Sixth Street Specialty Lending's Historical Value Creation May Offer Insights Into Its Future Returns

Sixth Street Specialty Lending, Inc. (TSLX) is a business development company, or BDC. The company primarily invests in companies with earnings before interest, taxes, depreciation, and amortization, or EBITDA, between $10 million and $250 million, according to the company’s most recent earnings presentation. Almost all of Sixth Street’s investments are in the companies’ first-lien secured, floating-rate debt.

I recently wrote about another BDC, Prospect Capital (PSEC), that looks cheap because it trades at a steep discount to book value.

Sixth Street Specialty Lending does not look cheap. The company trades at a price to book ratio of around 106.5%, compared to the average P/B ratio for BDCs, which is around 83%. This means each dollar of stock buys only 93.9 cents in equity in Sixth Street, compared to around $1.20 in equity in the average BDC.

That said, as in life, in investing you often get what you pay for. In several recent articles, I’ve described two common types of investment opportunities:

1. High quality companies trading at a modest discount to intrinsic value.
2. More average companies trading at a much larger discount to intrinsic value.

In the long run, high quality companies compound an investor’s capital far more than average ones. To see if Sixth Street Specialty Lending, Inc. is a high quality company, we can use the methodology I used in my article about Prospect. We can look at how much value the company has historically created for shareholders. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)