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Michael Forman

Thank you, Anna, and good morning, everyone. Thank you all for joining us for FSK's fourth quarter and full year 2024 earnings conference call. My opening comments this morning will cover two specific topics: our accomplishments during 2024 and our goals for 2025.
During 2024, we were highly focused on four specific objectives. First, our goal is to improve credit quality and overall portfolio stability. To that end, during the year, we reduced our nonaccrual investments by 58% to 33.7% on a cost basis and 2.2% on a fair value basis.
Second, our goal is to remain extremely disciplined from an origination standpoint, even if that discipline meant passing on certain transactions. During 2024, our investment team deployed $4.7 billion of capital into compelling new transactions. We are entering 2025 with significant available liquidity and view this as a competitive strength as we expect M&A activity to increase, perhaps materially during 2025 and beyond.
Third, our goal is to provide shareholders with an annual distribution of $2.90 per share. We achieved this goal as our basin supplemental distributions totaled $2.80 per share and we paid $0.10 per share in special distributions during the first half of the year.
Fourth, our goal is to maintain our strong balance sheet. During the second quarter, we issued $600 million of unsecured notes maturing in 2029. And during the fourth quarter, we issued $700 million of unsecured notes maturing in 2030.
For 2025, our goals are as follows: First, we expect our investment team will continue to utilize its deep relationships to originate attractive well-structured investments, which will be accretive to the quality of our investment portfolio. We recognize that we are starting from a position of strength given our relatively low leverage as of year-end.
Second, based upon our current view of interest rates for the year, we expect to provide shareholders with $2.80 of total distributions through a combination of our quarterly base distribution of $0.64 per share and our quarterly supplemental distribution, which has equated to $0.06 per share for the last several quarters.
And while we recognize that the recent decline in interest rates will reduce our net investment income, we believe our healthy balance of spillover income will enable us to continue awarding shareholders by returning to them the additional earnings we generated during the recent higher interest rate period.
Third, we expect to continue proactively laddering the right side of our balance sheet to maintain and over time enhance our investment-grade ratings.
Turning to our fourth quarter results. FSK generated net investment income totaling $0.61 per share and adjusted net investment income totaling $0.66 per share. as compared to our public guidance of approximately $0.63 per share and $0.68 per share, respectively.
The difference in our reported financial results as compared to our guidance relates to a few new investment opportunities, which closed after year-end. In keeping with my earlier comments, our Board has declared a first quarter distribution of $0.70 per share consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share.
And with that, I'll turn the call over to Dan.

Daniel Pietrzak

Thanks, Michael. As Michael indicated, 2024 was a strong year of execution for our credit platform and for FSK. I'm proud of the performance we delivered which is a testament to the hard work, dedication and strategic focus of our entire team. Since the establishment of the FSK K adviser almost seven years ago, we have originated over $27 billion of new investments which have generated an unlevered IRR of 9.6% since inception. Additionally, our strong 2024 performance enabled us to deliver shareholders a 12.1% yield on our average net asset value and shareholders were further rewarded with a total return of 23%.
Turning to the state of the economy and the lending environment. The current macroeconomic environment for many is a balancing act between the desire for growth, lingering inflationary pressures and recent and expected interest rate adjustments. The current administration's issuance of a significant number of executive orders and swift moves across multiple geopolitical and international economic fronts including the ongoing threats of significant tariffs with large trading partners have somewhat tempered enthusiasm for a quick start to the year from an M&A standpoint. Instead, companies are taking steps to quantify what affects these potential policies may have on their businesses.
As a result, while our expectations still call for a robust increase in M&A activity over the next few years, we caution investors that a significant increase in event activity may take longer to materialize than certain industry observers are forecasting.
That being said, I would note that our early-stage pipeline has been building meaningfully, supporting our view of a continued increase in deal activity during 2025 and beyond. Against this backdrop, we continue to see strong tailwinds in the direct lending market. The current level of interest rates has created a very balanced scenario where interest burdens for portfolio companies have been reduced from the highs of 2023. While simultaneously, the current rate environment is still producing attractive levels of income driven total return for investors.
Credit defaults have remained largely contained across the industry and borrowers continue to generate revenue and earnings growth. All of this points to direct lending market fundamentals remaining strong, and we believe the scales will continue moving in the favor of private credit providers.
Turning to our investment activity during the fourth quarter. We originated $891 million of new investments compared to $1.46 billion of exits. There were no sales from FSK to our joint venture this quarter. We continue to benefit from incumbency across our portfolio as the majority of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. New originations consisted of approximately 63% in first lien loans, 36% in asset-based finance investments and 1% in equity or other investments. Our new direct lending investments had a weighted average EBITDA of approximately $206 million, 5.4 churns of leverage through our security and a weighted average coupon of approximately SOFR plus 516 basis points.
We continue to focus on the upper end of the middle market as the weighted average EBITDA of our portfolio companies was $239 million as of December 31, 2024 and our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 16% across companies in which we have invested in since April of 2018. Interest coverage levels have rebounded to 1.7x compared to 1.6x last quarter at 1.5x during the fourth quarter of 2023. As of the end of the fourth quarter, nonaccruals represented 3.7% of our portfolio on a cost basis and 2.2% of our portfolio on a fair value basis. This can compare us to 3.8% of our portfolio on a cost basis and 1.7% of our portfolio on a fair value basis as of September 30, 2024.
We also believe it's helpful to provide the market with information based on the FSK assets originated by KKR Credit. Non-accruals relating to the 89% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor were 2% on a cost basis and 80 basis points on a fair value basis as of the end of the fourth quarter. This compares to 2.2% on a cost basis and 50 basis points on a fair value basis as of the end of the third quarter.
During the fourth quarter, two investments were added to nonaccrual status and on investment was removed. Our first lien senior secured position in Alacrity Solutions Group was added to nonaccrual, contributing $22 million of costs and $16 million of fair value. In addition, our preferred equity investment in Cuba Corp was added to nonaccrual, contributing $56 million of cost and $42 million of fair value. Also during the quarter, certain parts of our debt position in Miami Medical Group were written off in conjunction with the company's Chapter 11 process. We expect to receive certain additional proceeds in relation to our remaining debt exposure as the investment is winding down post the sale of the company.
In terms of other portfolio updates, worldwide, the pet product provider, which we discussed on our last earnings call was restructured during the fourth quarter. The sponsor contributed approximately $42 million of additional capital into the business, with $30 million being used to repay the term loan of par. As a result of the restructuring, FSK received $19 million of first lien senior secured take-back debt committed $1.7 million to a new DDTL and received equity in the business. Across FSK and other funds, KKR now has a 35% equity ownership and 3 board seats.
Lastly, we are pleased to note that MAVERICK Natural Resources, a legacy position, which has been in the portfolio since 2014 has announced the sale to diversified energy. As a result, FSK's $37 million investment will be monetized. We expect the transaction will close in the coming quarters, subject to the customary closing conditions.
And with that, I'll turn the call over to Steve.

Steven Lilly

Thanks, Dan. As of December 31, 2024, our investment portfolio had a fair value of $13.5 billion, consisting of 214 portfolio companies. At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 21% of the fair value of our investment portfolio compared to 20% as of the end of the third quarter. We continue to focus on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 64% senior secured debt as of December 31.
In addition, our joint venture represented approximately 10% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, and first lien loans total approximately 67% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of December 31.
The weighted average yield on accruing debt investments was 11% as of December 31, 2024, a decrease of 50 basis points compared to 11.5% as of September 30. The decrease primarily is attributable to the decline in base rates and incremental spread compression. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. From an operational perspective, our total investment income decreased by $34 million quarter-over-quarter to $407 million, primarily due to the decline in base rates and the delayed closing of certain new investments until the first quarter of this year. The delay in investment closings resulted in lower fee income quarter-over-quarter and also lower leverage as of quarter end.
The primary components of our total investment income during the quarter were as follows: Total interest income was $324 million, a decrease of $32 million quarter-over-quarter. Dividend and fee income totaled $83 million, a decrease of $2 million quarter-over-quarter. Our total dividend and fee income during the quarter is summarized as follows: $53 million of recurring dividend income from our joint venture other dividends from various portfolio companies totaling approximately $23 million during the quarter and fee income totaling approximately $7 million during the quarter.
Our interest expense totaled $116 million, a decrease of $2 million quarter-over-quarter, and our weighted average cost of debt was 5.4% as of December 31. Management fees totaled $53 million, a decrease of $1 million quarter-over-quarter and incentive fees totaled $35 million, a decrease of $9 million quarter-over-quarter. Other expenses totaled $9 million during the fourth quarter, a decrease of $1 million.
The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: Our ending third quarter 2024 net asset value per share of $23.82 was increased by GAAP net investment income of $0.61 per share. and was decreased by $0.09 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share total quarterly distribution paid during the quarter. The sum of these activities results in our December 31, 2024, net asset value per share of $23.64.
From a forward-looking guidance perspective, we expect first quarter 2025 GAAP net investment income to approximate $0.66 per share, and we expect our adjusted net investment income to approximate $0.64 per share. Detailed first quarter guidance is as follows: Our recurring interest income on a GAAP basis is expected to approximate $310 million. We expect recurring dividend income associated with our joint venture to approximate $46 million. We expect other fee and dividend income to approximate $41 million during the first quarter.
From an expense standpoint, we expect our management fees to approximate $53 million. We expect incentive fees to approximate $38 million we expect our interest expense to approximate $112 million, and we expect other G&A expenses to approximate $9 million. And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.80 per share comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions.
Turning to our capital structure. During the fourth quarter, we issued $700 million of 6.125% unsecured notes due 2030, which subsequently were swapped to floating rate via interest rate swap agreements at an average of SOFR plus 2.17%. Proceeds were used to repay outstanding debt on our revolver. We continue to proactively manage our liability structure for upcoming maturities, and we expect we will access the unsecured market on an opportunistic basis during 2025.
Our gross and net debt to equity levels were 112% and 104%, respectively, at December 31, 2024, compared to 121% and 109% and at September 30, 2024. At December 31, our available liquidity was $4.8 billion and approximately 75% of our drawn balance sheet and 47% of our committed balance sheet was comprised of unsecured debt.
And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Michael Forman

Thanks, Stephen. As we move into 2025, we remain highly focused on our strategy and the opportunities ahead of us. Our portfolio continues to demonstrate strong credit performance and our balance sheet provides us with ample liquidity to take advantage of quality transactions during 2025 and beyond. We thank you for your continued support and we look forward to updating you on our progress toward our goals during the year.
With that, operator, we would like to open the line for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Ken Lee of RBC Capital Markets.

Kenneth Lee

Hey, thanks for taking my question. Good morning. Just one on the dividend outlook there. I guess I wonder if you could just further flesh out your confidence in terms of the dividend outlook, it sounds as if the spillover income is a big factor there. I just wonder if you could just provide some color in terms of what it implies about the adjusted net investment income outlook as well. Thanks

Daniel Pietrzak

I'm happy to start, and Steve might want to add to it. I think a couple of different points there. We have set up our dividend policy from the last couple of years now with this kind of idea of the base and the supplemental, the base being the $0.64 million of the supplemental being the $0.06. I would note that the $0.64, I think at current NAV, is still roughly 11%, so still attractive.
We did have several quarters of over earning over the last handful of years, considering the rate as well as the spread environment. We think it was -- it's prudent to kind of reward the shareholders with that level of additional earnings. That's been the conversation with our Board as well. So I think we remain focused on that base and supplemental sort of components, but are providing the guidance of expecting $2.80 for the year.

Steven Lilly

Yes. And Ken, it's Steven, just to add on to what Dan was saying, we were -- they've been, I call it successful in building the spillover balance that we've talked to the market about. As we sit today, that represents 2.7 quarters worth of total dividends. In terms of the strategy this year, we would reduce that to somewhere around 2.3 quarters worth of total dividends, which on a long-term basis, and you certainly covered the stock for a long time, we said we'd like to be plus or minus two quarters. So it brings us back to that level, that sort of long-term target level in that range. So nothing more than that and think it's a good signal, obviously, for shareholders as well to have some certainty of payments this year.

Kenneth Lee

Got you. Very helpful there. And just one follow-up, if I may. I think in the prepared remarks, you mentioned seeing a decline in base rates as well some spread compression in the quarter there. I wonder if I could just get your thoughts around how would you characterize the spreads you're getting per unit of risk, like, for example, leverage? What kind of trends are you seeing there?

Daniel Pietrzak

Yes. I mean I think, Ken, we've seen almost across all credit markets, a decent amount of spread compression. I think in a lot of ways, at least for kind of the new deal flow we probably saw more of that spread compression in the first half of last year sort of going into the third quarter. So I think we've seen maybe some stability on the new deals, albeit maybe still testing certain kind of new levels. I think you could argue the regular way direct lending deal these days is 4.75% or kind of 5% before fee income though. But you've seen the syndicated market tightened down pretty meaningfully as well.
I think we've also seen a certain amount of repricings in the book. That said, I think the repricings are generally highly correlated to names that are performing well. And I think if we would also, though, on the other side of that, use those repricing to potentially exit certain positions if we didn't necessarily love the risk reward. But I think you can put in context that it's a bit of a more borrower-friendly market these days when it comes to spreads. I think on the other side of that, the total return of these deals that we're still seeing is roughly 10% considering, I think, the strength of the company, the size of the company, it's still pretty attractive in our mind.

Kenneth Lee

Gotcha, very helpful there. Thanks again.

Daniel Pietrzak

Thanks. Have a good day.

Operator

Casey Alexander of Compass Point Research and Trading.

Casey Alexander

Since the deals have already closed and because it might help for modeling purposes, is there any way to give any granularity or quantify how much in terms of new originations got rolled over from Q4 to Q1?

Daniel Pietrzak

I think you -- trying to think about the right to the number. We're talking a couple of a handful of deals, kind of that probably would have generated $0.02 odd $0.03-odd set sort of fee income. And those deals flow, it's just a timing difference.

Casey Alexander

Okay. And then you talked about how M&A may be delayed, but at the same time, you said that your pipeline is filling. So what do you -- where are you getting the pipeline fill are private equity sponsors starting to bring forward some of the back books that they need to get rid of are these companies that are just completely insulated from the bulk of government policies, where are you seeing that pipeline fill if M&A pickup is being delayed?

Daniel Pietrzak

Yes. No, it's a fair question, and maybe we should have been a little bit of crisper in the prepared remarks. But I think we were -- I think we and probably the rest of the market has been kind of waiting for, what I'll call that meaningful impact in M&A volumes sort of across the market. I'm not sure it gets maybe all the way to '21 levels, but I'm not sure it's that far off that in many ways, everything was lining up for that, right? You've got private equity LPs wanting to get capital back. You've got a bunch of dry powder. It's been a slow couple of years. I think the capital markets and others were probably further build up on that trend as it relates to the new administration sort of coming on board.
So I think in our mind, with some of the points, whether it's tariffs or sort of otherwise, I think people are doing a little bit more maybe work at the portfolio company level. It's slowing down in our mind, that larger wave that we're expecting. That said, and maybe in a simpler way, I think we're kind of busier now than we were in different points of '23 and '24, but I think we're expecting to get busier as the quarters go forward.

Casey Alexander

Okay. And one last one on MAVERICK. Would you characterize that sale kind of at the mark above or below?

Daniel Pietrzak

Fair question. It would have -- I would characterize it as below the mark. I mean I think the mark that's in sort of Q4 is quite a fair mark. Actually, above the mark --
The sale price was kind of above the mark. I think as we got to go through the closing conditions as there are certain ways which will monetize that on a go-forward basis. I think in all of our valuations, we would incorporate certain kind of points in there to not just bring it to straight kind of market value for the price, but I think that's in line with how we would value something like that. But the sale was above the mark you would have seen.

Casey Alexander

All right great thank you appreciate it.

Operator

Robert Dodd of Raymond James.

Robert Dodd

On the kind of -- tied to the M&A build, right? I mean a lot of the larger players of the market are just focused on sponsor finance, but you are that. So how would you characterize separately from the sponsor back outlook for '25 and building pipeline. The asset-backed finance side, obviously, has been up. A lot of market talk about that as kind of the next growth wave. I mean you've been in it for a while, but what's your outlook on that side of the book?

Daniel Pietrzak

Yes. I mean I think you're right, Robert. We've got a big kind of business there. We've got roughly 50 people focused on that. We've got north of $65 billion of total AUM. It's always been a part of what we're doing here at FSK. We've been active there. I think that had a fair amount -- that's kind of a certain amount of activity for kind of different reasons.
Right? We've seen different things going on with banks. We've seen different asset portfolios come out of banks. We've seen a thematic, which I think is almost equity market-driven where the equity market is rewarding companies for being balance sheet light. If you think about our asset-backed businesses or others, we're essentially in the asset storage business.
So there's good partnerships that we can do with those corporates there. A bunch of those corporates are probably names that we wouldn't historically get to do business with. The size of that market is meaningful. I do think in a lot of ways, that market, at least on the institutional side, probably feels like the direct lending market did 5 or 10 years ago in terms of people starting to get more interest. But it's a big market I think we've got a bunch of unique or proprietary origination angles we're going to continue to try to exploit.

Robert Dodd

Got it. And then just on normal calls. I mean are you seeing areas of weakness? Obviously, not broadly, I mean, I think you said EBITDA growth across the portfolio is weighted average 16%. That's clearly not weak, right? But that's across the whole portfolio. I mean, are there any areas of either the portfolio or the market where concerns are ramping up?

Daniel Pietrzak

It's the right question. I think the issues that we probably have seen either across the portfolio or maybe a couple of names that we would have mentioned here have probably been more idiosyncratic to those specific issuers, whether it was customer loss or otherwise I would say kind of more broadly, we've been in an environment where interest coverage ratios, even though they're sort of rebounding have been probably on the lower side for the last handful of years.
I think that does expose companies when there is a bump in the road that it bubbles up or becomes an issue sort of faster. So there's probably a little bit more of that as kind of time goes on. But again, it's been probably more idiosyncratic.
I do think there are things out there that are top of mind these days. We touched on tariffs. We touched on the Department of Government efficiency there are different, I think, scenarios or concerns around either continued wage inflation or the ability to get the right amount of employees that's kind of top of mind. So I think we're pretty constructive on the economy.
We're pretty constructive on the big levers of the US economy, but I do think there's some either events or scenarios out there that have some downside to it, and we're using our portfolio monitoring unit, we're using the whole team to be pretty focused on this.

Robert Dodd

Thank you very much.

Operator

Finian O'Shea of Wells Fargo Securities.

Finian O'Shea

Couple of questions on the fees. Is the $41 million, I think you said for the nonrecurring, that's an improvement. Can we think -- should we think of that as more of a one-off strong quarter or the sort of rebound level? And then a similar question for the CCOP dividend that's a recurring one, but understanding in practice, it moves around a little bit. So seeing we should think of that, the $46 million there as well.

Daniel Pietrzak

Yeah, good morning, Finn. I mean, on the joint venture dividend, maybe first, I think you're right. I mean, it will move a bit. Obviously, there's -- there could be different events repayments or kind of other fees earned within there. Obviously, we've got a great joint venture partner there as we think about how we kind of manage distributions there. But I think with inside that range of what you would have seen in the last couple of quarters is probably fair.
I would note, I think we got some room to grow the joint venture. I think that's kind of top of mind for us. it's almost in line with -- I like where we're at from a target leverage perspective, right, where we're at from a leverage perspective right now, right? But obviously, we're more on the lower side of our target I think we'd be pretty comfortable at 115 versus kind of 104. But that's the least the way I think about the joint venture. I think you're kind of broader fee and dividend income. I think that will bounce around right? You know the asset-backed space, well, not all those deals are necessarily linear in terms of when cash flow is released.
I think we probably continue to see lower, what I'll call, regular way fee income just because originations have been probably a bit more muted. And maybe even a little bit kind of make call or so the call pro income is we're holding on to assets for a fairly monthly amount of time and sort of that call pro is sort of rolling off. But I think that one will bounce around a bit. But I think the joint venture is probably a little bit more consistent to your point.

Finian O'Shea

Okay. So sort of tying into that and a question on the dividend discussion that you covered pretty well in the remarks in the Q&A here. what's the, like, ongoing level, if any, of taxable income over NOI I imagine ABF might generate some nonaccruals might generate some. And that looking at it from that way, if there's a significant amount, like does this pay out and say assumed low to mid-60s NOI this year, does that get you back down to the target two quarters? Or is there a good chance that this sort of same policy extends into '26 when we revisit a year from now?

Daniel Pietrzak

Yes. Let me start and then Steven is going to take it. I think it's probably difficult to forecast out or think about what happens in '26, right? I think that will be very dependent upon deal activity, what we're seeing kind of markets, et cetera. But I think we wanted to make the statement and provide the clarity as it relates to '25. But Steven, add to the rest.

Steven Lilly

No, I think that's right. Finian, as you remember, when we entered and came into 2024, then our spillover on, again, a total quarter's worth of dividend basis was kind of 2.9 quarters, close to 3 we paid the special last year in the first two quarters. That helped us a little bit there. And as mentioned earlier on one of the questions, we're 2.7 quarters now. At the end of this year, all things being equal, we'd be down around $2.3 million quarter's worth of dividends, which is in our range kind of closer to the top end of our range of plus or minus two quarters' worth of dividends.
So again, spillover will move a little bit to, it always does, just because of so many puts and takes there on a year-over-year basis. But we think it's, again, a very good strategy, returning some of this capital to shareholders this year. And then as Dan says, we'll sort of up periscope next year and see where things are.

Finian O'Shea

Is there like -- just going forward, say, beyond this year, are you always going to try to stick close to that 2 quarters like it did feel like you let it fan up to the high end for some time as did any of your peers. But is that sort of -- is this maybe sort of like a lesson learned, like we let it get too hot and we're going to stick to this to going forward? Or might there be times where I don't know, you find it advantageous and run it back up.

Steven Lilly

Well, I think the increase is really more rate-driven. We were in the environment, as Dan mentioned in his prepared remarks, with higher rates. And so there were materially higher earnings on a per share basis from -- as you would indicate we and also many of our peers. And so I think that accounted for the increase in spillover over sort of our target. And different companies have different target levels so we would readily say that. We're very comfortable in our plus or minus two quarters I think that's a good healthy balance.
We weren't upset that grew incrementally, so to speak, above that balance in the last several quarters because it was, again, at a really nice rate environment. We just didn't want to take the total payout to an artificially high level just for a couple of quarters. We wanted to save that because we had an expectation that rates at some point would come back down. So it's frankly worked and moved as we would be very comfortable with.

Finian O'Shea

Awesome, thanks so much for the colour.

Michael Forman

Thank you.

Operator

Maxwell Fritscher of Truist Securities

Hey, good morning. I'm calling in for Mark Hughes. You've hit on the economic topics of the day around executive orders, tariffs, et cetera. I think more broadly. And sorry if I missed this, but as you look at your portfolio today, how do you think you're positioned relative to some of these dynamics?

Daniel Pietrzak

Well, good question. I would take a step back in some ways. I think we -- for multiple months now, going back even kind of before the actual election. As a firm, we're focused on different scenarios or kind of what the impacts of things could be.
We're using the whole resources of the firm as we kind of think through this we have gone through position by position both with our portfolio monitoring team, the deal teams but actually going out to the portfolio companies themselves to think about where the tariff risk might be or where anything that might relate to government contracts could have an issue. It's not a large kind of percentage of the portfolio. I think that's the good news. I think the thing that we're keeping our eye on is it could be material though to a certain individual name.
But also, I would note, like this whole thing is pretty dynamic, right, in the sense of how it will really play out at the end. I think some of the conversations around tariffs has probably been almost a catalyst for other conversations with certain of these countries. So it's live. We've got effectively a list of names that we're focused on because of it, and I suspect it will continue to evolve.

Yes, that's helpful color. And then just as M&A picks up half of this year, I wanted to get your thoughts or your views on how you expect the mix of incumbent borrowers versus new borrowers to trend over the course of this year.

Daniel Pietrzak

Yes. I think you're right in the sense of -- when we talked about this at length in the prepared remarks and the Q&A, we are confident about that M&A level going up. I think that would almost by definition, reduce that incumbencies for the number. I think the larger platforms do have an advantage with the size of their portfolios. I think that advantage is not even just loans that are on the books today, right? But it's loans that you may have lent to even sort of prior, but you've got the history of the company. it's loans that we might know very well from our leverage credit business.
I think that incumbency point in my mind is not just helpful on an origination side. It's also helpful on the diligence side, almost in its most simplistic format. It's easier to lend to a company that you've lent to before. But I think you should expect that number just by definition of increased market activity for M&A probably trends down a bit on the incombency side.

Maxwell Fritscher

Got it thank you.

Michael Forman

Thanks. Have a good day.

Operator

Melissa Wedel of JPMorgan

Melissa Wedel

The first one is wanting to follow up on the fee income line item for 4Q. I take your point that a few deals slipped into -- it sounds like the first quarter. But even looking at the sort of average fee income over the first three quarters in the year, it was in the high teens. And for 4Q, it looks like it was less than half that. Is there something beyond a few deals slipping into 1Q that would drive that fee income lower?

Daniel Pietrzak

Yes, Melissa, and Steven can add to this. I mean I think that line will have a certain amount of volatility to it, right? It's obviously dependent on kind of new activity I think the deals in the asset-backed business are not all necessarily kind of linear when they can pay distributions on. But I would kind of continue to expect that. I do think the number was artificially probably low with respect of any historical type average. But Steven, you might want to add.

Steven Lilly

Yes. No, Melissa just adding to that a bit. I think the $7 million we had in the fourth quarter, as Dan mentioned in a question earlier with a couple of the deals that were delayed that had those deals closed, probably would have been more in the $10 million to $11 million range. I would imagine something along those lines. If you look at our long-term average, it's sort of between $15 million, $16 million on a quarterly basis. Obviously, it goes above and below that, that's just the average. And so I think Dan's comments about the mix of activity in the fourth quarter was more unique to it, coupled with a couple of deals that were delayed.

Melissa Wedel

Okay. And then sort of related to the slipping of deals into 1Q. I mean, we're 2/3 of the way through the first quarter at this point. In terms of repayment activity and exits, is there anything you can share with us. Certainly, it was elevated in 4Q. Can you share how first quarter is shaping up?

Daniel Pietrzak

Yes. I think you're correct on the -- we're probably I think everyone should expect a certain amount of additional repayments, right? You have the syndicated market open, we always expect these markets to act in some ways in sort of concert. I think obviously, there will be points in time when the private markets can step in when the syndicated market might not be open, but as I think we're seeing some of that. I think we are seeing certain instances of deals that are being repriced or sort of a new sort of refinancing being put in place where we're taking as an opportunity to get repaid and just kind of move on. I think you should probably expect though the balance of kind of new deals versus repayments to be better in Q1.

Melissa Wedel

And I'll throw in one last one. Just given the tight broad environment, to your point about the market being the broadly syndicated market being open, how urgent do you feel about relevering the portfolio a little bit?

Daniel Pietrzak

Yes. I think urgent is probably not the right word because that would probably imply just kind of racing to do deals. I do think this is an environment where discipline kind of matters. I always do describe the direct lending market as there'll be certain moments, when it's lender friendly, there's certain moments when it's borrower-friendly. I think that the theme though is always about downside protection, you're underwriting a deal with a view of not having a default, but if there is a default having a high recovery rate. So it is more borrower-friendly today. But as I said, I think the total return sort of still remains attractive.
We are at the lower end of our range, I think unequivocally, I think that's a positive thing. I think it speaks to the strength of the liability structure we have, which in these vehicles, you know, is very important. I think you should expect that we're going to trend back up to that midpoint of the 115 over the coming quarters with kind of that upper range of kind of 1 to 1 in the quarter is what we've always talked about for target leverage.

Melissa Wedel

That's very helpful thank you.

Michael Forman

Thank you. Have a good day.

Operator

I'm showing no further questions at this time. I would now like to turn it back to Dan Pietrzak for closing remarks.

Daniel Pietrzak

Well, thank you, everyone, for joining us today on the call. As always, we appreciate your time. If you do have any further questions or things that we didn't address on the call, please don't hesitate to reach out. And if not, we'll speak to you again next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.