Investment Risk and Allocation - The Investment Adviser rates portfolio investments at least quarterly, with Risk Rating 1 indicating the least risk and Risk Rating 4 indicating substantial risk and potential loss of initial cost basis[74]. - Risk Rating 1 investments perform above initial underwriting expectations, while Risk Rating 4 investments are substantially below expectations and may not recoup initial cost[75]. - Morgan Stanley engages in a broad spectrum of activities, creating potential conflicts of interest in allocating investment opportunities among affiliated accounts[77]. - The Adviser has implemented allocation policies to ensure fair access to new private credit investment opportunities among affiliated accounts[82]. - Morgan Stanley may invest in companies that compete with portfolio companies, leading to conflicts in resource allocation[83]. - The Adviser has received an SEC Order allowing co-investment with affiliated accounts, subject to certain conditions[86]. - Investment opportunities may be allocated to other affiliated accounts, potentially limiting access to attractive investments for the company[87]. - The company may invest in opportunities that Morgan Stanley has declined, and vice versa, creating a dynamic investment landscape[80]. - The Adviser may receive fees for origination activities, which could influence risk-taking behavior on behalf of the company[85]. - Conflicts of interest may arise even when co-investing in the same securities, necessitating careful allocation of opportunities[86]. Financial Performance and Management Fees - The base management fee is set at an annual rate of 1.0% of average gross assets, with a waiver reducing it to 0.75% for the period from January 24, 2024, to January 24, 2025[109]. - The incentive fee structure includes a hurdle rate of 1.5% per quarter, with 100% of pre-incentive fee net investment income payable until a "catch up" of 17.5% is reached[114]. - The company anticipates generating cash from share issuance and cash flows from operations, including interest received on debt investments[92]. - The company maintained a stable net asset value (NAV) of $1.8 billion across all quarters with a leverage ratio of 1.0x[137]. - The cumulative net return for Q2 was $72.0 million after accounting for net adjusted capital returns of $18.0 million[139]. - The company experienced net realized losses of 0.25% of NAV in Q1, Q2, and Q3, impacting overall performance[137]. Share Repurchase and Dividend Policies - The company has entered into a share repurchase plan to acquire up to $100 million of its Common Stock at prices below its net asset value per share[95]. - The share repurchase plan commenced on March 26, 2024, following the end of the "restricted period" under Regulation M[99]. - The company has adopted a dividend reinvestment plan (DRIP) effective January 26, 2024, allowing stockholders to reinvest dividends in additional shares[100]. - The company must comply with asset coverage ratios and covenants when distributing to stockholders or repurchasing shares[94]. Regulatory Compliance and Risks - The investment advisory agreement was amended and restated on January 24, 2024, and requires annual approval by stockholders or the Board[107]. - The company is subject to various risks, including interest rate fluctuations and the need to raise additional capital to support growth[150]. - The company is required to adopt and implement written policies to prevent violations of federal securities laws and designate a chief compliance officer for administration[174]. - The Sarbanes-Oxley Act imposes regulatory requirements on the company, necessitating ongoing compliance monitoring and policy reviews[175]. - The company must disclose any significant changes in internal controls over financial reporting, ensuring transparency and compliance with regulatory requirements[179]. - The company is prohibited from knowingly participating in certain transactions with affiliates without prior approval from Independent Directors and, in some cases, the SEC[172]. Investment Company Status and Taxation - The company intends to qualify annually as a RIC, which typically does not incur significant entity-level income taxes due to the ability to deduct distributions made to stockholders[153]. - The company is required to distribute at least 90% of its investment company taxable income (ICTI) to maintain its status as a regulated investment company (RIC) and avoid corporate-level U.S. federal income taxes[191]. - To qualify as a RIC, the company must meet specific source-of-income and asset diversification requirements, as well as annual distribution requirements[193]. - At least 90% of the company's gross income must derive from specific sources to qualify as a RIC, including dividends and interest[197]. - Any failure to qualify as a RIC could result in the company being taxed at regular corporate rates, affecting distributions to stockholders[211]. Market and Economic Conditions - The company operates in a highly competitive market, facing challenges from public and private investment funds, BDCs, and commercial finance companies[90]. - Market interest rate increases may allow the company to invest in higher-return debt instruments, enhancing pre-incentive fee net investment income[119]. - Changes in interest rates significantly impact the company's net investment income, which is affected by the difference between investment and borrowing rates[533]. - The company acknowledges that health crises and other external events can adversely affect investments and net asset value, leading to increased market volatility[532]. - The report highlights the interconnectedness of global economies, increasing the risk of adverse impacts across regions[532]. Investment Strategies and Instruments - The company primarily makes investments in qualifying assets as defined under the 1940 Act, ensuring at least 70% of its total assets are qualifying assets[154]. - The company invests primarily in illiquid debt and equity securities, requiring fair value assessments for accurate valuations[531]. - The company may use standard hedging instruments to mitigate interest rate fluctuations, but this could limit potential benefits from lower rates[536]. - The company may invest in Passive Foreign Investment Companies (PFICs), which could affect the taxation of gains and distributions[206]. - Fluctuations in foreign currency exchange rates can impact the company's income and distribution requirements[209].
Morgan Stanley Direct Lending Fund(MSDL) - 2024 Q4 - Annual Report