance, and that came despite a very challenging macro backdrop, which included rising interest rates, continuing supply chain issues, Russia-Ukraine war, and a significant downdraft in equity and fixed income markets.
For the March 31 quarter, adjusted NII per share before capital gains incentive fee accrual was $0.03, adjusted EPS was $0.39, and ending NAV rose from $15.26 per share to $15.35 per share. During the quarter, GBDC made a quarterly distribution of $0.30 per share. We believe our results highlight the resilience of our strategy, and we'll talk some more about that over the course of today's call. Now I'll hand the floor to Gregory, John, and Chris to elaborate on GBDC's performance for the quarter. After that, I'm going to provide some closing commentary about our outlook, and then I'll open the floor for questions. Gregory, over to you.
Thank you, David. I'm going to be turning on slide six, which describes three key themes that contributed to GBDC's success during the quarter. The first theme is strong portfolio performance. I call your attention to the Golub Capital Middle Market Report, or GCMMR, for March 21st, which we published several weeks ago. The median earnings growth rate in January and February of 2021 to the same period in 2022 was nearly 10%. Although GDP fell by an annualized 1.4% in Q1 in inflation-adjusted terms, Golub Capital's portfolio companies continued to perform well. This is not only reflected in strong credit results. We'll take a closer look at the data later in the presentation. It is also reflected in the second key theme for the quarter, net portfolio growth. Golub Capital's origination exceeded all of our expectations.
We expected the first calendar quarter to be slow. It typically is. We expected that deal makers would need to catch their breath after a really busy 2021. We were right in part. M&A was not particularly strong. However, Golub Capital's origination in calendar Q1 exceeded our expectations, primarily because our portfolio companies were pretty offensive. They were closing add-on acquisitions and executing growth programs, which created new investment opportunities for Golub Capital. Origination and existing borrowers, what we call incumbencies, across the platform represented over 70% of all originations this quarter. In calendar Q1, GBDC net portfolio growth also had a tailwind from unusually low paydowns. Moving on to slide seven. This slide provides a bridge from GBDC's $15.26 NAV per share as of 12/31 to its increased $15.35 NAV per share as of 3/31.
Let's walk through the bridge. Adjusted NII per share was $0.27. Dividends per share paid during the quarter was $0.40. Adjusted net realized and unrealized gains per share were $0.12. Let's now take a closer look at our results this quarter. For that, let me hand the call over to Jon Simmons to walk you through the results in more detail. John?
Thanks, Gregory. Slide nine summarizes our results for the quarter and over the past several quarters. Gregory already discussed the results for the March quarter. This slide also shows GBDC's consistent and solid adjusted NII, adjusted NII before the capital gains incentive fee accrual, adjusted net realized and unrealized gains, EPS, and distributions over the last several quarters. Moving to slide 10. As Gregory noted, net origination exceeded our expectations this quarter. New investment commitments totaled $323.2 million. After factoring in repayments on investments of $122.2 million, as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 5.4% for $279.4 million during the quarter.
As of March 31st, we had $40.6 million of undrawn revolver commitments and $203.2 million of undrawn commitments on delayed draw term loans. Each of these unfunded commitment amounts are relatively small in the context of GBDC's strong balance sheet and liquidity position. Finally, as shown at the bottom of the table, both the weighted average rate and spread over LIBOR on new investments remained consistent quarter-over-quarter. Slide 11 shows that GBDC's overall portfolio mix by investment type remained consistent quarter-over-quarter, with One-Stop loans continuing to represent approximately 80% of the portfolio at fair value. Slide 12 shows that GBDC's portfolio remains highly diversified by obligor, with an average investment size of less than 40 basis points.
As of March 31st, 94% of our investment portfolio was comprised of first lien, senior secured floating rate loans defensively positioned in what we believe to be resilient industries. Turning to slide 13. This graph summarizes portfolio yields and net investment spreads for the quarter. Focusing first on the light blue line. This line represents the income yield for the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium. The income yield decreased by 20 basis points to 6.9% for the quarter ended March 31st. The investment income yield, the dark blue line, which includes the amortization of fees and discounts, increased by 40 basis points to 7.3% for the quarter, driven by an unusually low level of repayments.
Repayments can be cyclical, and we don't expect this low level of repayments to be sustained in future periods. Our weighted average cost of debt or the aqua blue line increased by 10 basis points to 2.8%. Our net investment spread or the green line, which is the difference between the investment income yield and the weighted average cost of debt, increased by 50 basis points to 4.5%. Both LIBOR and SOFR base rates increased during the quarter, which increased interest expense, but did not meaningfully increase interest income because most of our loans have 1% base rate floors. Post-quarter end, we continue to see increases in base rates, which are expected to be additive to interest income and earnings in future periods, all else equal. With that, I'll hand the call over to Chris to continue the discussion of GBDC's quarterly results.
Thanks, Jon. Flipping to the next two slides. Non-accrual investments as a percentage of total debt investments at cost and fair value increased to 1.5% and 1.9% respectively as of March 31st, due to the number of non-accrual investments increasing from five to seven investments. Overall, fundamental credit quality remains strong, with over 90% of the investments in our portfolio having an internal performance rating of four or higher as of March 31st. As a reminder, independent valuation firms value at least 25% of our investments each quarter. Slides 16 and 17 provide further details on our balance sheet and income statement as of and for the three months ended March 31st, 2022. Turning to slide 18. The graph on the top summarizes our quarterly returns on equity over the past five years.
The graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same time frame. Turning to slide 19. This graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception. Slide 20 summarizes our liquidity and investing capacity as of March 31st, which remains strong with over $960 million of capital available through cash, restricted cash, and availability in our various credit facilities. Slide 21 summarizes the terms of our debt facilities as of March 31st. Slide 22 summarizes our recent distributions to stockholders. Most recently, our board declared a quarterly distribution of $0.30 per share, payable on June 29th, 2022 to stockholders of record as of June 3rd, 2022.
With that, I will turn it over to David for some closing remarks.
Thanks, Chris. To wrap up, GBDC had a strong quarter. Our portfolio companies continued to perform well, realized and unrealized gains were solid, and new commitments coupled with portfolio repayments resulted in healthy net portfolio deployment. Let me talk briefly about our outlook before I open the line for questions. I said in the last couple of quarters that we're cautiously optimistic about the prospects for capital and GBDC in the coming period. We still are, but I say cautiously for it is increasing. Before I talk about why we're cautious, I want to review and highlight four reasons for optimism. First, the strength of GBDC's portfolio. We've talked about it all on this call. Despite the recent reported negative risk score for GDP, despite the downdraft in stock market prices, our portfolio companies continue to report strong year-over-year growth in both revenue and EBITDA.
Do I expect it's gonna slow down from the pace of 2021? Absolutely. We're still seeing robust growth, and we continue to have very few companies showing signs of credit stress. Second reason for optimism is the strength and flexibility of GBDC's balance sheet. With interest rates rising, we're well-positioned with about half of GBDC's debt funding in the form of low cost, fixed rate unsecured debt. We think GBDC will benefit as rates go above the LIBOR or SOFR floors on GBDC's assets. We've already started to see this happen as the floors are typically 1%. Third reason for optimism is the momentum that we're seeing in the private equity ecosystem. Many are predicting that the overall size of the private equity ecosystem is gonna double in the next 3-5 years.
This means a growing opportunity set for us and for other leading private equity players. Finally, there's a market share shift underway within the sponsor finance industry. There's a shift towards the market-leading players. We think the private equity winners are concentrating their business with lenders who have scale and product breadth and expertise, and who are more generally strategically valuable partners. If this story about four factors that are leading to optimism sounds familiar, it should. I've discussed these trends for the last several quarters. It's not all clear skies out there. Let's talk about how our optimism is tempered by three sources of uncertainty. Let's start with COVID. It's supposed to be over now, but it's not.
In fact, top virologists are now saying that even though over 60% of Americans have had COVID, over 75% of youth, we're not only not at herd immunity, but we may never get to herd immunity. We're instead likely going to have to live with COVID. It may not just be COVID. It may be global pandemics may be part of the new norm. Second is inflation and higher interest rates. There's some good news here. The good news is that now everybody agrees that inflation is a problem. I think this is important because the first step to solving any problem is agreeing it's a problem. For an extended period of time, a lot of economists and members of the Fed thought that inflation was transitory. Didn't need to be addressed. That's the good news.
The bad news is that inflation is here to stay. While I think we all as investors need to plan for a lot of different scenarios, our base case is that inflation is gonna be around for a while, that higher rates are gonna be around for a while, and that we're all gonna need to adjust to both. The third source of uncertainty is Ukraine. Now we've all been reading about how this is a superpower standoff, and the nuclear age, and there's threats of escalation. All that's true. What I wanna focus on here is the degree to which the war has led to a global reset of the international monetary and trading system.
We've basically seen the West take moves in its restrictions on Russian foreign currency movements and tariffs on Russian goods that are fundamental changes to the post-World War II global economic order in international monetary and trading norms. I think it's gonna take some time for companies, for governments, for investors to understand and adjust to all the second and third order impacts of these new norms. My own view is that investors would do well to prepare for a long stretch of greater market volatility as we all see how these second and third order impacts play out. The good news from the perspective of GBDC shareholders is that our niche in sponsor finance is reasonably well insulated from these three sources of uncertainty. We and our sponsors and our borrowers, we've learned to manage COVID risk.
Our loans are floating rate, and so they adjust to changes in interest rates. Our borrowers are primarily U.S. companies selling to U.S. customers. The impacts on international trade system, international monetary systems, global commodity markets matter less. We're not immune to what's happening with COVID and interest rates and the war, but I do think we're well positioned for continued stable results. With that, operator, please open the line for questions.
Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Once again, press star one to ask a question. I'll also remember to compile the Q&A roster. Okay. We'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is now open.
Hey, everyone. Good afternoon. David, I'll ask the question on recurring revenue loans. You've been a leader in this space for years. You know, how the companies to our understanding are, you know, have less ongoing cash generation because they're spending that on marketing and research and so forth. That would still intuitively leave them more prone to higher interest rates on their debt, right? They could cut costs, but that wouldn't necessarily be good for them. You know, having a exposure to this and experience over the years, how well set up do you think this category is financially in its ability to withstand, you know, base rates going up to 1%, 2%, maybe 3% over the near term?
Good question. Let's take a step back and make sure everybody's familiar with the category, the context of Finian's question. Finian's asking about recurring revenue loans. These are loans to companies, generally in the software space, that have made the decision to have high levels of selling or general administrative or R&D expenses relative to their revenues in order to facilitate rapid growth, even though that's at the expense of profitability. Typically these loans are made at a lower loan-to-value, but if you look at them in terms of traditional credit metrics like debt-to-EBITDA, they look very good. We've been in the recurring revenue loan business for about eight years now. We're, as Finian said, one of the pioneers. It's been a very strong experience for us.
We've had very good results, very few loan losses. It's been a category in which I think we've done very well for our investors. I do think that the larger companies in the recurring revenue tier today are meaningfully less attractive than they used to be from a lender's perspective. One of the reasons is the one you mentioned, Tim, which is as interest rates go up, you've got a higher cash burn, which needs to be addressed in some way by these companies. It's not addressed out of operating cash flows, so it's addressed through new cash that's coming into the system or cash that's on the balance sheet. By definition, as rates go up, you're putting more pressure on these companies because you have to pay interest costs somewhere.
The second reason that I think these loans have become less attractive is simply competition. Eight years ago, when we were a pioneer in this area, spreads were higher. Coverage levels as a multiple of recurring revenues were lower. Terms were tighter. We've seen, and this is a normal part of our business, as you develop a relatively new area, all of those become less attractive from a lender's perspective, particularly in the last year or so. As a consequence of that, you know, we've focused in other areas. If you look at our loan origination, I think Jon mentioned this in our opening remarks. About 70% of our platform-wide loan originations in calendar Q1 were incumbents.
We were to companies that we were already a lender to. We're very focused in the current environment, given the uncertainties that I talked about in my opening comments, on making sure that we're lending to companies that are well-positioned for rising rates, for inflation, for the uncertainties that we're facing. And the single best category that we like to focus on is the companies that we know best, and those are our existing portfolio companies.
That's helpful. Thank you. Playing off of your remarks there on competition and origination. I know first quarter is often seasonally lower for you on origination, but what are things looking like now? The market's more volatile, so there may be maybe less demand, and there's still a lot of inflow to direct lending, you know, products as we're all seeing. How do you see you know, or what do you expect top line gross, at least origination fee is the pipeline just building up what you normally would this at this point in the year?
Again, I'm just going to go back before going forward. If you look at Q1, right as you say, Q1s tend to be seasonally low. As Greg said in our prepared remarks, we expected Q1 to be unusually low because of pull forward into 2021. We thought that a substantial number of sellers took their sales, their company sales into 2021 in order to avoid the prospect of higher capital gains tax rates, and that would have an impact on first quarter of 2022, maybe even on later in 2022. We were partly right, but if you look at our overall platform-wide origination in Q1, we were about 50% up year-over-year. It did slant, as I mentioned, very significantly towards existing borrowers.
I'd say overall we were pleasantly surprised by the attractiveness of the opportunities that we saw in Q1. In Q2, we're seeing some acceleration. Is it as fast a pace as 2021? No, I wouldn't expect this to be. 2021, I think will prove to be well an outlier for a bit. There were some special factors that made 2021 as active as it was, coming out of COVID and the pull forward impact of expected tax law changes that I just mentioned. I think Q2 will be a quite solid quarter for us from an origination standpoint. I do think we're starting to see some of the impacts that you'd expect from the market downdraft. New deal activity is shifting to the right to a degree.
That's, you know, that's to be expected. That's normal in this kind of environment. Despite that, I think calendar Q2 is gonna be a good origination quarter for us.
I'm sure it's helpful in that case. One more, if I may. Can you talk about credit? And you know, what the outlook would be as it relates to sort of the Fed going the other way, which is, you know, very opposite of what happened in the 2020 COVID era, where there was government, monetary, fiscal support all around, private equity support of companies because it was all, you know, supposed to be and ended up being temporary. Although COVID is still a problem, as you mentioned, but this time feels different where, you know, the Fed is addressing inflation problems and appears very serious about it, and financial conditions are therefore getting tighter.
How do you look at the outlook for, you know, sponsor middle market credit and, you know, the overall asset class loss and default rate?
Credit's gonna get tougher. I mean, if you look at not just in sponsor finance, but in liquid credit markets generally, the S&P LCD index for the first four months of 2022 had zero defaults. You can't get better than from zero, so it's gonna get worse. What are the factors that are gonna push things in the worst direction? Well, you mentioned one, which is higher interest rates. A second is some companies are gonna find themselves on the wrong end of the inflation curve, and inflation's gonna impact their costs. They're not gonna have the pricing power to raise prices enough. I think supply disruptions are a third issue that are gonna impact some companies.
What's going on right now in Shanghai is pretty scary for many companies that rely on tech inputs. I think we're gonna see more credit stress across the system. I feel pretty good about our portfolio. As I mentioned in my opening remarks, you know, we've been anticipating inflation for two years. We've been thinking about how to position the portfolio to have real resiliency in the context of inflation and rising interest rates. We're not exposed to Russia and Ukraine. We have relatively little exposure to China. I think we're in a good position, Finn, to continue our track record of meaningfully outperforming the market. I think it's reasonable to expect the credit markets are gonna get tougher in the coming period.
Very well. That's all for me. Thank you so much.
Next we'll go to Ryan Lynch with KBW. Ryan, go ahead.
Good afternoon. I wanted to talk about the Golub Capital Middle Market Report you guys put out. It's an incredibly helpful report. Provides a lot of insight. You know, as you've stated on the call today, you know, you're still seeing good revenue and earnings growth in the first two months of calendar Q1 of 2022. When I look at the report, you know, revenue growth in the overall portfolio of 18%, earnings growth of 90%, to me that shows pretty meaningful margin contraction, you know, in your overall portfolio. If you look at the individual sub-sectors, there are outliers in there as well. You look at industrials up 12% with a total revenue growth and earnings decline of almost 2%.
You know, while I think things look pretty good today, I would love to hear you comment on what are you seeing from a margin standpoint in your portfolio and what is the outlook for that going forward?
Happy to. Ryan, before I get that, I do need to respond to something that you wrote earlier today. You wrote that you thought that we missed on NII per share, and I don't agree with that. It's been a while since we've seen capital gains incentive fee accrual. I want to just review with everybody how that works, because it's very funky accounting. If, like Golub Capital, you're a BDC that's done exceptionally well from a credit standpoint and has net realized and unrealized gains from inception, this is very, very unusual. We're an extremely rare company in having that. If you have that, accounting says that you do an as-if liquidation at the end of the quarter. You assume that all of your unrealized positions are realized.
They're then marked, and you calculate what the incentive fee, capital gains incentive fee would be if that already took place. We had roughly $0.04 of capital gains incentive fee that goes above the NII line, and that's what brought our NII down. Because this is not a cash expense. In fact, when you calculate what's scheduled in cash, you do a completely different calculation. You look at realized gains and you look at realized and unrealized losses. In fact, this is not only a non-cash expense, it's also matched by an income item that falls below the NII line. The only way you can get a capital gains incentive fee accrual is if you have meaningful net realized and unrealized gains beneath it. I get that.
I agree with everything you said. Adjusted NII, you know, was $0.31. Consensus was $0.31, wasn't adjusted NII or adjusted for the capital gains incentive fee is $0.30, which would be below $0.31 net interest, or that's what it shows on slide four. Unless I'm missing something. I look like a mess.
You're saying $0.31 versus $0.30. Okay. I mean.
Right.
That's grounding. There's some other factors as well. We had some fixed income on preferred instruments that we take that income below the line and realized and unrealized. Other BDCs take it above the line. I guess I have a bias. I think EPS is a much better measure than NII. We can continue that debate offline. Let me go back and answer your other question, which was about company performance. You're 100% right that if you look at the most recent Golub Capital Middle Market Index, the numbers reflected a deceleration in growth from what we saw in 2021. They reverse something that we saw pretty consistently over the course of 2021, which was actually faster profit growth than revenue growth.
In the most recent quarter, quite as you described, Ryan, we saw revenue growth outpacing profit growth. I'm not sure that one quarter gives us enough data to draw a lot of really good conclusions about. If we saw that pattern continue over an extended period of time, and if we saw the profit growth start to go down further to the point where in real terms it's actually not positive, then I think your point about this being a sign of, yeah, an indicator of coming challenges. I think that'd be a more compelling argument. Right now, what I see is continuing levels of revenue growth that are very strong and continuing levels of profit growth that are really quite solid.
We always see on a quarter by quarter basis some volatility by industry. To me, given the supply chain issues that we saw in Q1, not surprising that we saw, you know, worse results for industrials. If I look across the portfolio at a bunch of different measures, not just the middle market index, but also the performance ratings, 94% in category four and five. The, you know, low level of non-accruals, 1.1% at par value. The performance of specific companies in the way in which a number of companies that have been historically underperformers are actually improving. My overall sense for the portfolio performance is actually quite positive. All that's a rising indicator, you know.
Mm-hmm.
In the best case, we're looking at history. We're not looking at projections. We're not looking at budget or forecasts. You know, we've got to leaven all of that data analysis with perspectives about what we're seeing on the horizon.
Yes. No, I totally agree. I mean, that's the thing is I think the path to it has been great. I think everybody's sort of worried about where is the future looking. Not for you specifically, but for all these private, you know, businesses. The other one of the other questions I had was what, you know, if you guys primarily, you know, play in direct lending private credit markets, but you guys also have a, you know, big broadly syndicated loans business and then there's some overlap between those two markets. I'm just wondering in the last, you know, call it couple weeks or last month, how has the broadly syndicated loan market been doing?
Because obviously that has impact on kind of the pipelines and people's desires to take a private solution versus, you know, tapping those markets.
Sure. The broadly syndicated market's been pretty bumpy over the last month. I'd say a typical broadly syndicated loan is probably down about a penny over that period. If you amortize that over an expected life of three years, that's an approximately 33 basis point spread widening. We've seen some similar indicators if you look at the new issue market, which hasn't been robust, but there's been some. If you look at new issue, I'd say again, there are signs in the new issue market that we've seen a modest degree of spread widening. Another thing we're seeing in the broadly syndicated market that's interesting and worth watching is we're seeing a slowdown in new CLO formation. That's important because over 70% of the buyers of new broadly syndicated loans are typically CLOs.
If you see a slowdown in new CLO formation, that's taking some buyers out of the market. I think we're likely to see some continued spread widening. We're seeing it in the high yield market. It's more marked in the high yield market. I think the usual pattern, Ryan, is that these things happen first in liquid credit markets, and then they migrate down to the private market over time. That's my expectation this time as well.
Okay. That's helpful. The other question I had, and these are, you know, I thought about kind of the March concerns. Again, just to be clear, these are concerns, you know, all throughout, you know, the private credit markets, not BDC, you know, things. It's certainly impacting and I'd love to hear your insight because you have great insight on the market. When we look at kind of the public markets, the public equity markets, I mean, there's been a huge reset in valuations and in particular some of very strong cash flow positive businesses that are spectacularly strong growers.
You know, you can talk about like Adobe or, you know, Salesforce or things like that. You have a lot of investments, I feel like, in very good, strong, secular growing businesses that are probably, you know, gonna be fine, you know, from a probably earnings, EBITDA standpoint. But what happens if that valuation reset in the public market, you know, stock down 20%, 30%, 40%. Again, very strong businesses also get to reset in the private market. I'm assuming that hasn't happened yet, and it may not happen, but what would that mean? Is that a concern for you? Obviously, you're still gonna be able to pay interest and all that, and they'll still be strong businesses, but ultimately you have to get paid back. What happens?
I guess, one, is that a concern as we're gonna see a major pullback in valuations in the private markets? Not a small one, but a major one. What would that mean?
I think, I mean, it's a couple different pieces. Let's talk about the opportunity side first. When you have a major public market pullback, one of the first things we tend to see is a bunch of take privates. We tend to see private equity firms looking at public companies and identifying undervalued ones and seeking to take them into the private equity ecosystem. We've started to see that. In fact, we've been involved in financing several of them in the last couple of months. I think that's a positive attribute. We don't have a particularly large equity portfolio. We have just some. It's a couple of percent of the portfolio.
There are other BDCs that have much larger portions of their portfolio in equities, where changes in equity market values might have a more significant impact on you know, unrealized. I don't think that's gonna be a meaningful factor for us. The third way it could impact us is if we have an underperformer. I mean, your point is right. These companies in general are performing quite well. If it's performing quite well, it can go down in value by 25%. It doesn't really impact us as the debt holder. If they're underperforming, then arguably we're losing some of the important cushion that makes sure that we don't have a credit loss. This is part of our business.
We've got to always be on the lookout for underperformance and working with our borrowers and working with our sponsors to address that underperformance early so that it doesn't become a credit loss over time.
Okay. Gotcha. That's very helpful, you know, color on some of the dynamics. That's all I have today. I appreciate the time and the dialogue.
Thanks, Brian. Next we'll go to Robert Dodd with Raymond James. Your line's open.
Hi guys. On a question about software as well. I mean, coming to the proposed 25% software, I mean, there's a couple of questions here. One, I mean, just curious how much of that is recurring revenue versus cash flowing software businesses. The bigger question really with software being such a large piece. I mean, software's quite an expansive term. Within your software exposure, is there any color on kind of give us that diversification in end markets? I mean, it's not all software for traffic design, right? I mean, it's different things. So how diversified is that? Are there any concentrations in particular subsectors that we should be aware of?
A couple things I can say and a couple things I think are probably best served to take away and see if we can improve our transparency next quarter. What I can say is that most of the software exposure is not recurring revenue loans. It's cash flow lending to very successful, very resilient, mission-critical businesses in the software companies. SaaS model, you know, very high recurring revenues, very high customer counts, very low attrition of customers, very high free cash flow. We like that profile. We have a lot of them. We're the earliest of the direct lenders to go into the technology lending space. I think we still have the largest technology portfolios as a platform in the industry.
I think this is one of our real areas of expertise and competitive advantages. If you look at end markets, they're very diversified. I'd like to take as a homework assignment if you don't mind, you know, figuring out a way to illustrate this in our next 10-Q so that we can share the information with you. I'm confident in the conclusion. The conclusion will be that we don't have meaningful concentrations by end market. I think that's important because all software companies don't move together in the context of serious and chronic changes in the economy. The better way to look at factor risks in software lending is based on end markets.
I appreciate it. Thank you. I'm fine with homework. Yeah, fine with signing it, not doing it. I appreciate that. On the healthcare side, I mean, it's been another area of focus for you over a long time. Through COVID, you had a lot of what we could call, well, discretionary healthcare. Obviously, COVID kind of upset the apple cart there a little bit because a lot of them got shut down. Then the company there obviously got back up this quarter. Do you have any concerns or any sort of concerns that the healthcare consumer attitude has changed going forward, particularly if we see more inflation, if we do see an economic slowdown and rising unemployment?
If COVID has taught them that they can defer these things for a period of time? Is there a higher risk of greater deferrals if we see an economic issue in future than might have been the case when you underwrote those businesses some of them, because there's two totals.
It's an interesting question and the honest answer is we don't know yet. We'll see over the course of coming quarters. As I think about your question and think about subspecialties, I think the answer may be different by different subspecialties. For example, we're very active in the vet space. I think Fido's gonna continue to get what Fido needs. That's been the history of the vet space through prior downturns. You know, given the trends towards humanization of pets, I don't think that's likely to change. We operate in a number of other subsectors, ophthalmology and eye care, dentistry, derm. I'm not seeing signs of what you're describing, at least not yet. I think it's an interesting question.
Look, the consumer's gonna have to make some changes. Gas prices are up and food prices are up and there are lots of consumers who are in the context of those two costs going up, are gonna have to save money somewhere else.
Okay. I appreciate it. Thank you.
Mr. Golub, I'll turn it over to you for closing remarks.
Great. Thank you, David. Appreciate everyone taking the time today to share with us and your questions. As always, if you have any other questions before we come back and talk to you next quarter, please feel free to reach out. Very much appreciate your partnership. Thank you.
This concludes today's conference call. You may now disconnect.