As of December 31, 2023, the fund’s cash balance was approximately $106 million. Despite a modest cash balance, we have ample availability in our credit facilities should a liquidity need arise. I’ll now turn it back to Andrew to discuss our forward notes.
Andrew Beckman: Thanks, Nick. 2024 opened with optimism that an economic hard landing has been avoided. However, falling yet persistent inflation, tighter credit conditions, and an election cycle, and continued geopolitical conflicts are things to monitor for investors. Against this macro backdrop, we remain cautious about the economic outlook and continue to see potential for future periods of volatility. We believe the solid index level returns last year, matched strong underlying cross currents in the credit markets. Performance differences, cross ratings and asset classes and industries could become more pronounced in 2024 as economic growth slows. Recognizing potential for volatility in 2024, we’ve constructed the portfolio based on several key attributes.
First, we believe active management combined with sound fundamental credit underwriting will remain critical to driving returns and avoiding excess risk in the year ahead. We’re focused on businesses with strong cash flow, modest leverage profiles, and management teams with deep operational experience managing through market cycles. We are invested in credits with appropriate loan to values to ensure ultimate repayment of the obligations, even in a more pronounced economic slowdown. Our sector allocations are informed by our bottoms-up fundamental research, and we tend to avoid highly cyclical areas of the economy unless loans to values are particularly low. We have been more cautious about making new investments than we would be in an environment with a less controversial outlook.
Therefore, we believe maintaining buying power is prudent not only to minimize potential drawdowns, but also take advantage of attractive investment opportunities arising from periods of volatility. Second, we continue to focus on senior debt investments with strong terms at attractive yields or expected total returns. We generally avoid debt in private equity-owned companies where we think there could be material risk of asset leakage or disputes between lenders. We are also cautious on credits where there are significant EBITDA addbacks that may never materialize and instead focus on true free cash flow. We seek to identify situations where return premiums exist due to the complexity of a company’s balance sheet, the illiquidity of an asset, unconventional ownership, or as a result of corporate events.
We are avoiding situations that are high return because of high loan to values and low credit quality. Third, we will continue to leverage size and scale to drive differentiated outcomes for our investors. FSCO is one of the largest credit-focused closed-end funds in the market with $2.1 billion in assets as of December 31, 2023. Size and scale matter in credit investing, especially when it comes to maximizing deal flow, mitigating risks, and achieving economies of scale. The portfolio management team also levers the full resources infrastructure and expertise of FS Investments, a $76 billion alternative asset manager. As Nick discussed, we believe our leverage structure provides FSCO with a unique advantage as a large percentage of our drawn leverage is multi-year fixed rate preferred debt and provides flexibility in the types of assets we can borrow against.
Finally, our ability to invest across the public and private market differentiates us from traditional credit funds and allows us to adjust our allocations based on where we believe the best risk-adjusted returns exist. Our goal is to dynamically allocate capital to the most attractive opportunities across the credit and business cycle. And we think this leads to enhanced stockholder returns relative to a more confined strategy. Importantly, we’re not constrained by a specific asset class mandate. We can invest across loans, bonds, and structured credit and occasionally highly structured equity investments, as well as across fixed and floating rate assets. Our private investment portfolio includes highly bespoke investments originating through our firm-wide sourcing network.
Our intensive due diligence process benefits from the sharing of collective insights on markets and individual credits. We believe our origination capabilities within the private market and focus on providing specialized financing solutions differentiates us from our closed-end fund peer group. In summary, we believe FSCO is a compelling long-term investment opportunity based on our well positioned portfolio, low average duration, healthy distribution, diversified capital structure, and the flexibility of our strategy. We believe we have a funded platform built to drive strong risk-adjusted returns through a diverse range of economic and financial market conditions. Since the current investment team assumed all portfolio management responsibilities in January of 2018, the fund on a net basis has outperformed the growth returns of high yield bonds by 260 basis points and the gross returns of levered loans by 171 basis points.
The team has invested more than $7 billion over the last six years in nontraditional areas of the credit markets, including opportunistic and event-driven credit, dislocated special situations, and private structured capital solutions. Once again, I’d like to thank you all for joining us today. And with that, we’ll take a brief pause to review the queue for answering your questions.
A – Robert Paun: Again, if you’d like to ask a question, please use the chat function under Q&A and on the right side of your screen to type in your question. And the first question, can you talk about the current market environment today as far as everything on new opportunities, structure of deals, and how has that changed over the last few quarters?
Andrew Beckman: Sure. So the credit markets were very strong in 2023, and we saw spreads compress throughout the year, particularly in the fourth quarter of the year. High-yield spreads compressed by 133 basis points last year, and levered loan spreads came in by 92 basis points last year. The trends continued into this year, with high yield spreads decreasing around 25 basis points and loan spread decreasing by 15 basis points. So generally speaking, pricing has come in. That attribute of tighter pricing is kind of most pronounced in the public markets, where there’s just a lot of visibility on spreads and transactions. And that really has kind of forced us or caused us to look more for kind of off the run opportunities in private markets.
