Morgan Stanley Direct Lending Fund (MSDL) risk factors, FY2024 10-K

Risks Relating to Our Business and Structure

1. 01Operating as a BDC imposes numerous constraints on us and significantly reduces our operating flexibility. In addition, if we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company, which would subject us to additional regulatory restrictions
2. 02We are subject to risks associated with the current interest rate environment and to the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income
3. 03We depend upon our Adviser and Administrator for our success and upon their access to the investment professionals and partners of Morgan Stanley and its affiliates
4. 04Our business model depends to a significant extent upon strong referral relationships with private equity sponsors. Any inability of the Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business
5. 05The time and resources that individuals associated with our Adviser devote to us may be diverted, and we may face additional competition due to the fact that neither our Adviser nor its affiliates are prohibited from raising money for or managing another entity that makes the same types of investments that we target
6. 06We may not replicate the historical results achieved by other entities advised or sponsored by members of the Investment Committee, or by the Adviser or its affiliates
7. 07The Adviser may frequently be required to make investment analyses and decisions on an expedited basis in order to take advantage of investment opportunities, and our Adviser may not have knowledge of all circumstances that could impact our investments
8. 08There are significant potential conflicts of interest that could affect our investment returns
9. 09Conflicts related to obligations the Investment Committee, the Adviser or its affiliates have to other clients and conflicts related to fees and expenses of such other clients
10. 10It should be noted that Morgan Stanley has, directly and/or indirectly, made investments in certain of its Affiliated Investment Accounts, and accordingly Morgan Stanley’s investment in us in itself may not determine the outcome in the resolution of any of the foregoing conflicts
11. 11The Investment Committee, the Adviser or its affiliates may, from time to time, possess material non-public information, or may not have access to certain information held by Morgan Stanley, each of which would limit our investment discretion
12. 12Our management fee and incentive fee structure may create incentives for the Adviser that are not fully aligned with the interests of our stockholders and may induce the Adviser to make speculative investments
13. 13Conflicts related to other arrangements with the Adviser and its affiliates
14. 14Our ability to enter into transactions with our affiliates is restricted
15. 15The recommendations given to us by our Adviser may differ from those rendered to their other clients
16. 16We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses
17. 17We will be subject to corporate-level income tax if we are unable to qualify as a RIC
18. 18We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income
19. 19We will need to raise additional capital to grow because we must distribute most of our income
20. 20Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital exposes us to risks, including the typical risks associated with leverage
21. 21We intend to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us
22. 22(1) Assumes $3,912,018 in total assets, $1,983,401 in debt outstanding and $1,842,156 in net assets as of December 31, 2024, and an effective weighted average annual interest of 6.46% as of December 31, 2024 (excluding unused fees and financing costs)
23. 23We expose ourselves to risks when we engage in hedging transactions
24. 24We are subject to risks associated with our Credit Facilities
25. 25Any inability to renew, extend or replace the Credit Facilities could adversely impact our liquidity and ability to find new investments or maintain distributions to our stockholders
26. 26Our interests in any subsidiary that enters into a Credit Facility would be subordinated, and we may not receive cash on our equity interests from any such subsidiary
27. 27Our equity interests in any such subsidiary would rank behind all of the secured and unsecured creditors, known or unknown, of such subsidiary, including the lenders in any Credit Facility
28. 28Our ability to sell investments held by any subsidiary that enters into a Credit Facility would be limited
29. 29We may enter into reverse repurchase agreements, which are another form of leverage
30. 30We may be subject to risks associated with any collateralized loan obligations, or CLOs, we enter into to finance our investments
31. 31If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy
32. 32Failure to qualify as a BDC would decrease our operating flexibility
33. 33The majority of our portfolio investments are recorded at fair value as determined in good faith by our Valuation Designee, under the supervision of our Board of Directors and, as a result, there may be uncertainty as to the value of our portfolio investments
34. 34Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, and we may temporarily deviate from our regular investment strategy
35. 35Provisions of the Delaware General Corporation Law, as amended, or the DGCL, and of our Certificate of Incorporation and bylaws could deter takeover attempts and have an adverse effect on the price of shares of Common Stock
36. 36The Adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
37. 37The Administrator can resign on 60 days’ notice, and we may not be able to find a suitable replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
38. 38We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer and our portfolio may be concentrated in a limited number of industries
39. 39We may be subject to risks associated with our investments in the software industry
40. 40Laws and regulations regulating insurance activities are complex and could negatively affect the business of our portfolio companies in the insurance services industry, which could reduce their profitability and potentially limit their growth
41. 41The liability of each of the Adviser and the Administrator is limited, and we have agreed to indemnify each against certain liabilities, which may lead them to act in a riskier manner on our behalf than each would when acting for its own account
42. 42Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited

Risks Relating to Our Investments

1. 43Limitations of investment due diligence expose us to investment risk
2. 44Our debt investments may be risky and we could lose all or part of our investments
3. 45Defaults by our portfolio companies will harm our operating results
4. 46We may experience fluctuations in our quarterly operating results
5. 47Economic recessions or downturns could impair our portfolio companies and defaults by our portfolio companies will harm our operating results
6. 48Inflation could adversely impact our portfolio companies and our results of our operations
7. 49We may hold the debt securities of distressed companies that may enter into bankruptcy proceedings
8. 50Our investments in private middle-market portfolio companies are risky, and you could lose all or part of your investment
9. 51Subordinated liens on collateral securing debt investments that we will make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us
10. 52Our investments in securities or assets of publicly traded companies are subject to the risks inherent in investing in public companies
11. 53Covenant-lite loans may expose us to different risks, including with respect to liquidity, ability to restructure loans, credit risks and less protective loan documentation, than is the case with loans that contain financial maintenance covenants
12. 54The lack of liquidity in our investments may adversely affect our business
13. 55Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation
14. 56Our investments in OID and PIK instruments may expose us to investment risk
15. 57Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity, and rising interest rates may make it more difficult for portfolio companies to make periodic payments on their loans
16. 58Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields
17. 59Our investments in portfolio companies may expose us to environmental risks
18. 60We have not yet identified all of the portfolio company investments we will acquire and we may have difficulty sourcing investment opportunities
19. 61Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio
20. 62Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments
21. 63We can offer no assurance that portfolio company management will be able to operate their companies in accordance with our expectations
22. 64Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies and such portfolio companies may not generate sufficient cash flow to service their debt obligations to us
23. 65We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient
24. 66We may be subject to risks under hedging transactions and may become subject to risks if we invest in foreign securities
25. 67We may not realize gains from our equity investments
26. 68We may be subject to risks to the extent we provide managerial assistance to our portfolio companies

Risks Relating to an Investment in our Securities

1. 69Investing in our Common Stock may involve an above average degree of risk
2. 70We cannot assure you that the market price of our Common Stock will not decline below our net asset value. The market price of our Common Stock may be volatile and may fluctuate significantly
3. 71There is a risk that you may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital
4. 72Purchases of our Common Stock by us under the Company 10b5-1 Plan may result in the price of our Common Stock being higher than the price might otherwise exist in the open market
5. 73Purchases of our Common Stock by us under the Company 10b5-1 Plan may result in dilution to our net asset value per share
6. 74We have not established any limit on the amount of funds we may use from available sources, such as borrowings, if any, or proceeds from any offering of securities, to fund dividends (which may reduce the amount of capital we ultimately invest in assets)
7. 75Sales of substantial amounts of our Common Stock in the public market, including shares of our Common Stock held by MS Credit Partners Holdings, may have an adverse effect on the market price of our Common Stock
8. 76Our stockholders may experience dilution in their ownership percentage
9. 77Our stockholders will experience dilution in their ownership percentage if they opt out of our DRIP
10. 78Our stockholders may receive shares of our Common Stock as dividends, which could result in adverse tax consequences to them
11. 79We may in the future determine to issue preferred stock, which could adversely affect the value of shares of Common Stock
12. 80Our stockholders may be subject to filing requirements under the Exchange Act as a result of an investment in us
13. 81Our stockholders may be subject to the short-swing profits rules under the Exchange Act as a result of an investment in us
14. 82Holders of any preferred stock that we may issue will have the right to elect certain members of our Board of Directors and have class voting rights on certain matters

Risks Related to the Notes

1. 83The Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we may incur. Additionally, the Notes are not guaranteed by Morgan Stanley
2. 84The Notes are subordinated structurally to the indebtedness and other liabilities of our subsidiaries
3. 85A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes, if any, could cause the liquidity or market value of the Notes to decline significantly
4. 86An increase in market interest rates could result in a decrease in the value of the Notes
5. 87The Indentures governing the 2027 Notes and 2029 Notes contain limited protection for holders of such notes
6. 88The optional redemption provision for the Notes may materially adversely affect the return on the Notes
7. 89If an active trading market for the Unrestricted 2027 Notes and/or Unrestricted 2029 Notes does not develop or is not maintained, a noteholder may not be able to sell such notes
8. 90We may not be able to repurchase the Notes upon a Change of Control Repurchase Event
9. 91We are operating in a period of capital markets volatility and economic uncertainty. The conditions have materially and adversely affected debt and equity capital markets in the United States, and any future volatility or instability in capital markets may have a negative impact on our business and operations
10. 92New or modified laws or regulations governing our or Morgan Stanley’s operations may adversely affect our business
11. 93an economic interest, these rules would increase our financing costs in comparison to other types of financings and this increase in financing costs would ultimately be borne by our stockholders
12. 94We are highly dependent on information systems, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the value of shares of our Common Stock and our ability to pay distributions
13. 95We, the Advisor and the Administrator currently or in the future are expected to routinely transmit and receive personal, confidential and proprietary information by email and other electronic means
14. 96We are subject to risks associated with artificial intelligence and machine learning technology
15. 97Terrorist attacks, acts of war, natural disasters, outbreaks or pandemics, may impact our portfolio companies and our Adviser and harm our business, operating results and financial condition
16. 98We may be the target of litigation
17. 99Our Compliance with Section 404 of the Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act would adversely affect us and the market price of our common stock
18. 100FDIC and may otherwise be materially affected by adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties