Investment Valuations and Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Investment Valuations And Fair Value Measurements [Abstract]

Investment Valuations and Fair Value Measurements

3. Investment Valuations and Fair Value Measurements

Investments at Fair Value: Investments held by the Company are valued at fair value. Fair value is generally determined on the basis of last reported sales prices or official closing prices on the primary exchange in which each security trades, or if no sales are reported, generally based on the midpoint of the valuation range obtained for debt investments from a quotation reporting system, established market makers or pricing service.

Investments for which market quotes are not readily available or are not considered reliable are valued at fair value according to procedures approved by the Board based on similar instruments, internal assumptions and the weighting of the best available pricing inputs.

3. Investment Valuations and Fair Value Measurements (Continued)

Pursuant to Rule 2a-5 under the 1940 Act, the Board has designated the Adviser as the "valuation designee" with respect to the fair valuation of the Company's portfolio securities, subject to oversight by and periodic reporting to the Board.

Fair Value Hierarchy: Assets and liabilities are classified into three levels by the Company based on valuation inputs used to determine fair value:

Level 1 values are based on unadjusted quoted market prices in active markets for identical assets.

Level 2 values are based on significant observable market inputs, such as quoted prices for similar assets and quoted prices in inactive markets or other market observable inputs.

Level 3 values are based on significant unobservable inputs that reflect the Company’s determination of assumptions that market participants might reasonably use in valuing the assets.

Categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation levels are not necessarily an indication of the risk associated with investing in those securities.

Level 1 Assets (Investments): The valuation techniques and significant inputs used to determine fair value are as follows:

Equity, (Level 1), includes common stock valued at the closing price on the primary exchange in which the security trades.

Level 3 Assets (Investments): The following valuation techniques and significant inputs are used to determine the fair value of investments in private debt and equity for which reliable market quotations are not available. Some of the inputs are independently observable however, a significant portion of the inputs and the internal assumptions applied are unobservable.

Debt, (Level 3), include investments in privately originated senior secured debt. Such securities are valued based on specific pricing models, internal assumptions and the weighting of the best available pricing inputs. An income method approach incorporating a weighted average cost of capital and discount rate or a market method approach using prices and other relevant information generated by market transactions involving identical or comparable assets are generally used to determine fair value, though some cases use an enterprise value waterfall method. Valuation may also include a shadow rating method. Standard pricing inputs include but are not limited to the financial health of the issuer, place in the capital structure, value of other issuer debt, credit, industry, and market risk and events.

Equity, (Level 3), includes common stock, preferred stock and warrants. Such securities are valued based on specific pricing models, internal assumptions and the weighting of the best available pricing inputs. A market approach is generally used to determine fair value. Pricing inputs include, but are not limited to, financial health and relevant business developments of the issuer; EBITDA; market multiples of comparable companies; comparable market transactions and recent trades or transactions; issuer, industry and market events; and contractual or legal restrictions on the sale of the security. When a Black-Scholes pricing model is used it follows the income approach. The pricing model takes into account the contract terms as well as multiple inputs, including: time value, implied volatility, equity prices and interest rates. A liquidity discount based on current market expectations, future events, minority ownership position and the period management reasonably expects to hold the investment may be applied.

Pricing inputs and weightings applied to determine value require subjective determination. Accordingly, valuations do not necessarily represent the amounts that may eventually be realized from sales or other dispositions of investments.

3. Investment Valuations and Fair Value Measurements (Continued)

Net Asset Value (“NAV”) (Investment Funds and Vehicles): Equity investments in affiliated investment fund (Strategic Ventures) are valued based on the NAV reported by the investment fund. Investments held by the affiliated fund include debt investments in privately originated senior secured debt. Such investments held by the affiliated fund are valued using the same methods, approach and standards applied above to debt investments held by the Company. The Company’s ability to withdraw from the fund is subject to restrictions. The term of the fund will continue until June 5, 2021 unless dissolved earlier or extended for two additional one-year periods by the Company, in its full discretion. The Company can further extend the term of the fund for additional one-year periods upon notice to and consent from the fund’s management committee. On February 25, 2021, Company extended the fund’s term one additional year, until June 5, 2022. On February 1, 2022, the Company further extended the fund's term one additional year, until June 5, 2023. On April 17, 2023, the Company further extended the fund's term one additional year, until June 5, 2024. On May 1, 2024, the Company further extended the fund's term one additional year, until June 5, 2025. The Company is entitled to income and principal distributed by the fund. As of June 30, 2024, the timing of the liquidation of the fund is not known.

The following is a summary by major security type of the fair valuations according to inputs used in valuing investments listed in the Consolidated Schedule of Investments as of June 30, 2024:


Investments	Level 1		Level 2		Level 3		NAV		Total
Debt	$	—	$	—	$	262,196	$	—	$	262,196
Equity		723		—		83,984		—		84,707
Investment funds & vehicles(1)		—		—		—		61,641		61,641
Short- term investments		442,747		—		—		—		442,747
Cash equivalents		2,798		—		—		—		2,798
Total	$	446,268	$	—	$	346,180	$	61,641	$	854,089

(1)

Includes equity investments in Strategic Ventures. In accordance with ASC Topic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.

The following is a summary by major security type of the fair valuations according to inputs used in valuing investments listed in the Consolidated Schedule of Investments as of December 31, 2023:


Investments	Level 1		Level 2		Level 3		NAV		Total
Debt	$	—	$	—	$	276,377	$	—	$	276,377
Equity		618		—		95,419		—		96,037
Investment funds & vehicles(1)		—		—		—		69,781		69,781
Short- term investments		491,966		—		—		—		491,966
Cash equivalents		2,372		—		—		—		2,372
Total	$	494,956	$	—	$	371,796	$	69,781	$	936,533

(1)

The following tables provide a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the three and six months ended June 30, 2024:

3. Investment Valuations and Fair Value Measurements (Continued)


	Debt			Equity			Total
Balance, April 1, 2024	$	284,851		$	87,932		$	372,783
Purchases, including payments received in-kind		7,296			—			7,296
Sales and paydowns of investments		(402	)		—			(402	)
Amortization of premium and accretion of discount, net		(250	)		—			(250	)
Net change in unrealized appreciation/(depreciation)		(29,299	)		(3,948	)		(33,247	)
Balance, June 30, 2024	$	262,196		$	83,984		$	346,180
Change in net unrealized appreciation/(depreciation) in investments held as of June 30, 2024		(29,299	)		(3,948	)		(33,247	)


	Debt			Equity			Total
Balance, January 1, 2024	$	276,377		$	95,419		$	371,796
Purchases, including payments received in-kind		16,904			—			16,904
Sales and paydowns of investments		(610	)		—			(610	)
Amortization of premium and accretion of discount, net		(27	)		—			(27	)
Net change in unrealized appreciation/(depreciation)		(30,448	)		(11,435	)		(41,883	)
Balance, June 30, 2024	$	262,196		$	83,984		$	346,180
Change in net unrealized appreciation/(depreciation) in investments held as of June 30, 2024	$	(30,448	)	$	(11,435	)	$	(41,883	)

The following tables provide a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the three and six months ended June 30, 2023:


	Debt			Equity			Total
Balance, April 1, 2023	$	354,972		$	73,225		$	428,197
Purchases, including payments received in-kind		4,346			—			4,346
Sales and paydowns of investments		(27,612	)		—			(27,612	)
Amortization of premium and accretion of discount, net		112			—			112
Net realized losses		(1,928	)		(116	)		(2,044	)
Net change in unrealized appreciation/(depreciation)		(6,282	)		7,076			794
Balance, June 30, 2023	$	323,608		$	80,185		$	403,793
Change in net unrealized appreciation/(depreciation) in investments held as of June 30, 2023	$	(5,606	)	$	6,960		$	1,354


	Debt			Equity			Total
Balance, January 1, 2023	$	349,861		$	79,526		$	429,387
Purchases, including payments received in-kind		12,912			—			12,912
Sales and paydowns of investments		(27,672	)		—			(27,672	)
Amortization of premium and accretion of discount, net		148			—			148
Net realized losses		(1,928	)		(116	)		(2,044	)
Net change in unrealized appreciation/(depreciation)		(9,713	)		775			(8,938	)
Balance, June 30, 2023	$	323,608		$	80,185		$	403,793
Change in net unrealized appreciation/(depreciation) in investments held as of June 30, 2023	$	(9,036	)	$	660		$	(8,376	)

The Company did not have any transfers between levels during the three and six months ended June 30, 2024 and 2023.

Level 3 Valuation and Quantitative Information: The following table summarizes the valuation techniques and quantitative information utilized in determining the fair value of the Level 3 investments as of June 30, 2024.

3. Investment Valuations and Fair Value Measurements (Continued)

        Investment Type

        Fair Value

        Valuation
Technique

        Unobservable
Input

        Range

        Weighted
Average*

        Impact to
Valuation if
Input Increases

Debt

42,972

Income Method

Discount Rate

14.2 to 17.6%

15.9%

Decrease

Debt

129,983

Market Method

EBITDA Multiple

5.8x to 8.5x

N/A

Increase

Debt

89,241

Market Method

Revenue Multiple

0.1x to 0.7x

N/A

Increase

Equity

61,256

Market Method

EBITDA Multiple

5.8x to 8.3x

N/A

Increase

Equity

22,728

Market Method

Revenue Multiple

0.1x to 0.7x

N/A

Increase

* Weighted based on fair value

The following table summarizes the valuation techniques and quantitative information utilized in determining the fair value of the Level 3 investments as of December 31, 2023.

        Investment Type

        Fair Value

        Valuation
Technique

        Unobservable
Input

        Range

        Weighted
Average*

        Impact to
Valuation if
Input Increases

Debt

43,506

Income Method

Discount Rate

13.6% to 16.5%

15.1%

Decrease

Debt

126,124

Market Method

EBITDA Multiple

5.8x to 9.5x

N/A

Increase

Debt

106,747

Market Method

Revenue Multiple

0.1x to 0.7x

N/A

Increase

Equity

72,198

Market Method

EBITDA Multiple

5.8x to 8.5x

N/A

Increase

Equity

23,221

Market Method

Revenue Multiple

0.1x to 0.7x

N/A

Increase

* Weighted based on fair value

Unless noted, the Company generally utilizes the midpoint of a valuation range provided by an external, independent valuation firm.

TCW Direct Lending LLC 10-Q