A publicly-traded private credit fund managed by Goldman Sachs Group Inc. put two additional companies on non-accrual status in the first quarter, as the industry grapples with mounting concerns over exposure to businesses vulnerable to AI-driven disruption.
Investments with the designation, typically reserved only for a fund’s most troubled holdings, now comprise 4.7% of Goldman Sachs BDC Inc.’s portfolio at cost, the fund said in a filing late Thursday. That’s up 1.9 percentage points from the prior quarter. The new additions include security software provider 3SI Security Systems and physician-practice management group One GI.
The $3.2 billion fund is the latest to add investments to non-accrual status, joining BDCs managed by Morgan Stanley, Blackstone Group Inc. and others.
Executives for the fund said if economic conditions soften, they would expect a pickup in non-accrual rates for the industry, as well as a greater divergence between private credit manager performance.
One GI, owned by Webster Equity Partners, has seen slower growth consistent with the broader industry, as physician-management practices have struggled, according to David Miller, Goldman’s Americas head of private credit.
“We’re continuing to work with the sponsor now to optimize recoveries, you know, for the lenders there,” Miller said. “Those conversations are ongoing.”
As for LLR Partners-backed 3SI, Miller said the company was sorting out a few acquisitions that hadn’t gone to plan, leaving leverage elevated, and that discussions were also ongoing with the sponsor.
More than 99.5% of the fund’s total non-accruals at cost are positions that predated when current management took over the portfolio in March 2022, according to Vivek Bantwal, Goldman’s global co-head of private credit, adding that the situations around both One GI and 3SI were idiosyncratic.
Trimming Risk
Elsewhere in the portfolio, Goldman had been trimming areas of risk, executives told investors on the call, and said they have been systemically shedding their annual recurring-revenue loans.
These loans were a popular way for private lenders to finance high-growth companies, typically software companies, that hadn’t yet produced a profit. The asset class has been upended by fears around the exposure to the software space and the impact that artificial intelligence may have on these businesses.
“We have successfully lowered our ARR exposure from nearly 39% of the portfolio during Q3 2022 at fair value to under 10% today,” Bantwal said. “We are proactively managing our legacy ARR positions through strategic exits or by facilitating conversions to EBITDA based loans, as these companies mature and are very selective in underwriting new ARR deals that are brought to market.”
Goldman Sachs BDC also cut the value of its assets by 3.7% to $12.17 per share. It left its dividend unchanged at 32 cents from the prior quarter.
Written by: Olivia Fishlow @Bloomberg
The post “Goldman Sachs Private Credit Fund’s Share of Bad Loans Rises” first appeared on Bloomberg