Morgan Stanley Direct Lending Fund Q3 FY2025 earnings call

• Generated solid Q3 performance with net investment income of $0.50 per share, inline with Q2.
• Committed $183 million to new investments, a 23% increase from Q2.
• Portfolio composition: 96% first lien debt, 2% second lien debt, remainder in equity/other investments.
• Closed inaugural CLO and repriced asset-based facility, with full earnings benefit to be seen in future quarters.
• Board declared $0.50 per share distribution for Q4, unchanged from prior quarters.
• Portfolio had 218 companies across 33 industries, average borrower exposure ~50 basis points.

Morgan Stanley Direct Lending Fund's third quarter 2025 had a total portfolio at fair value of $3.8 billion. It maintained a strong first lien focus with 96% first lien debt, 2% second lien debt, and the remainder in equity and other investments. Net investment income was $0.50 per share, consistent with the second quarter. The fund committed $183 million to new investments, a 23% increase from the second quarter. The portfolio had 218 portfolio companies across 33 industries, with an average borrower exposure of approximately 50 basis points. Weighted average loan-to-value was ~40%, median EBITDA ~$87 million, and weighted average yield on debt and income-producing investments was 9.7% at cost and 9.9% at fair value.

• Expect gross asset yields to remain elevated historically as spreads show signs of bottoming.
• Fed cuts may impact earnings with a 1 quarter lag; CLO and ABL repricing provide near-term offset ($0.01 benefit in 4Q and beyond).
• Focus on optimizing return on NAV (ROE) through various levers including regular way deployment, buybacks, and other ROE-enhancing strategies.

• Uncertainties surrounding market conditions, interest rates, and changing economic conditions.
• Potential deviation from defensive investment strategy when evaluating structural opportunities to enhance ROE.

Q: Expand on M&A outlook, specifically strategic vs PE to IPO/PE to PE turnover.

A: It's a mix with diversity in use of proceeds including LBOs, take privates, dividend activity; optimistic about continued emergence of regular way LBO activity into 2026.

Q: Thoughts on spillover income and maintaining dividend with NII pressure from declining base rates.

A: Spillover is one option; earnings drive dividend power; focus on optimizing ROE to support compelling distribution over time.

Q: Contemplated portfolio optimization and other return levers, like JV loan funds.

A: Constantly evaluating structural options; includes joint ventures, leveraging Morgan Stanley's brand and relationships, with diligence to avoid excessive risk.

Q: Expansion of team and impact on originations funnel.

A: Team has grown to ~80 individuals, net headcount up over 10% since Q3 start; firm supports talent build and investment in product/distribution capabilities.

Q: Details on nonaccrual positions, including further restructuring.

A: Some positions had prior restructurings and continued underperformance; moved to nonaccrual, expected to be resolved in near term.

Q: Deceleration in share buybacks and formulaic program.

A: Buyback program is formulaic; considers share price and capital structure; multiple capital allocation options including deployment are value generative.