Q2 2021 Ares Capital Corp Earnings Call
Good afternoon, welcome to the Ares Capital Corporation's second quarter ended June 32021 earnings Conference call. At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Wednesday July 28, 2021, I will now turn the call over to Mr.
There John stop on managing director of Ares Investor Relations.
Thank you and good afternoon, let me start with some important reminders comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements and are subject to risks and uncertainties.
The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.
Ares Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
This conference call the company.
Certain non-GAAP measures as defined by SEC regulation G such as core earnings or core EPS.
The company believes that core EPS provides useful information to investors regarding financial performance because.
It is 1 method the company uses to measure its financial condition and results of operation.
We made this conciliation of core EPS to the net per share increase or decrease in stockholders' equity, resulting from operations. The most directly comparable GAAP financial measure can be found on the accompanying slide presentation for this call.
In addition reconciliation.
These measures may also be found in our earnings release filed this.
A record with the SEC on form 8-K.
Certain information in this conference call and the accompanying slide presentation, including information related to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no representation or warranty with respect to this information.
The company's second.
Quarter ended June 32021 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the second quarter 2021on earnings presentation link on the homepage of the Investor resources section of the website.
Ares Capital Corporation's earnings release on 10-Q.
You are also available on our company's website.
I'll now turn the call over to Mr. Kipp, Davir Ares capital Corporation's Chief Executive Officer.
Thanks, John.
Hello, everyone and thank you for joining the call today I'm here with our co President Michael Smith, and Mitch Goldstein, Our Chief Financial Officer Penni roll on several.
Other members of the management team.
I want to start by highlighting our strong second quarter results and then I'll provide some thoughts on the current market and the Companys positioning.
This morning, we reported second quarter core earnings of 53 per share up from 40.
Several of <unk> <unk> per share last quarter, and 39 per share a year ago.
This was the second highest core earnings result in the company's history.
Our leading market position drove record new commitments of $4.9 billion for the quarter, which in turn led to robust interest in fee income.
43, our second quarter GAAP earnings per share of $1.9 increased from 87.
Last quarter and 65 a.
A year ago.
Very good portfolio company performance and favorable market conditions drove our investment valuations higher and we witnessed both.
And on realized gains.
As a result of these positive factors, our net asset value grew to a new record of $18.16 per share.
Given the higher level of earnings we have been generating consistently and our positive outlook for the business, we increased our quarterly dividend.
From <unk> 40 per share to <unk> 41 per share.
Let me now provide a high level overview of current market conditions, and how it's influencing our investment activity.
As we have all witnessed the economy is in the midst of a strong recovery and this is driving higher levels of transaction activity.
<unk> in our market.
Announced private equity deal activity in the U S is on track for the highest level in over a decade and corporate M&A activity remains robust as companies are focused on focusing on expanding or adding new verticals to complement their existing business models.
Greater than 70% of our new commitments in the second quarter were driven by corporate or sponsored M&A.
Today Ares capital as the largest BDC and our company as you know is managed by 1 of the largest global direct lending platforms in the market today.
We are witnessing more and more companies increasingly.
Singly seeking the flexibility of our capital the certainty of closing we can provide and the long term partnership approach that we can deliver with our financing solutions.
We believe the sound approach, we delivered throughout the pandemic and the recovery seems to be paying substantial rewards for further enhancing.
Our already strong market presence.
The other trend that's supporting our growth as the widening of our market opportunity as the private markets continue to scale.
We're seeing larger companies increasingly seek direct lenders with scale, particularly those like ARCC, they can commit to meaningful hold sizes.
Transactions.
While these larger borrowers are valuing the speed benefits and certainty of close that we can provide compared to a bank or syndicate led solution 2000, twenty's showed that having a consistent well capitalized capital provider like us as a financing partners have great value.
And to believe that many of our competitors were not open for business during the pandemic and market participants took notice that we were very active throughout this period.
This has enabled us to gain share as the private markets continue to grow on the upper end as an alternative to traditional market providers.
We result, we're continuing to source attractive relative value investments in both the middle and upper ends of our market.
As we commit larger amounts to larger companies in our book the weighted average EBITDA of our originations for the quarter was 30% higher than the prior 2 year average and our overall.
As our portfolio weighted average EBITDA doubled over the past 3 years to an average of $146 million.
While larger companies have a greater impact on the dollar value of our portfolio. We continue to maintain our interest in the core middle market, where we have focused most of our investing activities.
For all years.
By number of companies our portfolio is well distributed in terms of size of borrower with the majority of our loans go into accompanies with EBITDA below $100 million.
Remaining active within the core middle market allows us to form relationships with a broad spectrum of companies and create significant positions of incumbency.
Over the.
This incumbency in smaller companies allows future origination opportunities with these portfolio companies as they grow.
We believe these advantages are delivering further market share gains for us as new commitments for the past 3 quarters are 30% higher.
Vincent Ares capital as historical record for annual deployment.
We believe this increasing activity is not only driven by the scale of the capital solutions that we provide but also by our differentiated sourcing opportunities that come from 17 years of cultivating relationships with borrowers and sponsors.
In the second quarter incumbency positions in existing portfolio companies accounted for 63% of the number of commitments made during the quarter and repeat sponsors accounted for 95% of our sponsor backed investments that we made.
As these advantages continue we're.
<unk> will increase both the quantity and the size of our investment opportunities in.
In the second quarter, we saw 31% increase in our number of transaction opportunities and a 47% increase in the estimated aggregate dollar amount of deal activity when compared to the quarterly average for the past 5 years.
Enabled and breath of our of our pipeline allows us to see a larger and more diverse set of investment opportunities, which ultimately allows us to be highly selective.
We continue to finance <unk>.
Only approximately 5% of the new deals we review.
Ultimately, we believe our competitive advantages.
To grow here full credit selection results in a highly diversified and attractively positioned portfolio.
As Michael will discuss later in more detail our portfolio continues to perform well with weighted average EBITDA growth of 12% over the last 12 months lower non accruals at cost reduced.
And keyless names and continued valuation improvements.
Let me now turn the call over to Penni to provide more details on second quarter results and some other updates on our financing activities.
Thanks, Kevin Good afternoon, everyone.
Our core earnings per share of <unk> 53 for the second quarter of 2.
<unk> thousand 20 line or driven by a strong level of capital structuring service fees from record new originations and our capital markets activities as well as higher recurring interest and dividend income driven by our net portfolio growth in the past quarter.
Our GAAP earnings per share was $1.9 for the second quarter of 2000.
'twenty 1.
Including net realized gains on investments of 14th.
Net unrealized gains of 56.
The net unrealized gains primarily reflect performance improvement and higher company valuations in certain of our equity investments as well as continued tightening of credit spreads on our loan.
Loan book relative to the end of the previous quarter.
At June 32021, our stockholders' equity grew to $8.1 billion, resulting in a record net asset value per share of $18.16, an increase of 4% from a quarter ago and nearly 15.
<unk>, 15% since the second quarter of 2020.
Our total portfolio at fair value at the end of the quarter was $17.1 billion and we had total assets of $18 billion.
As of June 32021, the weighted average yield on our debt and other income producing securities that.
At amortized cost was 8.8% and the weighted average yield on total investments at amortized cost was 7.7% as compared to 8.9% and 7.9% respectively. At March 31.2021.
At June 32021.
Only 9% of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates, 88% of the remaining floating rate investments had an average LIBOR floor of approximately 1%, which is well above today's current 1 and 3.
Seth LIBOR rates.
Yes.
Shifting to our capitalization and liquidity, we had an active quarter focused on raising additional debt extending debt maturities and reducing our cost of debt.
During the quarter, we took advantage of a continued historically low rate environment and issuer friendly conditions.
3 months investment grade market.
We issued $850 million of 2 and 7.8 unsecured notes maturing in June 2028, which was a record low coupon for us or any BDC for a 7 year issuance.
We also had the opportunity to reopen our existing July 2025.
5 notes and issuing an additional $500 million out of premium which resulted in an effective yield to maturity of just over 2% on the incremental amount.
Besides the unsecured notes issuances during the quarter, we also upsized, our revolving credit facility by 260.
$89 million to $4.2 billion.
Upsized our S. M. B C funding facility by 75 million to $800 million, along with pushing out its maturity to may 2026, and.
And lastly, repriced, our B M P funding facility down to LIBOR, plus 180 basis points.
Considering these activities. We now have committed secured revolving facilities of $6.9 billion with a fully funded weighted average borrowing rate of LIBOR, plus 180 basis points and a weighted average remaining maturity of nearly 4 and a half years.
We ended.
Border with nearly $5.7 billion of total available liquidity and a debt to equity ratio net of available cash of $325 million of 1.12 times up from 1.02 times at the end of the first quarter.
While our leverage ratio will vary over time.
Time, depending on activity levels, we will continue to work to operate within our stated target leverage range of 0.921.0.25 times.
Overall, we continue to believe our strong balance sheet and financial position remains 1 of our most competitive advantages any eagles us to actively invest.
First in all market environments.
Before I conclude the increased third quarter dividend of 41 cents per share is payable on September 30th 2021 to stockholders of record on September 15th 2021.
I will now turn the call over to Michael to walk through our investment.
For the quarter.
Thanks Penni.
I'm going to spend a few minutes, providing more detail on our investment activity and portfolio performance for the second quarter of 2021, and also provide an update on post quarter end activity and our backlog and pipeline.
During the second quarter.
<unk> our team originated a record $4.9 billion of new investment commitments to a diverse set of high quality companies across 19 distinct industries.
Kipp mentioned earlier the continued growth in our platform has allowed us to expand our addressable market opportunity.
Activia meaningful solutions provider to a broader array of companies.
We continue to focus on the highest quality credits, which positions us well to finance what we believe are the most attractive transactions in companies.
While the market remains strong we find the market very investable and.
And beat the strategic advantages around our size and scale have enabled us to find compelling investments with strong risk adjusted returns.
Shifting to our portfolio, we continue to construct a highly diversified portfolio, which currently has 365 distinct portfolio.
Believe companies and an average hold position at fair value of only <unk>, 3%.
The portfolio is well diversified across industries sponsor and asset classes.
Additionally, we believe the portfolio is attractive as it relates to the enterprise value.
Fully companies, we provide financing.
With a weighted average loan to value of approximately 47% at the end of the second quarter.
Portfolio performance continues to be strong benefiting from the many competitive advantages of the platform and from our upmarket focus.
In the second quarter, our portfolio companies with greater than $100 million of EBIT EBITDA had growth rates that were more than 3 times those of companies with EBITDA below $50 million.
It is also worth noting that the weighted average EBITDA growth for our 4 largest.
You have the industry's inclusive of software and software services health care services commercial and professional services and durables.
Which represents about half of the portfolio at fair value had EBITDA growth rates, 35% higher than.
Largest oleo weighted average growth rate in aggregate.
This underscores our approach of over weighting large companies and what we believe are the most attractively positioned industries and sectors of the economy.
Is furthering enhancing our performance.
While the weighted average portfolio great.
At fair value remained effectively unchanged last quarter at 3.0.
The number of companies that have been graded as either 1 or 2 declined by 40% compared to the levels experienced a year ago.
Furthermore, our non accrual rate at cost declines.
Klein from to 2.9% from 3.3% last quarter and is nearing pre pandemic levels.
The number of companies on nonaccrual status remained flat with 1 removal and 1 addition.
Before concluding with the discussion of our pipeline.
Pipeline and backlog I wanted to quickly comment on this quarter's increase in NAV.
Which was driven by both strong portfolio performance and net appreciation and investment values.
A majority of the quarter's portfolio appreciation was supported by improved valuation of our.
Investments.
The source of this appreciation highlights a key differentiator for the company versus many other bdcs and direct lending funds in the market in terms of portfolio construction.
We believe a modest equity co investment portfolio and attract.
<unk> structured preferred equity positions.
Along with our expertise of taking equity positions and certain restructurings all help drive significant value creation for our shareholders alongside our long and stable debt portfolio.
I will finish with a brief.
Update on our post quarter and investment activity and pipeline.
From July 1 through July 22021, we made new investment commitments totaling 470 million of which $430 million were funded.
We exited or repaid on 260.
$10 million of investment committee on commitments generating approximately 31 million of net realized gains on exit.
As of July 22nd on.
Our backlog and pipeline stood at roughly 1.4 billion and $110 million respectively.
Our backlog contains.
<unk> settlements that are subject to approvals and Documentations and may not close or we may sell a portion of these investments post closing.
I will now turn the call back over to Kip for some closing remarks.
Thanks, a lot Michael.
And our view of the company is performing well on all levels, we are generating robust.
Robust earnings, making attractive new investments with compelling risk adjusted returns.
<unk> improving credit performance.
On enjoying growth on our net asset value.
The increase in our quarterly dividend is a reflection of the optimism that we have around our earnings power and the strength of our competitive position.
<unk> and bucket.
That concludes our prepared remarks.
On the more happy to open the line for questions operator.
At this time, if you'd like to ask a question. Please press Star then 1 on your Touchtone flow.
He would like to withdraw your question. Please press Star then 2 please note as a courtesy to those who may wish to ask your question. Please limit yourself to 1.
1 question on a single follow on.
If you have additional questions you may reenter the queue.
The Investor Relations team will be available to address any further questions at the conclusion of today's call.
We will now pause momentarily to assemble our roster.
Our first question today will come from Ryan Lynch with VW. Please go ahead.
Hey, good afternoon, thanks for taking my questions.
First 1 I average regarding the dividend you guys had the 1 cent dividend increase you guys announced this quarter, which was really.
Nice to see and kind of shows the earnings power you guys project going forward, but.
As I look going forward you guys ended 2020 with with some pretty large spillover income.
And then as I look at the result in 2021, you guys had some very large gains which is obviously good now a lot of those were unrealized.
Relies on I know theres difference between tax and GAAP accounting, but it looks like you guys may be in a position at some point you know rolling into late 2021, or 2022 to potentially need to pay out a meaningful amount of maybe special or supplemental dividends down the road.
Does that thought process sound correct and also on that what is your philosophy in terms of potentially paying out special or supplemental dividends because different bdcs have taken a different approach to paint on large ones are paying out smaller ones over time of day, you'd kind of a core and supplemental just just thoughts around that.
It would be helpful.
Yeah, Hey, Ryan good afternoon.
So I was going to kick this to penny just.
Just for the technical point, because theres, some reasonably complicated accounting and 40 act stuff that frankly, she's better at describing than I am and then perhaps I'll come back on interest.
Just give you some thoughts more broadly about the dividend increase and thinking around specials, but penni do you want to answer Ryan's first question directly if you would.
Yeah sure so Ryan on the just technical planed as a wreck we can spillover.
Enough earnings.
Kind of as long as it doesn't exceed our current dividend payout level, which if you do a run rate on the 41 senses, a $1.64, and we ended last year with a dollar for I agree with your comment that Oh, we have a lot of additional things happening that would indicate that we could be growing.
It's all over this year, but I think we still have room between roughly the dollar 4 we spilled over last year and the run rate. We're currently paying so I think we have some flexibility so from a technical point of view I don't think you'll see us in a position this year, where we're are required to pay something out like others.
Others have stated that they need to do to make sure. They have met the Ric requirements, but we are so we would.
It won't be in a position to I guess as you said be required to pay something.
Still have some cushion there so maybe with that Kipp I'll turn it back to you for thinking about.
How we look at it more philosophically.
Thanks, Benny that's great.
So Ryan obviously this is you know with the dividend increase.
Imagine this was front of mind, you know at our board meeting and our discussion amongst the management team I really think the dividend increase for us was exactly as.
You laid out here, we have over the last however, many quarters, but its a lot of consistently out earned the dividend on a on a core basis and we have always insisted on the core earnings for the most part meeting or exceeding the dividend on a quarterly basis and your comment about optimism.
On that that's likely to continue.
As is reasonable right, which is obviously why we're trying to show the trajectory of our regular dividend increase this quarter for the first time and obviously are hopeful for the future.
Personally I think that the management team has taken the attack that debt looking at specials.
It is probably best on around tax cleanup at year end and the philosophy has typically been to retain some spillover income and all acknowledged that it's pretty significant at this point so.
We don't have a real determination today, but we do have a determination to take a look at that at year end.
In terms.
A philosophy.
We've tended to pay specials out if we choose to pay them over a longer period of time just to reward shareholders that have been with us for a while but obviously also to continue to keep shareholders interested in the company rather than sort of provide a 1 time reward. So I think its something for the.
Future.
Not as much for today, but the great news is we're materially out, earning the dividend on both a core and certainly on a realized sort of distributable income basis, and it's something that we're going to continue to work through.
Okay I appreciate the technical commentary and I appreciate.
Appreciate the channel.
Most optical commentary on the dividend debt. The other question My follow up question I had was probably directed.
<unk>.
Over the last several years and really even on the last several quarters you guys have really continued to boost your liability structure.
Probably.
On the having a best in class structure.
And a lot of that has come with very attractive unsecured.
Debt offerings.
It feels like the whole entire investment grade BDC market is also coming into its own you've really over the last several years and really specifically the last several quarters.
So I'm just curious, though I saw your guidance increase and Upsized some of your credit facilities.
Recently I was just wondering what was the thought process behind that because at some point it seems like given the strength of the investment grade market for the BDC space in your guys ability to tap.
But it would seem that it would make sense then maybe downsize some of those because there is a cost of those unfunded commitments and given kind of how.
Your guys' assets to the market it seems like.
It may make sense.
But just wanted to hear your thoughts on on that kind of philosophy.
Yes, I mean, that's a great question I mean, if you look at just where we are growing to maybe part of us keeping a little perspective of the size of our balance sheet. So if you go back a year ago, we were about $15 billion on today, we're <unk>.
S growth.
Prospects.
Particularly as we've just seen the amount of opportunities. We've had this year for investing in our space. So.
We do have the need to have.
I guess flexible financing.
And we think having.
Available capital in the context of revolvers is.
Is important because you want flexibility of funding deals repaying deals if we raise additional capital. We wanted immediate use of proceeds so we're not sitting on cash so that revolver allows us to have that flexibility around.
The movement of.
Money in and out of the balance sheet.
Our investing activities. So the question then of.
If you look at where were we.
We are today on pricing I think I mentioned in my comments that if you look at the aggregate committed revolving capital.
The funding rate is LIBOR, plus 180 on a weighted average basis, which is still pretty compelling in the context on where LIBOR is today, but it does arguably compete with the low end of where you can invest our issue in the investment grade market. So we think it's important to have both we are happy for the opportunity.
To lower our cost of term.
Term debt funding as we've taken advantage of the markets.
We know those ebb and flow over time.
But right now I think the reason why we you've seen us issue more in that space is to take advantage of that historically low rate environment that we've all been experiencing.
I think it's healthy for our balance sheet to have the ladder of maturities that we built but we want the financial flexibility with the revolvers and a growing balance sheet and the reality is is it doesn't cost a lot to carry that unfunded commitment.
Holly paying somewhere between you know.
35.50 basis.
Points and the unfunded so I kind of look at that as a low price to have that flexibility that we've grown to enjoy around the way we built the capital structure.
Okay.
Understood.
I appreciate the time today, and a really nice quarter guys.
Thanks Ryan.
Our next question will come from Finian O'shea with Wells Fargo. Please go ahead.
Okay.
Hi, good morning.
Chip about the capital raising in the space.
A lot of that now is coming from players that are larger.
Larger.
And perhaps more importantly ramping up into direct lending can you talk about what that's gone on on the large market side of origination and then does it does it push you to.
To respond with with more aggressive fundraising yourself on the air.
Ares platform.
I'll take the second piece of it we're not we're not doing anything any differently in terms of capital raising you know we've got a fair amount of.
Dry powder across the platform in the U S whether it's.
The BDC or elsewhere. So I don't think we will be making any big.
Changes in terms of how we've raised capital historically going forward.
Look I mean, there is I think.
On 1 player in particular.
As folks have read the press had been raising a tremendous amount of capital.
Outside of the public BDC channel, but targeting our markets.
It's had a modestly.
The negative impact on the market in terms of.
Pressure on spreads pressure on terms and that kind of stuff, but for us it's been at the margin.
A little bit of.
Concern, but I say that all the while having just obviously created the most significant.
Our nation's quarter on the Companys history, so I'm not all that concerned I really still believe that we have.
The best set of relationships out there the longest track records in the public BDC space on just a great.
On a competitive position from which to plan to we look at if you look.
You can read a lot of deal flow across a lot of industries. Some of it's sponsored some not and we've built real capabilities. There just to make sure that at times, where we see a competitive pressure like that.
We have the ability to walk away from deals that aren't fits for us.
Because we have so much deal flow coming.
Concurrently in and behind it and Thats always been the philosophy. So for US, it's just continuing to really diversify and build that origination platform. So.
We can drive strong originations and despite some of the pressures this quarter on maybe last quarter from that potential competitor I think youre referring.
<unk> 2 we've had 2 really good origination quarters on the companies growing in the earnings are growing and obviously, we were able to push a dividend increase as well this quarter, which is great. So.
It's not it's not.
This high level of concern at this point, but we'll acknowledge.
Hey, chip its Mitch can and the only thing I would add.
<unk>, we've mentioned this over the years as 1 of the advantages we have developed over the last decade and half is in any given quarter.
40% to 60 plus percent of our gross originations comes from our existing book of business and I think that was sort of the case this quarter and so that tends to be our least competitive dynamics and so when that quantum of.
That is the innovation comes from your existing book of business.
Sort of.
As Kip said can be more selective when the competitive factors.
Get increased vs.
A more selected market.
Yeah. Thanks, Mitch that's a great point.
Yes.
Thanks, everyone.
Just a follow up on.
Ivy Hill.
Pretty similar.
Consistent asset side, but it looks like.
You've had a couple vehicles roll off on the past few.
Quarters.
Would you say that is.
Anything to see there in terms of.
The size of.
Ivy Hill underneath that is in.
In your or I guess, how would you describe what's happening with your strategy there or your growth plans there.
Yes.
I'd say this over and over again, when we get asked about Ivy Hill on mentioned is very close to a can.
I am into but.
Ivy Hill has been an unbelievably successful portfolio company of ours and 1 that we've continued to growth since its inception. So Finn from time to time, you'll see some vehicles roll off but they tend to come with.
Ramps of new vehicles, so our.
No.
So there is for continued growth continued investment in that company because the money. We've invested there is obviously generated great returns in this quarter we did.
Sell some assets to them.
As they're looking to ramp new things and obviously the dividend that I think was increased it was either last quarter or the quarter.
Before is stable.
The last quarter this year and we wouldn't we wouldn't expect any.
Any changes I mean, we continue to be excited about investing in that company and they are generating great returns.
Okay.
Great. Thank you.
Yes, thanks for the questions.
Our next question will come from John Hecht with Jefferies. Please go ahead.
Good morning, guys and thanks for the congratulations on on another good quarter.
The first question is just kind of basic modeling question.
I know the capital structuring fees can vary quite a bit depending on kind of end market activity.
<unk>, but kipp.
Based on your comments it seems and also Mike's comments about the pipeline and so forth it seems like.
On the deal environment is pretty strong so is it reasonable to think that that line item will be.
Elevated relative to call it as recent averages for at least a quarter or 2.
I mean, it's not all hey, John.
On by the way. Thanks for the question, it's not all of that out of line right. So I mean, the majority of the new fees.
Fees coming in are linked to new fees that were.
Originations.
This quarter did like some in the past experience a couple of larger transactions, where maybe there isn't.
On a hold along with our participation on a larger deal.
But look I mean, it's right around 2% on right around 2% of new commitments, which is about the average if you look back historically, so as you think about modeling.
While the numbers high I think the numbers.
Mostly driven by the fact that the origination number.
So significant.
Okay.
That's helpful and then secondly, a bit of a higher level question Kipp.
Last several years you guys have been talking about kind of the opportunity set given that the banks were.
The average high yield size offering might've been increasing and so forth. So maybe kind of you were able to cash.
Number with some incremental market share there.
You seem pretty constructive on your comments about the deal flow now on the opportunity set I'm wondering is is there anything changed with the banks doing anything either more or less aggressively.
Debt that would change that kind of thesis and or are there other markets maybe.
Capture so their loan sizes that you guys can go after.
Kind of how is the opportunity set evolved over the past year and a half or so.
Yes, I think I think with Covid.
I wouldn't say the banks have materially changed their behavior I think what has happened is larger and larger pools of.
Ending assets, obviously ones that we manage and ones that some of our competitors manage have taken market share in these larger club deals.
At the upper end of the middle market or I guess, where historically it was the upper end of the middle market just seem to be more frequent right and the.
The borrowers that are looking for solutions are finding them valuable certainly they were finding them unbelievably value valuable during sorted that COVID-19 and slow recovery from Covid period, where.
Doing a deal with a few partners and you knew that it would get done well.
Really it was valuable and the point on the competition I think we're seeing more and more we're seeing work.
We're gaining market share as 1 of the leading players because we can obviously lead deals we can structure them. We've got the capacity for substantial holds.
Quality of competitors that we see in this space are.
Same thing and I think they're gaining market share too and thats coming probably at the expense of the smaller syndicated transactions, which are at the upper end of our margin.
And I think the more capital we have the west we're bringing in smaller players perhaps for small holds in the deals that we're leading so.
I think there is periods another 1.
Doing a large direct lenders.
With strong teams strong originations and good track records are attracting investor capital and they are becoming increasingly preferred partners for for private equity and for companies generally.
Okay, Great I appreciate the color. Thanks, guys. Thanks a lot.
Our next question will come from Devin Ryan with JMP Securities. Please go ahead.
Great. Good afternoon, everyone, great to see the momentum here.
I guess first question just.
Wanted to touch on the mix of unit tranche, and obviously, that's growing pretty meaningfully over the past.
Ask you a few years currently I think 22% of the investment portfolio and so it feels like that's been an attractive opportunity, but longer maybe just drill down around how you guys are thinking about the longer term mix of unit tranche, whether youre targeting a certain level or how much you'd be comfortable with and just in terms of that growth how much has.
A function of just I guess, what youre seeing in the broader market, maybe with larger borrowers or is it just simply that.
Where there has been more attractive risk rewards more recently thanks.
Yes, Thats a good question I think some of it plays off the comments that I gave to John's question, which is.
The the.
Ben.
The large unit tranche I think is an incredibly attractive product right from borrowers in that its easy to use and it couldnt be done with 1 or 2 or 3 people depending on how large it is.
And it's definitely kind of.
Seeing an increase in uptake I think partially because.
To the comments I made earlier, but I think that theres, a lasting trend here, where large direct lenders have the ability to do larger and larger.
Unit tranches, either on their own or together.
To be honest is as a percentage of the mix I don't think we've really talked about that much.
On.
As a team.
We view them generally as being some of the best risk reward assets at the company.
And frankly in the market. So we're going to continue to be happy seeing that as as <unk>.
Substantial source of kind of new originations, but.
No no big thoughts other than that but I think it is.
Something thats increasingly taken market share to your question on to John's question.
Yeah, Okay. That's helpful and then.
A follow up I guess, John touched on in his question as well, but thinking about the capital structuring fees in the fourth quarter of last year I think 3.
Billing of gross commitments and you had 93 billion of capital structuring fees and then this past quarter at $4.8 billion to an incremental billion dollars of commitments are still 93 million kind of the same level of capital trucking fleet. So.
You try to think about like is there fee compression occurring there are just more broadly how we should think about kind of that.
8 relationship.
Moving forward if at all but just.
Just trying to figure out from a modeling perspective to the extent.
We see strong activity.
Yes.
I mean, the quick answer is the.
The percentage of kind.
The real pure structuring and capital markets fees I E. Not commitment fees were higher in the fourth quarter of last year right. We were engaged in a couple in this is not not dollars, but in terms of mix. We're engaged in a couple of transactions there relative to the overall origination size, where we simply didn't end up with a final hold on the name.
That was a little bit less true this quarter the originations the.
The originations that we're holding or higher rate debt transactions, where we're acting in a more capital markets oriented way. We're we're lesser because we're finding some pretty nice companies to invest in so I mean, I think generally when you guys or when you guys are modeling.
If you look historically.
2% of originations I think is always a pretty good place to anchor your numbers, but it's just going to move around depending on that on that mix and if you think about Q4 versus Q4 of last year versus this quarter, it's just a slightly different mix.
Got it okay that makes sense I'll leave it there. Thank you very much yeah now you're welcome. Thanks for the question.
Our next question will come from Terry MA with Barclays. Please go ahead.
Hey, good afternoon can you maybe just talk about the SDLP in this strategy from that.
Going forward the size has been more or less the same over the last year. So was that about as big as it is going to get or is there a longer term strategy there.
No I think were.
Terry Thanks for the question I think we're very open to continuing to grow it remember we don't.
We can't tell our companies.
<unk>.
Kind of how to do things and obviously doing a deal with SDLP, which obviously is a joint venture.
Requires a borrower wanting to to do something not just with Ares capital, but with obviously some other counterparties that are involved in that joint venture.
I wouldn't I wouldn't really.
Take anything away from it right, sometimes that has more uptake on a quarter than at other times, but we still have a lot of confidence in the program.
We like it as an investment and.
We still view our partners there is valuable so.
No change in our thoughts or outlook around SDLP.
Got it.
Is there I guess is it being done in a way or is there anything different compared to the legacy program the SDLP.
<unk> I'm sorry.
Is there anything happening with legacy SSL P.
Is there any.
About the SDLP, that's being done differently than the legacy program before it.
Yeah, I mean, there are a few nuanced differences, obviously in and that you know we.
We have more than 1 capital partner right. So there are a couple of different folks involved in that joint venture.
AIG and Paragon being 1.
Another insurance company, who we are.
He did their desire to.
Not be public and yes, there are some different.
I don't know maybe mechanics of the vehicle that we've structured slightly differently. If you remember from <unk> way back when.
Saying, it's wind down didn't go exactly how we might have hoped and we are in negotiation with GE back then probably wasn't as pleasant as we might have hoped it would be so I think that we've structured the program in a way that we've taken some of those learnings from the past and made sure that we.
We don't end up with.
Sort of any of those.
On to the extent, we ever chose to wind it down, but that's something that's frankly not even.
A discussion around the table today, but yes certainly.
Certainly there are some nuances and some learnings from what we did with <unk> versus what we have in place today that we've put in put into place.
Okay, Alright thats helpful. Thank you.
Issues.
<unk>.
Hello, My question will come from Melissa <unk> with J P. Morgan. Please go ahead.
Good morning.
Yes.
Taking a closer.
Yeah.
As we see the portfolio yield.
Yeah, a little bit lower.
Each quarter.
And attributing part of that to the competitive environment and I think you touched on earlier, but then also should we think about that as being a function of the larger companies that you are you are increasingly allocating capital to and if that's the case.
Should we also think about that.
Sort of related to any increased comfort level at running towards the higher end of your target leverage range.
Yeah.
Yes, I mean, I think some of it looking backwards is just LIBOR resetting, but luckily and thankfully that's pretty much behind us.
But yeah. It's it's all of those things, it's a more competitive environment now than it certainly has been over the course of the last let's say at least 4 quarters ago for sure.
Its partially that.
Yes, I think larger companies, obviously can command a lower cost of financing. So I think the combination of those.
Or are the 2 best conclusions I'd agree with them.
Okay.
And then just thinking about the debt.
Sort of aftermarket program.
Guys habits on something that you would expect too.
Sort of tap more regularly going forward.
And should we be expecting that.
Okay.
Well I mean I think.
We're happy that the.
Stock price is finally sort of trading to levels that are at least makes sense to us.
Showing a material premium to book.
And with that the ATM.
<unk> is a nice tool to issue some accretive equity I mentioned that I really do think coming out of Covid and into this recovery that we've gained market share and we think that there's no reason for us to grow the company based on the investment environment being attractive and as Mike said on the call or on the prepared remarks, you know more than.
Investable and pretty attractive, but yes, the Atms a nice tool to have so as not to come surprise the market with on.
Overnight equity deal.
As we've done in the past so we view it as a useful tool, but it's but it's at the margin rate the amount of stock that we're actually able to issue.
The ATM is quite limited, but the good news is we're doing it on an accretive basis, that's low cost that allows us to continue to grow the business.
Okay. Thanks Kim.
Thanks for the question.
Our next.
<unk> will come from Casey Alexander with Compass point. Please go ahead.
That's okay. My questions were asked and answered thank you.
Thanks Casey.
Our next question will come from Robert Dodd with Raymond James. Please go ahead.
Question on I'm, just touching on on the equity and it was touched on in prepared remarks, I mean that seemed to generate a lot of the appreciation I mean, my math says about 2 thirds of the AR.
Appreciation.
The unrealized depreciation this quarter came from from the equity book is diversified across a lot of assets not concentrated.
Can you give us any color I mean, you mentioned its company performance and end market environment I mean is it.
50% multiple 50% performance I mean any color you can give us on on that.
The relative weighting to the market driving that valuation versus the performance of the underlying businesses.
Yes.
Yes, Thanks, Robert Yeah, I mean, your math pretty much spot on in terms of the mix right I mean, the most significant.
Driver of the fair value improvement was the equity portfolio.
Look we've seen good profit growth.
Simply as as we mentioned.
About 12%.
<unk>.
EBITDA growth from the portfolio, which we which we talked about in the prepared remarks. So some of it is improvement.
And profit to companies.
And thats in companies that.
Avi is certainly have some recovery from Covid.
If you did your industry cuts is.
As healthcare and consumer I mean, there is certainly some fair value improvement in the energy portfolio, which has been more difficult over the last 12 months.
But then for sure you have to acknowledge to that evaluation broadly.
Lee from most assets, but certainly certainly private equity and private companies is has increased substantially and youre seeing much much higher purchase prices and new transactions and obviously, you've seen pretty robust equity markets, which is how.
We think about valuing our equity portfolio.
I think it's I.
So I think it's all of that.
Okay.
Thank you just a related follow up.
Probably for Penny because it's a tax question.
If these equity positions all towards the markups on the portfolio were realized how much of those.
Teens.
Would be shielded ball I mean, if we go back to al coming obviously, you could shield a lot of that.
Because it's going all the way back to Allied.
On the tax shield that you still retain an efficacy that shield the bullets permanent NAV growth, if and when those realization has happened I mean, my math looking at the Q it looks like.
<unk> $800 million in available tax shield still left is that the right kind of number where.
That level of realized gains, which could flow to Permian NAV growth versus flow into spillover.
Yeah, and I think you're looking at the footnote we have on the Soi, yes, yes, yes.
They're they're on.
Our capital loss carryforwards, as even I think Ryan mentioned earlier, there are book tax timing differences you referenced the Allied acquisition. So there are things.
That are there that we have to go through the tax process to determine what utilize level. It gets the gains along.
It's about those differences I think if you go back to.
Our 10-K, where we typically given annual update on our.
Capital loss Carryforwards, we had a few hundred million dollars of even loss carryforwards, we could use so somewhere between that carryforwards, and maybe belton losses, which is the way I think about what you're referencing.
Along our opportunities to shelter future capital gains and therefore, not have a tax distribution requirement for the gains that we realized.
But there are a lot of things to figure out in the context of timing differences and other differences that exist, but directionally. That's a good way to look at it.
Understood.
They are everybody wants to do their taxes.
Alright.
Appreciate that thank you.
This will conclude our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.
Sure.
No just thanks, thanks to everybody for joining the call.
Hope you enjoy a bit of <unk>.
The rest and relaxation here towards the end of the summer after with.
With the continued to be a crazy here, but thanks for the support of the company and we will be in touch.
Okay.
Ladies and gentlemen, this concludes our conference call for today.
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