TCW Direct Lending VII Proposes Significant Portfolio Investment Adjustments

Amendments to investment policies aim to enhance flexibility while balancing potential risks and returns.

November 14, 2024

TCW Adjusts Follow-On Investment Limits to Bolster Portfolio Strategy

Boston, MA – TCW Direct Lending VII LLC (TCW), a private credit investment entity under the management of TCW Asset Management Company LLC, has proposed significant amendments to its Fourth Amended and Restated Limited Liability Company Agreement (LLC Agreement). The change would allow for increased flexibility in follow-on investments, aimed at optimizing returns across its existing portfolio companies.

The proposal seeks to revise Section 6.1.4(b) of the LLC Agreement, increasing the cap on follow-on investments to 10% of cumulative investments made during the commitment period, potentially allowing follow-ons up to $254.8 million—over $117 million above the previous cap. This amendment reflects the company’s evolving investment environment and goals.

The Driving Factors for Change

The existing follow-on investment cap, tied to 10% of investor commitments, limited such investments to $137.3 million. As of September 30, 2024, the company had utilized approximately $127.8 million under this framework, leaving limited room for strategic follow-ons without further adjustments.

The proposed increase follows TCW’s assessment that the original cap inadequately supports its operational strategy. While historical funds managed by TCW or its predecessor Regiment Capital did not use leverage or reinvestment mechanisms (“recycling”), the current portfolio leverages both, necessitating greater flexibility in reinvestment capacity. By aligning limits with actual invested and committed capital rather than investor commitments, TCW expects enhanced portfolio management and negotiation power for maximizing asset value.

Implications for Stakeholders

The amendment would not alter TCW’s overall investment objectives. However, it introduces both opportunities and risks for unitholders. Increased follow-on investment capacity is intended to capitalize on favorable opportunities within the current portfolio, potentially amplifying long-term returns. The company also emphasizes its intention to use existing liquidity and credit reserves, avoiding the need for additional capital calls from investors.

Nonetheless, the proposal presents financial trade-offs. Expanded follow-on investments may defer distributions to unitholders and increase the company’s exposure to borrowing and interest expenses. Additionally, TCW notes potential delays in portfolio liquidation timelines, which could impact short-term liquidity preferences for some stakeholders.

Governance and Consent Process

The proposal has been presented to unitholders for approval through a consent solicitation process. TCW requires consent from holders representing more than 50% of outstanding units by December 6, 2024, for the amendment to take effect. Consent forms can be submitted electronically via DocuSign, email, or fax. As of October 31, 2024, the company reported 13,734,010 common units outstanding across 128 unitholders.

The board has refrained from explicitly endorsing the proposal, focusing instead on facilitating informed decision-making among investors. The consent-based approach also aims to streamline the process while avoiding the logistical and financial burdens of convening a formal meeting.

Looking Ahead: Balancing Risks and Rewards

TCW’s leadership views the proposed changes as a strategic step toward enhancing the flexibility and resilience of its investment approach. In addition to improving the alignment of follow-on investments with current portfolio dynamics, the amendment reflects broader trends in private credit investment practices.

For stakeholders, the decision requires weighing the potential benefits of higher returns against risks associated with increased financial commitments and extended timelines. As TCW continues to navigate the evolving private credit landscape, the outcome of this consent solicitation could shape its trajectory for years to come.