10-K: North Haven Private Income Fund LLC Outlines Investment Strategy and Financial Structure in Annual Filing

North Haven Private Income Fund LLC details its investment approach focused on senior secured loans to middle-market companies, alongside its financial structure and governance in its annual 10-K filing.

Summary

• North Haven Private Income Fund LLC, a non-diversified, externally managed specialty finance company, released its annual 10-K filing.
• The company is structured as a perpetual-life BDC, focusing on directly originated senior secured loans to U.S. middle-market companies.
• As of March 4, 2024, there were 135,613,984 Class S Units outstanding, with no preferred units.
• The company does not intend for its units to be listed on any national securities exchange.
• The company's investment objective is to achieve attractive risk-adjusted returns through current income and capital appreciation.
• The company primarily invests in senior secured term loans, with some allocation to higher-yielding assets.
• The company targets middle-market companies with EBITDA between $15 million and $200 million.
• The company's debt investments typically have maturities of five to eight years and bear interest at a floating rate.
• The company also invests in traded bank loans and other liquid debt securities for cash management purposes.
• The company's investment approach is focused on long-term credit performance, risk mitigation, and preservation of principal.
• The company is externally managed by MS Capital Partners Adviser Inc., an indirect, wholly owned subsidiary of Morgan Stanley.
• As of January 1, 2024, the Adviser managed approximately $18.5 billion in committed capital.
• The company has entered into an Expense Support Agreement with the Adviser, where the Adviser may elect to pay the Companys expenses.
• The company has entered into an Administration Agreement with MS Private Credit Administrative Services LLC, an indirect, wholly owned subsidiary of Morgan Stanley.
• As of December 31, 2023, the company had investments in 212 portfolio companies across 42 industries.
• Approximately 99.9% of the company's debt portfolio was invested in debt bearing a floating interest rate as of December 31, 2023.
• The weighted average total yield of investments in debt securities at amortized cost was 11.8% as of December 31, 2023.
• The company intends to limit the number of units to be repurchased in each quarter to no more than 5% of its outstanding units.

Sentiment

Score: 6

Explanation: The document presents a balanced view of the company's operations, highlighting both its strengths and risks. While the company has a clear strategy and experienced management, it faces challenges related to liquidity, valuation, and potential conflicts of interest. The document also notes the company's net increase in members' capital resulting from operations was a loss of $(9,696) for the year ended December 31, 2022, compared to a gain of $205,918 for the year ended December 31, 2023. The sentiment is therefore neutral to slightly positive.

Positives

• The company has a clear investment strategy focused on senior secured loans to middle-market companies.
• The company has a strong management team with extensive experience in credit and principal investing.
• The company has access to the resources and expertise of Morgan Stanley.
• The company has a diversified portfolio of investments across various industries.
• The company has a unit repurchase program to provide some liquidity to unitholders.

Negatives

• The company's units are not listed on any national securities exchange, limiting liquidity for investors.
• The company's investments are primarily in illiquid debt and equity securities, which may be difficult to value.
• The company's incentive fee structure may create incentives for the Adviser that are not fully aligned with the interests of unitholders.
• The company is subject to potential conflicts of interest due to its affiliation with Morgan Stanley.
• The company is subject to risks associated with the current interest rate environment.

Risks

• The company's investments are primarily in illiquid debt and equity securities, which may be difficult to value.
• The company's incentive fee structure may create incentives for the Adviser that are not fully aligned with the interests of unitholders.
• The company is subject to potential conflicts of interest due to its affiliation with Morgan Stanley.
• The company is subject to risks associated with the current interest rate environment.
• The company's portfolio companies may default on their loans, which could harm the company's operating results.
• The company's ability to enter into transactions with its affiliates is restricted.
• The company operates in a highly competitive market for investment opportunities.
• The company will be subject to corporate-level income tax if it is unable to qualify as a RIC.
• The company will need to raise additional capital to grow because it must distribute most of its income.
• Regulations governing the company's operation as a BDC affect its ability to, and the way in which it, raise additional capital.
• The company is subject to risks associated with its Credit Facilities.
• Failure to qualify as a BDC would decrease the company's operating flexibility.
• The majority of the company's portfolio investments are recorded at fair value as determined in good faith by the Valuation Designee and, as a result, there may be uncertainty as to the value of the company's portfolio investments.
• The company is a non-diversified investment company within the meaning of the 1940 Act.
• The company's Board of Directors may change the company's investment objective, operating policies and strategies without prior notice or unitholder approval, and the company may temporarily deviate from its regular investment strategy.
• The Adviser and Administrator can each resign on 60 days notice, and the company may not be able to find a suitable replacement within that time.
• The liability of each of the Adviser and the Administrator is limited.
• The company's debt investments may be risky and the company could lose all or part of its investments.
• Subordinated liens on collateral securing debt investments that the company will make to its portfolio companies may be subject to control by senior creditors with first priority liens.
• The company's investments in traded bank loans and other liquid debt securities of U.S. corporate issuers could include covenant-lite loans, which may expose the company to different risks.
• The lack of liquidity in the company's investments may adversely affect its business.
• Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of the company's portfolio investments, reducing its net asset value through increased net unrealized depreciation.
• The company may be subject to risks associated with syndicated loans.
• The company's portfolio companies may prepay loans, which may reduce the company's yields if capital returned cannot be invested in transactions with equal or greater expected yields.
• The company's failure to make follow-on investments in its portfolio companies could impair the value of its portfolio.
• Because the company generally does not hold controlling equity interests in its portfolio companies, it may not be able to exercise control over its portfolio companies.
• The company can offer no assurance that portfolio company management will be able to operate their companies in accordance with the company's expectations.
• The company's portfolio companies may incur debt that ranks equally with, or senior to, the company's investments in such companies.
• The company may be subject to risks under hedging transactions and may become subject to risks if it invests in foreign securities.
• The company's Units are not listed, and the company does not intend to list its Units on an exchange.
• There is a risk that unitholders may not receive distributions.
• Investors will not know the purchase price per unit at the time they submit their subscription agreements.
• If the company is unable to raise substantial funds in its ongoing, continuous best efforts offering, it may be limited in the number and type of investments it may make.
• The company intends, but is not required, to offer to repurchase Units on a quarterly basis.
• The price at which the company may repurchase units will be determined in accordance with its unit pricing policy and, as a result, there may be uncertainty as to the value of the company's Units.
• The company may be unable to invest a significant portion of the net proceeds of its offering of Units on acceptable terms.
• The company has not established any limit on the amount of funds it may use from available sources to fund distributions.
• The company's distributions to unitholders may be funded from expense reimbursements or waivers of investment advisory fees.
• Investing in the company's Units may involve an above average degree of risk.
• The net asset value of the company's Units may fluctuate significantly.
• The company's unitholders may experience dilution in their ownership percentage.
• The company's unitholders will experience dilution in their ownership percentage if they opt out of the company's DRIP.
• The company is operating in a period of capital markets volatility and economic uncertainty.
• New or modified laws or regulations governing the company's or Morgan Stanleys operations may adversely affect the company's business.
• Disposition of the company's Units by MS Credit Partners Holdings, Inc. may negatively impact the company's performance and the price of its Units.
• The company is highly dependent on information systems, and systems failures could significantly disrupt its business.
• Terrorist attacks, acts of war, natural disasters, outbreaks or pandemics may impact the company's portfolio companies and its Adviser and harm its business, operating results and financial condition.

Future Outlook

The company believes the middle-market direct lending market environment continues to be attractive and will continue to seek to invest in companies that are led by strong management teams, generate substantial free cash flow, have leading market positions, benefit from sustainable business models, and are well positioned to perform well despite the impact of recent market volatility. The company's investment pace will depend on several factors including the market environment, including the current inflationary economic environment, and deal flow.

Management Comments

• The company remains highly focused on conducting extensive due diligence and leveraging the Morgan Stanley platform.
• The company believes the current market environment offers opportunities to seek compelling risk adjusted returns.

Industry Context

The document highlights the increasing demand for direct lending solutions in the middle-market, with private credit's share of the sub-investment grade credit market growing significantly. It also notes the decrease in bank participation in middle-market secured loans, which presents an opportunity for non-bank lenders like North Haven Private Income Fund LLC.

Comparison to Industry Standards

• The document notes that middle-market companies typically have less leverage, larger equity contributions, lower rates of default, and achieve higher recoveries as compared to broadly syndicated loans.
• The document also states that middle-market loans tend to garner more attractive pricing, conservative structures, tighter legal documentation, meaningful financial covenants, and provide for greater access to management than broadly syndicated loans.
• The document also states that middle-market loans often avoid riskier large deal debt characteristics such as covenant-lite structures.

Related Party Transactions

• The company has entered into an Investment Advisory Agreement with MS Capital Partners Adviser Inc.
• The company has entered into an Administration Agreement with MS Private Credit Administrative Services LLC.
• The company has entered into a Placement Agent Agreement with Morgan Stanley Distribution Inc.
• The company has entered into an Expense Support and Conditional Reimbursement Agreement with the Adviser.
• MS Credit Partners Holdings, Inc., an affiliate of the Investment Adviser, has made a capital contribution of $25.0 million to the Company.

Stakeholder Impact

• Unitholders will have limited liquidity for their units, as they are not listed on any exchange.
• Unitholders may not receive distributions or may receive distributions that are a return of capital.
• Unitholders will be subject to the risks associated with investing in illiquid debt and equity securities.
• Unitholders will be subject to the risks associated with the company's use of leverage.
• Unitholders will be subject to the risks associated with the company's reliance on its Adviser and Administrator.
• Unitholders will be subject to the risks associated with the company's investment strategy.
• Unitholders will be subject to the risks associated with the company's portfolio companies.
• Unitholders will be subject to the risks associated with the company's compliance with regulations.
• Unitholders will be subject to the risks associated with the company's reliance on information systems.
• Unitholders will be subject to the risks associated with terrorist attacks, acts of war, natural disasters, outbreaks or pandemics.

Next Steps

• The company intends to continue to seek to invest in companies that are led by strong management teams, generate substantial free cash flow, have leading market positions, benefit from sustainable business models, and are well positioned to perform well despite the impact of recent market volatility.
• The company intends to continue to conduct quarterly repurchase offers as described in the document, but is not required to do so and may suspend or terminate the unit repurchase program at any time.

Key Dates

Keywords

Business Development Company, BDC, Private Credit, Middle Market Lending, Senior Secured Loans, Direct Lending, Morgan Stanley, Investment Management, Private Equity, Alternative Investments