RBC Capital Markets, LLC

Kenneth S. Lee (Analyst)

(212) 905-5995
kenneth.s.lee@rbccm.com

Outperform
November 12, 2019 NYSE: TSLX; USD 21.48

TPG Specialty Lending Inc Price Target USD 23.00

Scenario Analysis*
Initiating coverage at Outperform; above peer Downside Current Price Upside
average ROE generation potential Scenario Price Target Scenario

15.00 21.48 23.00 25.00

Our view: We are initiating coverage with an Outperform rating and a
22% 16% 25%
$23 PT. We think TSLX's ability to leverage platform resources of TSSP is
*Implied Total Returns
a potential competitive advantage and note TSLX has above-peer-average
ROE generation potential, partly driven by ability to source differentiated Key Statistics
Shares O/S (MM): 66.2 Market Cap (MM): 1,422
investment opportunities. Dividend: 1.81 Yield: 8.4%
NAVPS: 16.70 P/NAVPS: 1.29x
Key points: Avg. Daily Volume: 199,228
Ability to leverage platform resources of TSSP a potential competitive
advantage: In our view, TSLX’s external investment adviser, TSL Advisers RBC Estimates
FY Dec 2017A 2018A 2019E 2020E
LLC, and its relationship with TSSP and TPG could be a competitive Core EPS 2.00 2.25 1.89 1.94
advantage for TSLX. TSSP is a global credit platform in a JV with TPG P/CEPS 10.7x 9.5x 11.4x 11.1x
and has extensive experience investing across industries, geographies, BVPS Basic 16.09 16.25 16.70 16.91
capital structures and asset classes. TSSP’s credit platform employs over P/BVPS 1.33x 1.32x 1.29x 1.27x
200 investment and operating professionals and has investment capability Core EPS Q1 Q2 Q3 Q4
across direct lending, private credit market investments, syndicated 2018 0.51A 0.56A 0.50A 0.67A
leveraged loan markets, European middle-markets lending, as well as 2019 0.41A 0.47A 0.55A 0.46E
financing solutions for growing companies. Net, we think TSLX has access 2020 0.48E 0.48E 0.49E 0.49E
BVPS Basic
to significant potential US middle markets direct lending deal flow. 2018 17.16A 16.40A 16.48A 16.25A
2019 16.37A 16.70A 16.72A 16.70E
Above-peer-average ROE generation potential: In our view, return on 2020 16.76E 16.80E 16.86E 16.91E
equity (ROE) is a key metric for measuring performance within the BDC All values in USD unless otherwise noted.

sector and TSLX has generated NII ROE above peer averages for the
past few years, and, based on our estimates, we expect to see such
trends continue for 2019/2020. We expect TSLX to generate NII ROE
of 11.5% in 2020, above the 10.6% average within our BDC coverage.
Importantly, we note TSLX has been able to achieve above-peer-average
ROEs without utilizing excessive leverage. Further, given management’s
targeted leverage ratio range of 0.9x-1.25x, due to recent passage of the
SBCAA, we think there is potential to further enhance the ROE.

Experienced management team: The management team of TSLX, in our

view, is very experienced and has achieved a solid track record. We note
the senior management team members have many years of experience
within specialty lending, underwriting, and other credit-focused roles. In
terms of track record, of the fully exited investments since inception,
which totals $3.6bn of cash invested, TSLX has delivered average gross
unlevered IRRs of roughly 19%.

Dividend policy helps maximize returns with a well-supported base: We

think the company’s regular dividends ($0.39/qtr base dividend) is well-
supported (regular dividends are 83% of 2019E NII, coupled with ~$1.60/
sh of 'spillover' income) and there is a variable supplemental dividend to
help maximize returns.

Disseminated: Nov 12, 2019 00:50ET; Produced: Nov 12, 2019 00:50ET Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Conflicts Disclosures, see Page 26.
 TPG Specialty Lending, Inc.

Target/Upside/Downside Scenarios Investment summary

We think TSLX's ability to leverage platform resources of
Exhibit 1: TPG Specialty Lending, Inc.
TSSP is a potential competitive advantage and note TSLX has
125 Weeks 21JUN17 - 11NOV19
UPSIDE
above-peer-average ROE generation potential. We have an
23 25.00
22
TARGET
CURRENT
23.00 Outperform rating.
21.48
21
20
19
Ability to leverage platform resources of TSSP a potential
18 competitive advantage: In our view, TSLX’s external
17 investment adviser, TSL Advisers LLC, and its relationship with
16 TSSP and TPG could be a competitive advantage for TSLX.
15 DOWNSIDE 15.00 TSSP is a global credit platform in a JV with TPG and has
6m extensive experience investing across industries, geographies,
capital structures and asset classes. TSSP’s credit platform
4m
2m

2017 2018 2019

J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
TSLX US Rel. S&P 500 COMPOSITE MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Price target/base case
Our price target of $23 is based on our base case scenario,
which assumes zero non-accruals in the investment portfolio
(unrealized/realized credit losses are excluded from core net
investment income, we note); 1.2x debt/equity leverage ratio
in 2020; and asset yield roughly in the 11% range.
Upside scenario
Our upside valuation of $25 assumes the company fully
utilizing the upper end of the targeted 1.25x debt/equity
leverage ratio; zero non-accruals; and a ~25bps increase in the
average asset yield across the portfolio; and a ~25bps decline
in cost of debt.
Downside scenario
Our downside valuation of $15 assumes a 1.1x debt/equity
leverage ratio, less than the base case driven by slower than
expected deployment of called capital; 3.0% realized credit
losses within the portfolio (which is roughly in line with what
we have seen from at-scale peers during the financial crisis);
and a ~50bps decrease in average asset yield across the
portfolio, partly offset by a 50bps decrease in debt funding
costs (given the company matches liabilities with assets in
terms of interest type).
Nov 2020 employs over 200 investment and operating professionals and
has investment capability across direct lending, private credit
market investments, syndicated leveraged loan markets,
European middle-markets lending.
Above-peer-average ROE generation potential: In our view,
return on equity (ROE) is a key metric for measuring
performance within the BDC sector and TSLX has generated
NII ROE above peer averages for the past few years, and,
based on our estimates, we expect to see such trends continue
for 2019/2020. Importantly, we note TSLX has been able to
achieve above-peer-average ROEs without utilizing excessive
leverage. Further, given management’s targeted leverage ratio
range of 0.9x-1.25x, due to recent passage of the SBCAA, we
think there is potential to further enhance the ROE.
Experienced management team: The management team of
TSLX, in our view, is very experienced and has achieved a
solid track record. We note the senior management team
members have many years of experience within specialty
lending, underwriting, and other credit-focused roles.
Catalysts include SBCAA, which could allow leverage and thus
earnings to increase over time.
Key risks include: 1) price volatility in the leveraged loan
markets or any economic downturn could negatively impact
the investment portfolio; 2) changes in interest rates could
impact asset yields and funding costs; 3) competition within
the direct lending space could slow capital deployment pace;
4) company’s use of leverage, through borrowing money,
could magnify risks; 5) potential conflicts of interests arising
from the investment advisor's affiliation.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 2


Key Questions
1) Can TSLX continue to generate
above-peer-average ROEs?
2) Can the company maintain a robust
pace of originations?
3) Is the company’s dividends well-
supported?
November 12, 2019
TPG Specialty Lending, Inc.
Our View
TSLX has generated net investment income ROE above peer averages for the past
few years, and, based on our estimates, we expect to see such trends continue
for 2019/2020. We expect TSLX to generate NII ROE of 11.5% in 2020, above the
10.6% average within our BDC coverage. Importantly, we note TSLX has been able
to achieve above-peer-average ROEs without utilizing excessive leverage; TSLX’s
leverage ratio of 0.81x debt/equity is close to the peer average of 0.82x within
our coverage. We would attribute the company’s ability to generate higher ROEs
to higher debt investment yields, positive impact from fees, and relatively lower
debt costs due to investment-grade ratings. Further, given management’s
targeted leverage ratio range of 0.9x-1.25x, due to recent passage of the SBCAA,
we think there is potential to further enhance the ROE. Management has stated
in the past of potentially seeing 150-250bps incremental ROE if leverage ratios
are at the top end of the range.
YTD through 3Q 2019, TSLX had $798mn of new investments funded, a robust
pace of originations. While timing certainly helped, and the company saw a recent
increase in retail ABL activity as well, we think the company’s relationship with
the global credit platform TSSP can help source potential originations. Specifically,
TSLX gets first look at all US middle market loan investment opportunities from
the TSSP platform and, due to a SEC exemptive relief, TSLX can co-invest with TSSP
on transactions as well.
We think the company’s dividends should have a relatively stable base ($0.39/qtr
base dividend) that is well below the company’s net investment income (regular
dividends are 83% of 2019E NII). Further, to maximize returns to shareholders,
TSLX has a variable supplemental dividend, where the company pays out 50% of
excess NII generated above the base dividend level, subject to constraints (should
not exceed a 15c/sh NAV decline over the current and preceding quarters).
Finally, TSLX has ‘spillover’ income of ~$1.60/sh, which can be used to support
dividend payments. Our published estimates contemplate 2020 dividend of
$1.73/sh, which represents a 10.3% yield on NAV and is composed of $1.56/sh
base dividend and $0.17/sh in variable supplemental dividends.
Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 3
 TPG Specialty Lending, Inc.

Table of contents
Key investment points .......................................................................................................... 5

Valuation and base/upside/downside scenarios .................................................................. 7

Our valuation framework ........................................................................................................... 8

Key risks to rating and price target ....................................................................................... 9

Company overview ............................................................................................................. 10

Management team ................................................................................................................... 16

Appendix: Our BDC industry outlook .................................................................................. 17

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 4

 TPG Specialty Lending, Inc.

Key investment points

Ability to leverage platform resources of TSSP a potential competitive advantage: In our
view, TSLX’s external investment adviser, TSL Advisers LLC, and its relationship with TSSP could
be a competitive advantage for TSLX. Specifically, the adviser is managed through TSSP and
the relationship enables TSLX to access the resources of TSSP. TSSP is a credit-focused
investment firm, established in 2009, with a joint venture relationship with global alternative
investment firm TPG and has extensive experience investing across industries, geographies,
capital structures and asset classes. TSSP’s credit platform employs over 200 investment and
operating professionals and has investment capability across direct lending, private credit
market investments, syndicated leveraged loan markets, European middle-markets lending, as
well as financing solutions for growing companies. TSLX’s adviser closely works with TSSP on a
substantial number of investments for TSLX, and has access to TSSP’s scaled investment
resources, including market, sector, and macroeconomic expertise, as well as intensive due
diligence capabilities.

Importantly, we note TSLX is the first-stop for directly-originated U.S. middle market credit
opportunities within the TSSP platforms; thus we think TSLX has access to significant potential
US middle markets direct lending deal flow and, further, potential conflicts of interest could
be mitigated. We would highlight that over 99% of TSLX’s investment portfolio is either directly
sourced or sourced through a proprietary relationship. We generally favor directly sourced
originations, as we believe the BDC has more control over the terms and structure of the
transaction under such scenarios (TSLX has effective voting control in 83% of its portfolio’s
investments).

Exhibit 2: TSLX’s adviser is part of the TSSP global credit platform

Note: TSLX’s adviser falls within the direct lending platform.

Source: Company reports

TPG Specialty Lending is an externally managed BDC, meaning TSLX itself does not have any
employees and instead has an investment advisory agreement with the investment adviser
TSL Advisers LLC to manage TSLX’s day-to-day operations. The adviser itself is managed
through TPG Sixth Street Partners (TSSP), a global credit investment firm with $31bn+ in AUM
that has a strategic partnership (joint venture) with TPG, the global alternative investment firm
headquartered in Fort Worth and San Francisco with $111bn in AUM. As of year-end 2018, 33
employees of TSSP are dedicated to TSLX, including 25 investment professionals.
November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 5
 TPG Specialty Lending, Inc.

Above-peer-average ROE generation potential: In our view, return on equity (ROE) is a key
metric for measuring performance within the BDC sector and TSLX has generated net
investment income ROE above peer averages for the past few years, and, based on our
estimates, we expect to see such trends continue for 2019/2020. We expect TSLX to generate
NII ROE of 11.5% in 2020, above the 10.6% average within our BDC coverage. Importantly, we
note TSLX has been able to achieve above-peer-average ROEs without utilizing excessive
leverage; TSLX’s leverage ratio of 0.81x debt/equity is close to the peer average of 0.82x within
our coverage. Further, the company’s investment portfolio is focused on debt investments at
the top of the capital structure (99% are first-lien loans).

Exhibit 3: TSLX has above peer average estimated NII ROE

2018 2019E 2020E

Company Ticker ROE ROE ROE
TPG Specialty Lending, Inc. TSLX 14.2% 11.5% 11.5%
Ares Capital Corporation ARCC 10.1% 11.1% 10.7%
Main Street Capital Corporation MAIN 10.4% 10.1% 10.4%
Owl Rock Capital Corp ORCC 10.4% 10.9% 10.5%
Apollo Investment Corporation AINV 9.4% 10.3% 9.8%
Average 10.9% 10.8% 10.6%
Note: Estimated ROE based on net investment income for shown.
Source: Company reports, RBC Capital Markets estimates

We would attribute the company’s ability to generate higher ROEs to higher debt investment
yields, with positive impact from fees (including call protection fees), and ability to source
relatively complex, differentiated investment opportunities. Further, given management’s
targeted leverage ratio range of 0.9x-1.25x, due to recent passage of the SBCAA, we think there
is potential to further enhance the ROE. Management has stated in the past of potentially
seeing 150-250bps incremental ROE if leverage ratios are at the top end of the range. Our
published estimates contemplate a leverage ratio of 1.05x in 2020.

Experienced management team: The management team of TSLX, in our view, is very
experienced and has achieved a solid track record. The company highlights the senior team
members have over 240 years of collective experience as commercial dealmakers and risk
managers. We note the senior management team members have many years of experience
within specialty lending, underwriting, and other credit-focused roles. In terms of track record,
of the fully exited investments since inception, which totals $3.6bn of cash invested, TSLX has
delivered average gross unlevered IRRs of roughly 19%.

Dividend policy maximizes returns with a well-supported base: Management takes into
account several factors when setting its dividend policy, among which includes portfolio
returns, interest rates, the investing environment and tax implications and RIC compliance.
The dividend level is set at a level that would be consistent with sustainable earnings power
across an economic cycle. Thus, in our view, we think the company’s dividends should have a
relatively stable base ($0.39/qtr base dividend). Further, to maximize returns to shareholders,
TSLX has a variable supplemental dividend, where the company pays out 50% of excess NII
generated above the base dividend level, subject to constraints (should not exceed a 15c/sh
NAV decline over the current and preceding quarters). Finally, TSLX has ‘spillover’ income of
~$1.60/sh, which can be used to support dividend payments. Our published estimates
contemplate 2020 dividend of $1.73/sh, which represents a 10.3% yield on NAV and is
composed of $1.56/sh base dividend and $0.17/sh in variable supplemental dividends.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 6

 TPG Specialty Lending, Inc.

Our estimates and recent financial results

TSLX reported 3Q 2019 results recently, reporting NII per share of $0.55. Total investment
income in the quarter was $70.1mn, while bottom line net investment income was $36.7mn.
NAV per share was $16.72 at the end of the quarter. The investment portfolio totaled $2.05bn
at fair value at the end of the quarter, with new investments made in companies totaling
$309.1mn, while exits totaled $309.9mn in the quarter. Leverage (debt/equity) was 0.81x at
the end of the quarter (or 0.83x pro forma for the supplemental dividend to be paid in 4Q).
Reported asset yields (yield on secured debt) declined to 10.7% (from 11.2% in 2Q), driven by
the decline in LIBOR as well as mix shift of investments, as higher-yielding investments were
repaid in the quarter.

For 2019, we are forecasting NII per share to be $1.89. We are forecasting 2020 NII per share
to be $1.94, with net investment income of $129mn, and total investment income at $254mn.
We are estimating leverage to reach 1.05x debt/equity by the end of 2020, within the 0.9x-
1.25x range targeted by management. We are estimating NAV per share to be $16.91 at the
end of 2020. We estimate total dividends to be $1.73/sh in 2020, which includes supplemental
dividends, representing a 10.3% yield on NAV per share.

Valuation and base/upside/downside scenarios

The exhibit below details our base case, upside and downside scenarios for estimated
earnings. Our price target is based on our base case scenario, which assumes zero non-accruals
in the investment portfolio (unrealized/realized credit losses are excluded from core net
investment income, we note); 1.1x debt/equity leverage ratio in 2020, which is based on our
forecasts for asset originations; and asset yield roughly in the 10% range (roughly in the
neighborhood of what the company has been generating). Our price target supports our
Outperform rating.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 7

 TPG Specialty Lending, Inc.

Exhibit 4: Our scenario analysis

Scenario inputs FY2020
Base Upside Downside
Leverage ratio (debt/equity) 1.1x 1.3x 0.9x
Incremental investments at fair value ($ mn) $222.3 ($170.1)
Realized credit losses (% of portfolio, at FV) 0.0% 0.0% 3.0%
Incremental investments at fair value ($ mn) $0.0 ($70.1)
Net incremental assets ($ mn) $222 ($240)
total investment portfolio, at fair value ($ mn) $2,338 $2,560 $2,097

Debt outstanding ($ mn) $1,179 $1,179 $1,179

assumed asset yield 10.05% 10.30% 9.50%

assumed cost of debt 5.30% 5.05% 5.00%
Incremental investment income ($ mn) n/a $31.8 ($32.1)
Incremental expenses n/a $0.0 $0.0
calculated after-tax net investment income $128 $160 $96
implied NII yield 11.46% 13.90% 9.46%

incremental net investment income (NII) n/a $32 ($32)

total net investment income (after-tax) $128 $160 $96

estimated ending NAV ($ mn) $1,121 $1,153 $1,019

Diluted shares outstanding 66.3 66.3 66.3

incremental NII per share $0.48 ($0.48)
Net investment income per share $1.94 $2.42 $1.45
NAV per share $16.91 $17.39 $15.37
Scenario analysis
Base Upside Downside
Forward NAV ($ mn) $1,121 $1,153 $1,019
Shares outstanding 66.3 66.3 66.3
NAV/share $16.91 $17.39 $15.37
Implied P/NAV multiple 1.3x 1.4x 1.0x
Estimated valuation $23 $25 $15
Source: Company reports, RBC Capital Markets estimates

Our upside scenario assumes the company fully utilizing the upper end of the targeted 1.25x
debt/equity leverage ratio; zero non-accruals; and a ~25bps increase in the average asset yield
across the portfolio; and a ~25bps decline in cost of debt.

Our downside scenario assumes a 0.9x debt/equity leverage ratio, less than the base case
driven by slower-than-expected deployment of called capital; 3.0% realized credit losses
within the portfolio (which is roughly in-line with what we have seen from at-scale peers during
the financial crisis); and a ~50bps decrease in average asset yield across the portfolio, partly
offset by a 50bps decrease in debt funding costs (given the company matches liabilities with
assets in terms of interest type). We note the company has disclosed an interest rate sensitivity
of ~1.5 percentage points of ROE impact for 1% change in all-in portfolio yield.

Our valuation framework

For business development companies (BDCs), our valuation framework centers around the
price/NAV multiple as the key valuation metric. In our view, a price/NAV multiple is
appropriate, given that earnings generation potential is driven from balance sheet items.
Consequently, we think it is important to look at the return on equity (ROE) being generated
at BDCs, as a higher ROE should merit a higher price/NAV. Growth is less of a focus, in our

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 8

 TPG Specialty Lending, Inc.

observation, due to BDCs being permanent capital vehicles with limitations on how much
earnings a BDC can retain to invest for growth (BDCs electing tax status as RICs must distribute
at least 90% of their taxable income annually). We note publicly-traded BDCs can access the
capital markets periodically, through common equity issuance, in order to raise capital for
deployment. As an ancillary metric, we look at NII (net investment income) and the associated
price/NII multiple, which could give us a sense of normalized earnings power. However, we
note NII would reflect an earnings multiple excluding credit losses.

We evaluate BDCs holistically and assign our target price/NAV multiples based on various
factors. These factors include management team, underwriting track record, investment
portfolio and strategy. As well, we will look at the dividend yield, though we would look for
BDCs able to earn their dividends without stretching the investment strategy. As we think
about it, the prospect for relatively stable earnings and book value, achieved through
conservative investment strategy and underwriting, should merit a lower cost of equity capital,
and thus higher valuation.

Currently, we note TSLX is trading at a premium to peers within our coverage (1.29x P/NAV vs
median closer to 1.2x for peers).

Exhibit 5: Comparisons
Business development companies Potential Dividend
Upside Mkt Cap Net inv income/sh estimates Forward P/E Price/ Debt/ yield
Company Rating PT Last Px NAV/sh to PT ($ mn) Dividend 2018A 2019E 2020E 2019E 2020E NAV Equity (div/NAV)
Apollo Investment Corporation (AINV) SP $17 $16.36 $18.69 4% $1,103 $1.80 $1.81 $1.96 $1.84 8.3x 8.9x 0.88x 1.3x 9.6%
Ares Capital Corporation (ARCC) O $20 $18.53 $17.27 8% $7,912 $1.60 $1.70 $1.91 $1.86 9.7x 10.0x 1.07x 0.9x 9.3%
Main Street Capital Corporation (MAIN) O $44 $42.03 $24.20 5% $2,660 $2.45 $2.60 $2.49 $2.53 16.9x 16.6x 1.74x 0.7x 10.1%
Owl Rock Capital Corp (ORCC) O $17 $17.70 $15.22 -4% $6,812 $1.45 $1.67 $1.55 $1.60 11.5x 11.1x 1.16x 0.4x 9.5%
TPG Specialty Lending, Inc. (TSLX) O $23 $21.55 $16.72 7% $1,427 $1.81 $2.25 $1.89 $1.94 11.4x 11.1x 1.29x 0.8x 10.8%
$19,915 Average 11.6x 11.5x 1.23x 0.8x 9.9%
Median 11.4x 11.1x 1.16x 0.8x 9.6%

Note: Ratings are: O=Outperform; SP=Sector Perform; U=Underperform. For BDCs, showing net investment income per share. For ARCC, showing core NII per share. For AINV, showing fiscal years 2019, 2020E, and
2021E. Priced as of market close ET, November 8, 2019.
Source: FactSet, company reports, RBC Capital Markets estimates

Given TSLX’s access to the resources of TSSP and TPG, which could be a competitive advantage
in our view, experienced management team, and our expectations that the firm can generate
annualized ROE around 11.5% in 2020, which we believe is comfortably above the firm’s cost
of equity capital and is the highest within our coverage, we would ascribe a target P/NAV
multiple of 1.3x, a premium to peer average. Our $23 price target represents 1.3x our 2020
estimated NAV/sh of $16.91.

Risks to rating and price target

We view the following items as the key risks to our rating and price target:

 Price volatility in corporate leveraged loan market may adversely affect fair value of the
company’s portfolio: Further, a significant percentage of portfolio company investments
may be acquired from private companies, which may be subject to legal and other
restrictions on resale or are otherwise less liquid than publicly traded securities.
 Economic recessions or market downturns could impair the company’s portfolio
companies and negatively impact the company’s operating results: Many of the
company’s portfolio companies may be susceptible to economic slowdowns, and may be
unable to repay the company’s debt investments during these periods, which could
increase the company’s non-performing assets and the value of the company’s portfolio
is likely to decrease. Adverse economic conditions may also decrease the value of any
collateral securing the loans. Defaults by the company’s portfolio companies could
November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 9
 TPG Specialty Lending, Inc.

jeopardize a portfolio company’s ability to meet its obligations under the debt or equity
investments, which could negatively impact the company’s results.
 Recent legislation may allow the company to incur additional leverage; further, the
company’s use of leverage, through borrowing money, could magnify the risk of
investing in the company: The company, as part of its business strategy, may borrow from
or issue senior debt securities to banks, insurance companies or other lenders or
investors. If the value of the company’s assets decreases, leverage would cause the net
asset value to decline more sharply than it otherwise would have been if the company did
not employ leverage.
 Increased competition for investment opportunities could delay deployment of capital
and could reduce returns: The company competes for investments with other BDCs and
investment funds, including alternative investment vehicles such as hedge funds, as well
as commercial banks and other sources of funding. Some competitors may have lower
cost of capital or higher risk tolerances than the company.
 The company is exposed to risks associated with changes in interest rates: As the
company earns an investment spread between investment income and cost of funding,
declining interest rates could reduce investment income on new investments. Rising
interest rates could increase borrowing costs.
 The company may compete for capital and investment opportunities with other entities
managed by TPG and TSSP, subjecting the company’s adviser to potential conflicts of
interests: In our view, while potential conflicts of interest exist, as the adviser or affiliates
may have overlapping investment objectives within future or existing affiliated
investment vehicles, they are minimized through: 1) investment allocation policy that
refers all middle-market loan origination within the US through TPG Specialty Lending;
and 2) incentive fee structure embedded in the management agreement that aims to
ensure the adviser’s interests are aligned with TPG Specialty Lending’s interests (and
ultimately TSLX shareholders).

Company overview
TPG Specialty Lending Inc (TSLX) is a specialty finance company, incorporated under the laws
of Delaware and formed in July 2010. TSLX is focused on lending to U.S. middle-market
companies, with “middle-market companies” being defined as companies with annual EBITDA
between $10mn to $250mn. Since forming in 2011, through year-end 2018, TSLX has
originated $9.5bn in aggregate principal of investments. The company seeks to generate
investment income through lending to middle-market companies by investing in senior
secured, and to lesser extent, unsecured loans, subordinated loans or mezzanine loans, and
equity-related securities including warrants and preferred equity. TSLX’s portfolio companies,
or companies that TSLX would invest in, would typically use the capital to support growth,
acquisitions, market or product expansion, re-financings and/or recapitalizations.

TSLX has three wholly owned subsidiaries, TC Lending LLC, which holds a CA finance lender and
broker license, TPG SL SPV LLC, which holds assets previously related to support an asset-
backed credit facility, and TSL MR LLC, which holds certain investments.

As of 2018, core portfolio companies had weighted average annual revenues of $101.7mn and
annual EBITDA of $27.9mn.

TPG Specialty Lending targets middle-market companies with enterprise values between
$50mn-$1bn. As of year-end 2018, the average portfolio investment was $37mn.

As of September 2019, the company had total investments of $2.1bn, measured at fair value.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 10

 TPG Specialty Lending, Inc.

The company’s investment strategy is to generate interest income from its debt investments,
and, may generate income from dividends (from equity investments), capital gains, and
various fees (including origination fees).

TPG Specialty Lending Inc. is an externally managed, closed-end, management investment

company that has elected to be regulated as a business development company (BDC) under
the 1940 Act. The company has elected and intends to qualify annually as a regulated
investment company (RIC) under U.S. federal income tax purposes. The company is externally
managed and advised by TSL Advisers LLC.

TSLX is an externally-managed BDC

TPG Specialty Lending is an externally-managed BDC, meaning TSLX itself does not have any
employees and instead has an investment advisory agreement with the investment adviser
TSL Advisers LLC to manage TSLX’s day-to-day operations, as well as actively manage the
investment portfolio, including origination and transaction execution, and investment
realization. The adviser itself is managed through TPG Sixth Street Partners (TSSP), a global
credit investment firm with $31bn+ in AUM that has a strategic partnership (joint venture)
with TPG, the global alternative investment firm headquartered in Fort Worth and San
Francisco with $111bn in AUM. The adviser works with TSSP on a substantial number of TSLX
investments, and has access to TSSP’s scaled investment resources, including market, sector,
and macroeconomic expertise. As of year-end 2018, 33 employees of TSSP are dedicated to
TSLX, including 25 investment professionals. We note TSLX has an exemptive order from the
SEC that allows the company to co-invest with affiliates of TSSP.

We note TSSP’s other platforms include: special situations, capital solutions, European middle-
markets lending, adjacent opportunities (private credit investments), and institutional credit.

TSLX pays the adviser a management fee and an incentive fee. The management fee is based
on an annual rate (currently 1.5%) of average gross assets of the two most recently completed
quarters, payable quarterly in arrears. We note the adviser plans to waive 50bps of the
management fee on assets financed with leverage over the 1.0x debt/equity ratio (2x asset
coverage).

The incentive fee has two components, both calculated independently: 1) income-based
incentive fee; and 2) capital gains based incentive fee. The income based incentive fee is paid
quarterly and calculated on 100% of the pre-incentive fee net investment income in excess of
a 1.5% hurdle rate (or 6% hurdle rate annually), until the adviser receives 17.5% of the total
pre-incentive fee net investment income. Any pre-incentive fee investment income in excess
of a 1.82% quarterly rate (7.82% annually) would translate into incentive fees of 17.5% on the
amounts of the income. Pre-incentive fee investment income includes dividends, interest and
fee income, less operating expenses and excludes realized capital gains, realized capital losses
or unrealized capital gains/losses.

The capital gains based incentive fee, payable at the end of each calendar year, is calculated
as 17.5% of cumulative realized capital gains post IPO, less cumulative realized capital losses
and unrealized capital depreciation, and less the aggregate amount of any previously paid
capital gains based incentive fee.

Portfolio management and investment process

A substantial majority of TSLX’s investments are sourced and originated directly; the
company’s portfolio currently is 99% sourced directly (without assistance from banks or other
traditional Wall Street sources). As well, TSLX’s adviser also sources transactions through its

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 11

 TPG Specialty Lending, Inc.

relationship with TSSP. That said, the adviser maintains relationships with financial sponsors,
banks, consultants, and investment banks to potentially source opportunities.

The investment process involves extensive research into the company, industry, ability to
withstand adverse economic conditions. Due diligence follows, which includes understanding
the purpose of the capital; meeting company management (including top and middle-level
management); checking management backgrounds; reviewing historical financial
performance; contacting customers and vendors to assess the company; evaluating asset
values; and researching regulatory and legal risks.

We note approval of an investment requires approval from the investment review committee,
which consists of senior members of the adviser and TSSP. After approval, the structure and
terms of the investment in a candidate portfolio company are finalized.

We note the investment process if fairly rigorous, with the TSLX ‘deal funnel’ evaluating ~6,500
potential portfolio companies since inception, but then only sourcing 152 of the companies
historically (2.3% of the total).

Exhibit 6: Highly selective investment process

Note: Typical underwriting process is 1-3 months. TSLX deal funnel shown.
Source: Company filings

On an ongoing basis, the adviser monitors the portfolio, checking to ensure the portfolio
companies are following the stated business plans; making periodic contact with management
teams; attending board meetings; reviewing financial performance; and benchmarking against
peers in the same industry.

Investment portfolio
TSLX’s investment portfolio is predominantly composed of first lien senior secured debt
investments (97% of total), and thus, in our view, is conservatively-positioned, compared to a
BDC composite portfolio where first lien loans are more likely 2/3 of the portfolio. Investments
spanned 56 portfolio companies as of June 2019.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 12

 TPG Specialty Lending, Inc.

Exhibit 7: Investment portfolio is conservatively positioned relative to peers ($2.1bn fair value as of September 2019)
First-lien secured debt investments form ~97% of asset …compared to a BDC peer composite portfolio which is 67% first-lien
Second-lien senior Equity and other
secured debt Equity and other
2%
1% 12%

Second-lien senior
secured debt
21%

First-lien senior
secured debt
67%

First-lien senior
secured debt
97%

Note: As of September 2019. BDC composite consists of 16 publicly-traded, externally managed BDCs with > $1bn of assets, analyzed by TSLX.
Source: Company reports, RBC Capital Markets

We note the portfolio consists of investments in companies that are fairly diversified across
industries. The largest industry exposures include financial services (20%) and business
services (15%), followed by retail (12%). In terms of geography, portfolio companies were
predominantly located in the U.S. (>95%) and, within the US, located primarily in the West
(40%), Northeast (23.5%) and South regions (19.6%), as of year-end 2018.

Exhibit 8: Industry diversification within portfolio

Oil, gas and

Other
consumable fuels
7% Financial services
Transportation 4%
4% 20%

Internet services
4%
Pharmaceuticals
5%

Insurance
5% Business services
15%
HR support services
6%
Education
8%
Retail and consumer
Healthcare products
10% 12%

Note: Percentages of fair value shown. As of June 2019.

Source: Company filings, RBC Capital Markets

Weighted-average total yield of the portfolio is 11.2% at fair value, as of June 2019. The
weighted-average term for new investment commitments has been roughly 5 years over the
past several quarters. Roughly 99% of the portfolio’s debt investments are with floating-rate
terms, with the weighted-average spread over Libor at 8.4%.

Weighted average debt investment profile includes net LTV of 41%; 87% have call protection;
83% have effective voting control.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 13

 TPG Specialty Lending, Inc.

We show a table below of the company’s top 10 investments, which represent roughly 34% of
the portfolio. We note the company’s top 10 investments have trended around 36-40% of fair
value since 2017, and had declined meaningfully from the neighborhood of ~50% in 2015.

Exhibit 9: Top portfolio investments

Percentage
Investment name of portfolio Type of investment Industry
Ferrellgas 4.2% First lien loan Transportation
Nektar Therapeutics 3.8% Secured note Pharmaceuticals
Nintex 3.7% First lien loan; equity and other Business services
Sears Newco 3.6% First lien ABL DIP loan; Retail and consumer products
Integration Appliance Inc 3.5% First lien loan Business services
PayLease LLC 3.1% First lien loan Financial services
Illuminate Education Inc 3.1% First lien loan Education
Motus LLC 3.0% First lien loan; equity and other Business services
AvidXchange 3.0% First lien loan; equity and other Financial services
PaySimple Inc 2.9% First lien loan Financial services
Totals 33.9%

Note: Percentages of fair values shown. As of June 2019.

Source: Company reports, RBC Capital Markets

The debt investments the company could invest in include:

 First-lien debt: Such debt is typically senior on a lien basis to other liabilities within the
capital structure and has first-priority security interest in the assets of the issuer. Ranks
above second-lien debt. First-lien debt could include: stand-alone first-lien debt, “last out”
first-lien loans, “unitranche” loans, and secured corporate bonds. “Unitranche” loans
combine features of first-lien, second-lien and mezzanine debt and usually form most, if
not all, of the capital structure above equity for the corporate borrower.
 Second-lien debt: Such debt may include secured loans, and, to a lesser extent, secured
corporate bonds. Second-lien debt ranks below first-lien debt, but typically ranks above
unsecured liabilities within the capital structure. Second-lien debt typically has security
interest over assets of the issuer (though typically is ranked below first-lien debt on such
collateral).
 Mezzanine debt: Mezzanine debt typically ranks below first-lien and second-lien debt
within the capital structure and is often unsecured. Mezzanine debt ranks above preferred
and common equity within the capital structure. Mezzanine debt may not have the benefit
of financial covenants (first-lien and second-lien debt generally have such protections).
Mezzanine debt will typically have higher interest rates than first-lien or second-lien debt,
and will typically have fixed interest rates, and may provide some capital appreciation
through equity-linked instruments such as warrants.

We note the company also invests in retail asset-backed loans (ABL), typically these
investments comprise less than 10% of TSLX’s portfolio. Further, the company’s ABL
investments are priced to liquidation values (TSLX’s last dollar is usually at 80% of liquidation
value); are short duration (retail ABL credits’ average life is usually 12-18 months); and
potentially generate high IRRs (typically 20%+).

As well, the company has equity investments, though to a significantly lesser extent (currently
~2% of the total portfolio). Such equity investments could include warrants, options and
convertible instruments, as well as direct equity investments.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 14

 TPG Specialty Lending, Inc.

Capital structure and funding sources

Like other BDC peers, due to regulatory constraints on leverage ratios (2:1 debt/equity), TSLX’s
capital structure is well balanced between equity and debt funding. TSLX has indicated it is
targeting a 0.9-1.25x debt/equity ratio. Like other BDC peers, TSLX is primarily reliant on a
revolving credit facility with $1.245bn capacity ($303mn drawn) (with interest at
L+187bps/L+175bps).

While TSLX has fixed-rate debt in the form of unsecured notes and convertible notes, the
company utilizes interest rate swaps to convert them to floating-rate debt. Effectively, the
company’s debt composition is 100% floating-rate. The weighted average maturity of debt is
~4.3 years (as of September 2019). Management has indicated the company is match funded
from an interest rate and duration perspective.

Exhibit 10: Sources of debt funding

Source: Company reports

In our view, TSLX’s funding should be relatively stable as the sources and types are well-
diversified. Further, we note most of the funding on the debt side is effectively floating, which
should match the floating-rate assets and thus serve to mitigate the impact of interest rate
movement.

We note TSLX has investment-grade ratings from four rating agencies:

 Moody’s rating: Baa3

 Standard & Poor’s: BBB-
 Fitch Ratings: BBB-
 Kroll Bond Rating Agency: BBB+

In our view, having investment-grade ratings could keep the company’s cost of funding
competitive versus peers.

Business development company (BDC) vehicle, with tax treatment as a RIC

TPG Specialty Lending is an externally-managed, closed-end, management investment
company that has elected to be regulated as a business development company (BDC) under
the 1940 Investment Company Act. The company has elected and intends to qualify annually
as a regulated investment company (RIC) under U.S. federal income tax purposes.

As a BDC, TSLX must maintain at least 70% of total assets in securities of qualifying U.S. private
or thinly traded companies. Further, a BDC is required to make available ‘managerial
assistance’ to portfolio companies that request such services. We note as a closed-end,
permanent capital vehicle, a BDC is not obligated to have redemptions.
November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 15
 TPG Specialty Lending, Inc.

Further, a BDC has restrictions on its capital structure – namely, limitations on leverage. Under
the recently enacted Small Business Credit Availability Act (SBCA), a BDC must have an asset
coverage ratio of at least 150%, or, effectively, must maintain a debt-to-equity ratio below 2:1.
Any reduction to a BDC’s targeted asset coverage ratio must be approved by a majority of the
Board of Directors or a majority of shareholders. We note, rating agencies may view the
adoption of a reduced asset coverage ratio as a credit negative event.

As a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code
of 1986, TSLX obtains pass-through tax treatment and thus is not subject to corporate-level
U.S. federal income taxes. However, TSLX, as a RIC, must distribute at least 90% of its
investment company taxable income (which includes dividends, interest) annually in the form
of dividends. There are some other income and asset diversification requirements that the
company must meet in order to continue qualifying as a RIC.

Management team
Key management executives include:

 Joshua Easterly, Chairman, CEO, Co-CIO of the adviser, Director: Mr. Easterly was appointed
the sole CEO of TSLX in 2018, and had served as co-CEO since 2013. Mr. Easterly is a partner at
TPG and TPG Sixth Street Partners (TSSP) and a co-CIO of TSLX’s investment adviser. Previously,
he was a managing director at Goldman, Sachs & Co within the Americas special situations
group, and, earlier, he served as the co-head of the Goldman Sachs Specialty Lending Group.
Prior to that, Mr. Easterly served as a senior vice president, northeast regional originations
manager at Wells Fargo. Mr. Easterly received his Bachelor of Science degree, magna cum
laude, in business administration from California State University, Fresno.
 Robert (Bo) Stanley, President: Mr. Stanley is president of the company and a partner of TPG
Sixth Street Partners (TSSP). Previously, Mr. Stanley was at Wells Fargo Capital Finance, serving
in various roles within underwriting and origination. Earlier, while at Wells Fargo Capital
Finance, Mr. Stanley was a vice president, serving in various credit focused roles, having
responsibilities including loan underwriting and portfolio management support. Mr. Stanley
holds a B.S. degree in business administration with a concentration in finance from the
University of Maine.
 Ian Simmonds, CFO: Mr. Simmonds serves as the CFO of the company and a managing director
of TPG Sixth Street Partners (TSSP). Previously, Mr. Simmonds worked within the financial
institutions group in the global investment bank of Bank of America Merrill Lynch, as a
managing director. Prior to that, Mr. Simmonds was a managing director at Principal Global
Investors, part of Principal Financial Group, based in Singapore. Earlier in his career, Mr.
Simmonds worked in public accounting at KPMB. Mr. Simmonds received his bachelor of
commerce degree from the University of South Wales, a master of applied finance from
Macquarie University, and an MBA degree from the Wharton School of the University of
Pennsylvania. Mr. Simmonds is a chartered accountant.
 Michael Fishman, Vice President, Director: Mr. Fishman was appointed a vice president in
2018 and has served as a director since 2011. Mr. Fishman also served as CEO since 2011, and
co-CEO since 2013 along with Joshua Easterly. He is a TPG Sixth Street Partners (TSSP) and TPG
partner. Previously, Mr. Fishman served as executive vice president and national director of
loan originations for Wells Fargo Capital Finance, with responsibility for primary and secondary
lending, loan distribution and syndication and strategic transactions. Mr. Fishman received his
degree in finance from the Rochester Institute of Technology.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 16

 TPG Specialty Lending, Inc.

Appendix: Our BDC industry outlook

We have a favorable BDC industry outlook: We have a favorable outlook on the business
development company (BDC) industry, given: 1) BDC’s specialized niche, direct lending, which
serves to finance U.S. middle-market companies that are not currently well-served by banks
or capital markets; 2) while we may very well be late in the credit cycle, industry credit losses
have been benign so far, and we believe BDCs have ample tools to help mitigate potential
losses; 3) recent regulatory changes, such as the Small Business Credit Availability Act, could
give BDCs additional flexibility in a potential credit down cycle, while any potential changes,
down the line, to the SEC’s “AFFE” rule and rule 12d1-4 could expand the potential investor
base; and 4) private equity industry buyout dry powder levels could support potentially
substantial debt origination volume growth longer term.

That said, given a fairly fragmented industry with a historically wide disparity in returns among
BDCs, we would recommend being selective on stocks to own.

Direct lending is an attractive niche

Business development companies, through direct lending, serve to fill a niche in financing U.S.
middle-market companies that are currently less well served by banks or the capital markets.
Further, in our view, this funding niche is likely to remain going forward, as banks continue to
re-trench from middle-markets lending, and capital markets structurally remain less accessible
to smaller corporate borrowers.

Banks, in general, have been pulling back from lending to U.S. middle-market companies due
to regulatory changes, as capital requirements post-Dodd-Frank have made such lending more
costly than previous, as well as a changing focus towards arranging syndicated deals, and
earning fees, rather than holding the loans directly on their own books. That said, we note
smaller, regional banks may still be actively competing for small/medium-sized business loans,
though we note these banks may still be restricted in terms of leveraged lending guidelines
and ability to lend through products such as ‘unitranche’ loans.

For middle-market companies, which can have annual revenues ranging from $10mn to $1bn,
as defined by GE Capital, obtaining financing through the public capital markets, which
includes high-yield debt issuance, may not be a realistic option. Further, even for larger
companies, market volatility could restrict access to the capital markets from time to time
(such as 4Q 2018, when capital markets access was very restricted).

Consequently, direct lending has been growing meaningfully over the past several years, with
outstanding U.S. direct loans estimated to be close to $1 trillion in 2018, according to Ares
Capital Corporation (ARCC), a meaningful increase from the roughly $750 million in 2012. We
note that the US direct loan market is likely approaching the size of the U.S. leveraged loan
markets (~$1.1 trillion, according to the International Monetary Fund) and the high-yield bond
markets (~$1.2 trillion).

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 17

 TPG Specialty Lending, Inc.

Exhibit 11: Nonbanks have gained share of leveraged lending

Banks have a declining share of the leveraged loan markets Outstanding leveraged loans approaching high-yield bonds

Note: Left: US leveraged loan investor base shown, percentage of primary market issuance. Right: Showing outstanding high-yield bonds versus leveraged loans. Units in $ billions (lhs) and billions of euros (rhs).
Source: International Monetary Fund

Direct lending may also offer some benefits for corporate borrowers, which include:

 one-stop shop for financing, with one BDC potentially offering a single ‘unitranche’ deal
versus a syndicated deal involving multiple parties;
 certainty of execution, versus potential inability to access the capital markets during
market volatility or potential for deal terms to ‘flex’ during a syndication deal; and
 confidentiality of a private financing solution.

Finally, we note Congress was motivated to create BDCs back in 1980 in order to make more
capital available to small, developing, or otherwise thinly capitalized companies that may not
have access to capital through more traditional means, including the public capital markets.
Thus, we think BDCs serve a structural niche that banks and capital markets have been less
able to serve. Recall, the BDC vehicle was established as a variant of a closed-end investment
company in 1980 when Congress amended the Investment Company Act of 1940.

Could be late in the credit cycle, but BDCs have various tools to mitigate potential
credit losses
While we may very well be late in the credit cycle, we would point out that: 1) industry credit
losses have been very benign so far; 2) the economic backdrop and management commentary
surrounding the business conditions of portfolio companies have been generally positive; and
3) in a downturn scenario, we believe BDCs have ample ability to help mitigate potential losses.

Broadly speaking, though there is certainly concern from some investors that the U.S. may be
late in the credit cycle, we note industry credit losses have been very benign so far. We note
commercial & industrial loan non-accrual rates and net charge-off rates for all FDIC-insured
institutions remain very low.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 18

 TPG Specialty Lending, Inc.

Exhibit 12: C&I loan losses have been trending lower

Non-accrual rates have been trending lower… …so have net charge-offs
3.5%
6%
3.0%
5%
2.5%

4%
2.0%

3%
1.5%

2%
1.0%

1% 0.5%

0% 0.0%
1Q87 1Q89 1Q91 1Q93 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 1Q19 1Q87 1Q89 1Q91 1Q93 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 1Q19
nonaccrual rate % 30-89 days past due rate %

Note: Showing data for commercial & industrial loans for US-based borrowers, across all FDIC insured institutions.
Source: FDIC, RBC Capital Markets

Default rates for U.S. leveraged loans, which can be seen as a rough proxy for direct lending,
remain very low as well. The industry leveraged loan default rate peaked at close to 10% during
the financial crisis, but has more recently been hovering closer to 1%.

Exhibit 13: Credit losses have been benign in the leveraged loan markets

Note: Default rates of U.S. leveraged loans.

Source: Federal Reserve Board

Further, we would characterize recent management commentary on the business conditions

and trends being seen by their portfolio companies as being generally cautious, but optimistic.

There could certainly be potential for credit losses during an economic downturn, though we
think the losses could be manageable. We note BDCs will typically invest in debt securities that
are unrated, but if they were rated, would likely receive a below-investment-grade rating. For
reference, we review the average loss rates of select BDCs during the last financial crisis. In
particular, we note that average realized losses peaked at 6.0% during the financial crisis
(2008-2010) for the largest BDCs we have data going back to that period. Though a meaningful
loss rate, we would highlight that there is a wide dispersion of realized losses among BDCs,
with several reporting realized losses <5% and many others between 5%-10%. Thus, we believe
investors should assess each BDC’s underwriting and risk management processes carefully.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 19

 TPG Specialty Lending, Inc.

Exhibit 14: While average loss rates can seem very meaningful, we note there can be wide dispersion of loss rates among BDCs
Avg realized loss rates during the last financial crisis seem very meaningful… …but we note there can be wide dispersion of realized loss rates among BDCs
5%
1%
0%
0%

-1% -5%
-2%
-10%
-3%

-4% -15%

-5%
-20%
-6%

-7% -25%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016

Note: Net realized gains/(losses) as a percentage of average amortized cost of investment portfolios shown. Including companies: ARCC, GBDC, FSK, PSEC, MAIN, AINV, HTGC, SLRC, PNNT. Left: Showing average net
realized gains/losses as a percentage. Right: Showing actual net realized gains/losses for individual companies.
Source: Company reports and RBC Capital Markets estimates

In our view, BDCs have various tools available to mitigate potential credit losses including:

 Rigorous underwriting: BDCs tend to hold their debt investments to maturity, and thus
do not actively trade their securities; as such, some BDCs will perform rigorous
underwriting on new investment involving industry analysis, review of historical and
forecasted financials, review of EBITDA add-backs, due diligence on the management
team, contacting the potential portfolio company’s vendors and customers, assessing
regulatory risks and valuation of the enterprise itself.
 Structuring deal terms to include downside protection: When negotiating deal terms for
a potential investment, a BDC can include various forms of downside protection, including
financial maintenance covenants (which can limit corporate actions), collateral
protection, and EBITDA with selected add-backs.
 Portfolio diversification: Generally, BDCs aim to diversify their investment portfolios
across a multitude of sectors, and depending on views of the economic cycle, may choose
to emphasize defensive, non-cyclical sectors. As well, BDCs aim to diversify across multiple
portfolio companies.
 Focus on the top end of the capital structure: For many BDCs, a significant portion of their
investment portfolios consists of debt investments at the top end of the capital structure
(i.e., first-lien senior secured debt), and thus where there is more of a cushion during
down cycles (a portfolio company would have to see negative impact in its equity and
subordinated debt before affecting the senior debt). Similarly, some BDCs strive to invest
at low loan-to-value (LTV) ratios.
 Capability for workouts to potentially maximize recoveries: Because a BDC is a
permanent capital vehicle, there is much less likelihood for forced redemptions, even
during a downturn. Thus, for select BDCs with the capability, performing workouts is an
option to maximize potential recoveries if a portfolio company runs into financial
difficulties.

All in, while there is certainly some investor focus on potential for credit losses during a
downturn, we think the backdrop is favorable so far and believe for some BDCs there could be
multiple ways to mitigate potential credit losses.

PE dry powder supports longer-term potential growth of debt origination

In our view, North America private equity industry dry powder levels, specifically buyout fund
dry powder, could support potentially substantial debt origination volume growth longer term,
which could benefit direct lending. Various industry sources, including consulting firm
November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 20
 TPG Specialty Lending, Inc.

Ernst&Young, estimate North America buyout fund dry powder to be in the $300bn-$450bn
range, which, when compared to North America industry direct lending dry powder closer to
$70bn, according to Ares Capital Corporation, suggests ample opportunities for direct lending
capital deployment (especially if you consider buyout funds would typically contribute 30%-
40% in equity for a transaction, with the rest made up of debt).

Exhibit 15: Industry buyout dry powder in North America can support potential growth of
debt origination

Note: $ billions shown. Dry powder for buyout funds.

Source: Ernst&Young (“Private Equity Capital Briefing” April 2018)

Granted, financial sponsors can turn to the high-yield bond markets, or, more recently, rely
more on syndicated leveraged loans, for debt financing. However, we think direct lending can
offer some benefits for financial sponsors, including certainty of execution and being able to
provide one-stop debt financing solutions.

Potential regulatory changes down the line could be positives

In our view, there are a few regulatory developments that could potentially impact BDCs and
are worth monitoring. Potential revisions to the SEC’s “AFFE” rule could expand the potential
investor base for BDCs. More recent regulatory changes that have taken place, such as the
Small Business Credit Availability Act, could give BDCs additional flexibility in a credit down
cycle. We review each of the key regulatory items below.

 SEC’s “Acquired fund fees and expenses” (AFFE) rule: Potential revision of the AFFE rule
could increase the percentage of institutional investor ownership in BDCs and thus expand
the investor base. With the SEC having solicited industry comments on potential revisions
for the AFFE rule, we acknowledge there is certainly some probability for a rule revision
in the near to medium term but we would ascribe a small probability at this point, in the
near-term. Brief background: in 2006, the SEC amended its open-end investment
company registration form such that if an investment company (fund) acquired another
fund, the acquiring fund must aggregate the operating expenses of the acquired fund onto
the acquiring fund’s prospectus fee table (“acquired fund fees and expenses”), thus
overstating the expense ratio for the acquiring fund. The rule was motivated to address
the fund of funds industry, but effectively also impacted open-end funds owning shares

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 21

 TPG Specialty Lending, Inc.

of BDCs. Subsequently, several index providers, in 2014, removed BDCs from various
indexes.
 SEC’s proposed rule 12d1-4 (which would change the “3% rule”): The SEC had solicited
industry comments for its proposed changes to the “3% rule,” called rule 12d1-4, which
would, among other things, allow acquiring funds to own more than 3% of an acquired
fund’s voting securities. However, we note voting rights above the 3% ownership would
be limited. As the SEC has been soliciting industry comments on proposed changes for the
“3% rule,” we think there is some probability we could see some revisions in the near-
term; a key consideration is whether the SEC allows a fund to own more than 3% with
voting rights in-line with economic ownership. Brief background: In 2006, the SEC
amended the Investment Company Act of 1940 with rules that would restrict ‘fund of
funds’ arrangements. Key provisions include limitations for an acquiring fund in: 1) owning
more than 3% of a registered fund’s outstanding voting securities; 2) investing more than
5% of the acquiring fund’s assets in another registered fund; and 3) investing more than
10% of the acquiring fund’s total assets in other registered funds. Effectively, the
amendments would significantly restrict the ability of a fund from owning more than 3%
of the common stock of a BDC. As well, the rules would likely make it very difficult for any
sort of BDC industry consolidation.
 Small Business Credit Availability Act (SBCAA): The recently enacted SBCAA effectively
expanded the leverage ratios under which the BDCs can operate to 2:1 debt-to-equity
(from 1:1 previously). That said, we note any change to a BDC’s leverage ratios would
require shareholder approval. In our view, we could see a variety of investment strategy
shifts from BDCs. BDCs focused on potential downside protection may wish to target
conservative leverage ratios (modestly above 1:1), as the expanded regulatory ratio would
help the firms from being forced to sell assets in order to maintain a 2:1 ratio during a
downturn. We could, of course, see some other BDCs shift towards more aggressive
investment strategies.

Industry structure
The BDC industry, in our view, is fairly fragmented, with a few large, at-scale players, and many
much smaller companies. In our view, this is mainly due to low barriers to entry for new
entrants. Industry consolidation, in our view, may be restricted given the “3% rule,” which
prevents a BDC from owning more than 3% of the common stock of another BDC.

As shown previously, there are only a few large, at-scale players within the industry.

BDCs compete to lend to U.S. middle-market companies against other BDCs, the capital
markets (high-yield bond markets), and banks and other financial institutions.

The business development company (BDC) vehicle

Business development companies (BDCs) are permanent capital vehicles, more specifically a
variant of closed-end investment companies. We note many BDCs elect and intend to qualify
annually as a regulated investment company (RIC) under U.S. federal income tax purposes.

BDCs must maintain at least 70% of total assets in securities of qualifying U.S. private or thinly
traded companies. Further, a BDC is required to make available ‘managerial assistance’ to
portfolio companies that request such services. We note as a closed-end, permanent capital
vehicle, a BDC is not obligated to have redemptions.

Further, a BDC has restrictions on its capital structure – namely, limitations on leverage. Under
the recently enacted Small Business Credit Availability Act (SBCA), a BDC must have an asset
coverage ratio of at least 150%, or, effectively, must maintain a debt-to-equity ratio below 2:1.
Any reduction to a BDC’s targeted asset coverage ratio must be approved by a majority of the
November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 22
 TPG Specialty Lending, Inc.

Board of Directors or a majority of shareholders. We note that rating agencies may view the
adoption of a reduced asset coverage ratio as a credit negative event.

When a BDC qualifies as a regulated investment company (RIC) under Subchapter M of the
Internal Revenue Code of 1986, it obtains pass-through tax treatment and thus is not subject
to corporate-level U.S. federal income taxes. However, as a RIC, the company must distribute
at least 90% of its investment company taxable income (which includes dividends, interest)
annually in the form of dividends. There are some other income and asset diversification
requirements that the company must meet in order to continue qualifying as a RIC.

BDCs were established as a variant of a closed-end investment company in 1980 when

Congress amended the Investment Company Act of 1940 (through the Small Business
Investment Incentive Act). Congress was motivated to create BDCs in order to make more
capital available to small, developing, or otherwise thinly capitalized companies that may not
have access to capital through more traditional means, including the public capital markets.
As well, BDCs make available managerial assistance to these small companies.

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 23

 TPG Specialty Lending, Inc.

TPG Specialty Lending Inc (TSLX)

($ millions, except per share data and where otherwise noted)
Source: Company filings, RBC Capital Markets estimates
Kenneth S. Lee (Analyst), 212.905.5995, kenneth.s.lee@rbccm.com
1Q19 2Q19 3Q19 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 2018A 2019E 2020E
INCOME STATEMENT
Investment income
Interest Income $49.5 $55.5 $56.1 $52.1 $53.2 $54.7 $56.2 $57.7 $249.9 $213.2 $221.8
Interest income - other fees $0.8 $5.0 $11.2 $5.0 $6.0 $6.0 $6.0 $6.0 $22.0 $24.0
Other Income 2.1 2.0 2.7 2.0 2.0 2.0 2.0 2.0 $12.0 $8.8 $8.0
Total investment income 52.5 62.4 70.1 59.1 61.2 62.7 64.2 65.7 $261.9 $244.0 $253.8

Operating expenses
Interest Expenses 10.4 12.7 12.6 12.5 12.9 13.6 14.4 15.1 $42.8 $48.2 $56.0
Management Fees 6.6 7.4 7.9 8.0 8.1 8.4 8.5 8.7 $28.6 $29.8 $33.7
Incentive Fees 5.7 6.6 7.8 4.8 5.3 5.3 5.4 5.6 $30.5 $24.8 $21.6
Other expenses 2.9 3.6 3.5 3.3 3.0 3.3 3.3 3.3 $12.8 $13.3 $12.8
Total Operating Expenses 25.5 30.3 31.8 28.5 29.2 30.6 31.6 32.7 $114.7 $116.1 $124.1
Other adjustments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 $0.0 $0.0 $0.0
Net Investment Income Before Taxes 26.9 32.1 38.3 30.5 31.9 32.1 32.6 33.0 $147.2 $127.9 $129.7
Income Taxes, including Excise Taxes 0.3 1.0 1.6 0.3 0.3 0.3 0.3 0.3 3.4 3.2 1.2
Net Investment Income After Taxes 26.6 31.1 36.7 30.2 31.6 31.8 32.3 32.7 $143.8 $124.8 $128.5
Total Net Unrealized Gain / (Loss) 11.5 16.4 (11.5) 0.0 0.0 0.0 0.0 0.0 (14.2) 16.4 0.0
Total Net Realized Gain / (Loss) 0.6 0.2 5.1 0.0 0.0 0.0 0.0 0.0 (10.7) 6.0 0.0
Net Income, GAAP basis 38.7 47.8 30.3 30.2 31.6 31.8 32.3 32.7 $119.0 $147.1 $128.5

Net Inv Income per share, diluted $0.41 $0.47 $0.55 $0.46 $0.48 $0.48 $0.49 $0.49 $2.25 $1.89 $1.94
Net Unrealized Gain/(Loss) per share $0.17 $0.25 ($0.17) $0.00 $0.00 $0.00 $0.00 $0.00 ($0.22) $0.25 $0.00
Net Realized Gain/(Loss) per share $0.01 $0.00 $0.08 $0.00 $0.00 $0.00 $0.00 $0.00 ($0.16) $0.09 $0.00
EPS, GAAP basis, diluted $0.59 $0.72 $0.46 $0.46 $0.48 $0.48 $0.49 $0.49 $1.86 $2.23 $1.94
Dividends per share ('distributions') $0.51 $0.40 $0.43 $0.47 $0.42 $0.43 $0.44 $0.44 $1.78 $1.81 $1.73
NAV per share $16.37 $16.70 $16.72 $16.70 $16.76 $16.80 $16.86 $16.91 $16.25 $16.70 $16.91

Basic shares out., end of period 65.6 66.0 66.3 66.3 66.3 66.3 66.3 66.3 66.3 66.3 66.3
Avg basic shares out. 65.6 66.0 66.2 66.3 66.3 66.3 66.3 66.3 64.0 66.0 66.3
Dilution 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Avg diluted shares out. 65.6 66.0 66.2 66.3 66.3 66.3 66.3 66.3 64.0 66.0 66.3

Key metrics
Leverage ratio (debt/equity) 0.67x 0.84x 0.81x 0.86x 0.89x 0.96x 0.99x 1.05x 0.57x 0.86x 1.05x
NII ROE (%), annualized 9.9% 11.5% 13.3% 10.9% 11.4% 11.4% 11.6% 11.7% 14.2% 11.5% 11.5%
ROA (%), annualized 5.8% 6.3% 7.1% 5.8% 5.9% 5.8% 5.7% 5.6% 6.9% 6.5% 5.7%
Dividend yield (dividend/NAV), annualized 12.5% 9.6% 10.3% 11.3% 10.1% 10.3% 10.3% 10.4% 11.0% 10.8% 10.3%
NII yield (%), annualized 9.9% 11.3% 13.3% 10.9% 11.4% 11.4% 11.6% 11.7% 13.5% 11.3% 11.5%
Net investment spread 5.0% 5.3% 5.4% 4.6% 4.7% 4.7% 4.7% 4.7%
Dividend as % of NII (dividend coverage) 96.0% 82.6% 70.3% 85.5% 81.7% 81.3% 80.1% 79.0% 69.4% 82.6% 80.5%
First lien as % of total portfolio mix 97.0% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0%
Source: Company reports and RBC Capital Markets estimates

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 24

 TPG Specialty Lending, Inc.

$ millions shown 1Q19 2Q19 3Q19 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 2018A 2019E 2020E
BALANCE SHEET

First lien investments 1,770.1 1,998.7 1,986.1 2,034.6 2,073.4 2,151.0 2,189.8 2,267.4 1,654.8 2,034.6 2,267.4
Second lien investments 9.1 10.3 10.2 10.5 10.7 11.1 11.3 11.7 8.5 10.5 11.7
Unsecured investments 9.1 10.3 10.2 10.5 10.7 11.1 11.3 11.7 8.5 10.5 11.7
Equity investments 18.2 20.6 20.5 21.0 21.4 22.2 22.6 23.4 8.5 21.0 23.4
Other investments 18.2 20.6 20.5 21.0 21.4 22.2 22.6 23.4 25.6 21.0 23.4
Total investments, fair value 1,824.9 2,060.5 2,047.5 2,097.5 2,137.5 2,217.5 2,257.5 2,337.5 1,706.0 2,097.5 2,337.5
Cash 9.7 10.0 8.1 8.1 8.1 8.1 8.1 8.1 10.6 8.1 8.1
Other assets 15.0 19.2 17.7 17.7 17.7 17.7 17.7 17.7 13.8 17.7 17.7
Total Assets 1,849.5 2,089.7 2,073.3 2,123.3 2,163.3 2,243.3 2,283.3 2,363.3 1,730.3 2,123.3 2,363.3

Debt outstanding 724.5 929.9 902.3 953.3 989.7 1,066.5 1,103.0 1,179.3 608.0 953.3 1,179.3
Other liabilities 50.9 58.2 62.7 62.7 62.7 62.7 62.7 62.7 59.1 62.7 62.7
Total Liabilities 775.5 988.1 965.0 1,016.0 1,052.4 1,129.2 1,165.7 1,242.0 667.1 1,016.0 1,242.0

Common equity 1,074.1 1,101.6 1,108.3 1,108.3 1,108.3 1,108.3 1,108.3 1,108.3 1,063.2 1,108.3 1,108.3
Other 0.0 0.0 0.0 (1.0) 2.7 5.8 9.3 13.0 0.0 (1.0) 13.0
Preferred equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total shareholders' equity ('net assets') 1,074.1 1,101.6 1,108.3 1,107.3 1,110.9 1,114.0 1,117.5 1,121.3 1,063.2 1,107.3 1,121.3

Total liabilities and equity 1,849.5 2,089.7 2,073.3 2,123.3 2,163.3 2,243.3 2,283.3 2,363.3 1,730.3 2,123.3 2,363.3
Source: Company reports and RBC Capital Markets estimates

November 12, 2019 Kenneth S. Lee, (212) 905-5995; kenneth.s.lee@rbccm.com 25