Q3 2021 Ares Capital Corp Earnings Call

Yeah.

[music].

Good afternoon.

What does the Ares Capital Corporation third quarter ended September 32021 earnings Conference call.

At this time all participants are in a listen only mode.

A reminder, this conference is being recorded on Tuesday October 26 2021.

I will now turn the conference over to Mr. John Zillmer, managing director of Investor Relations.

Thank you let me start with some important reminders comments made during the course of this conference call and webcast and 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 the country to filing.

Ares Capital Corporation assumes no obligation to update any such forward looking statements.

Also note the past performance or market information is not a guarantee of future results.

During this conference call. The company May discuss certain non-GAAP financial measures as defined by SEC regulation G. Such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method. The company uses to measure its financial condition and results of operation.

A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity.

<unk> from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.

Certain information discussed in this conference call and the accompanying slide presentation, including information relating 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 third quarter ended September 30th 2021 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the third quarter 2021 earnings presentation link on the homepage of the Investor Resources section.

There's capital Corporation's earnings release, and 10-Q are also available on the digital side.

Now I'll turn the call over to Kip to Vir Ares Capital Corporation's Chief Executive Officer.

Thanks, a lot John.

Hello, everyone and thank you for joining the call today I'm here with our co President Mitch Goldstein and Michael Smith.

Our Chief Financial Officer, Penni roll and several other members of the management team.

I'll begin by providing some third quarter highlights and then discuss the current market and the company's positioning.

This morning, we reported third quarter core earnings of 47 per share up from 39 cents per share a year ago, and well ahead of our 41 cents per share dividend.

Our third quarter GAAP earnings per share of 73 cents included $150 million.

Net realized and unrealized gains, which drove our net asset value to a new record of $18.52 per share.

<unk> is now about a dollar and 20 cents per share higher than the NAV pre pandemic.

With this rising N. A V. We've generated $110 million of realized gains in excess of losses since the onset of the pandemic, which I believe is a real achievement for debt oriented portfolio and it's worth calling out.

This continued increase in N V demonstrates not only the quality of our underwriting and the benefits of our approach to portfolio construction.

But also the strength of our risk management efforts and our portfolio management team.

These gains add to our industry, leading track record.

The company has now generated over $1 billion of net realized gains since our IPO in 2004.

We believe we are one of the few business development companies that has demonstrated an ability to pay a stable dividend while growing around a V over an extended period of time and through multiple credit cycles.

In terms of the current market. We believe we are benefiting from an expanding opportunity set and we believe we have increased our market share in this large and growing industry.

The U S economy is experiencing well above average economic growth and this remains a positive driver of transaction activity.

Companies and sponsors are increasingly seeking growth capital to support the execution of organic and M&A driven business plans.

Additionally, private capital solutions are now increasingly accepted by larger companies, who see value in our flexible capital partnership approach and our ability to provide certainty of close.

As these market trends accelerate we've seen the size of our portfolio companies grow and today the weighted average EBITDA of our portfolio companies has increased to $157 million compared to 67 million.

Just five years ago.

We believe our company is now operating with a wider fairway for deal opportunities and an expanding market for direct lenders in the U S.

The company's exceptional team scale and market tenure, coupled with the many platform advantages we can harness at Ares have all permitted us to expand our share in what we believe to be a one and a half trillion dollar addressable market.

As evidence of this trend our pipeline of reviewed transactions has increased almost four times faster than refinished view of their reported middle market since 2019.

In order to achieve this market share growth, we continue to build upon our relationships with sponsors and middle market companies.

We believe our track record of working with private equity sponsors during our 17 years as a public company is unmatched and we continue to benefit from the continued growth in private equity.

We've closed transactions with more than 400 sponsors, but we're continuing to expand our leading roster of private equity relationships with over 15% of the deals completed this quarter being with new sponsors.

Beyond our sponsor relationships, we continue to develop our coverage of non sponsored transactions over the past five years, we've focused more intently unexpected these capabilities and now have dedicated specialized teams in software health care services financial services.

<unk> and sports media and entertainment all aimed at going direct to companies seeking financing.

We're seeing these focused industry groups contribute meaningfully to the growth of our non sponsored business.

And over the past four quarters, our non sponsored total commitments grew over 30% when compared to the full year 2019.

In addition to these sourcing advantages our team continues to focus on the existing portfolio and robust risk management.

Our portfolio companies are generally demonstrating strong underlying financial performance in the third quarter. The weighted average annual EBITDA growth rate of our portfolio companies increased 13% more.

More than double the conference boards expected GDP growth for 2021.

This strong growth and profitability at portfolio companies reflects our long standing focus on selecting high free cash flow companies.

In defensive industries with relatively inelastic demand for their products and services.

For example, our three largest industries software and services health care services, and commercial and professional services, which represent about 40% of the portfolio today are demonstrating 30% faster EBITDA growth on average.

And the overall portfolio as a whole.

We believe this orientation to defensive industries and downside protection has positioned our portfolio away from segments of the economy that are likely to be negatively impacted by commodity inflation and the current supply chain disruptions that we are witnessing generally.

With strong overall portfolio credit metrics, it's also worth noting that our non accrual rates at cost declined this quarter and are now below our historical average.

With that let me turn the call over to Penni to provide more details on our third quarter results.

And some updates on the balance sheet.

Thanks, Ken good afternoon, everyone.

Our core earnings per share of 47 for the third quarter of 2021, we're primarily driven from higher recurring interest and dividend income due to our net portfolio growth in the past quarter as well as capital structuring service fees from our continued strong level of origination.

Our GAAP earnings per share was 73 cents for the third quarter of 2021, including net realized and unrealized gains of 33 cents per share.

Net unrealized gains on investments for the quarter, primarily reflect performance improvement in the companies in our portfolio continued tightening of credit spreads on our loan book and improved valuation of our equity investments relative to the end of the previous quarter.

At September 32021, our stockholders' equity grew to $8 $5 billion, resulting in a record net asset value per share of $18.52, an increase of 2% from a quarter ago and over 12% since the third quarter of 2020.

Our total portfolio at fair value at the end of the quarter was $17 $7 billion and we had total assets of 19.2 billion as of September 32021, the weighted average yield on our debt and other income producing securities at amortized cost was eight 6%.

And the weighted average yield on total investments at amortized cost was seven 7% as compared to eight 8% and seven 7% respectively at June 32021.

At September 32021, 80% of our total portfolio at fair value was in floating rate investments.

Additionally, excluding our investment in the SDLP certificates, 91% of the remaining floating rate investments had an average LIBOR floor of approximately 1%, which is well above today's current one and three month LIBOR rates.

Shifting to our capitalization and liquidity, we had another active quarter focused on raising additional capital to help fund the continued growth of our business.

During the quarter, we took advantage of a drop in treasury rates, along with improved spreads and reopened our existing 17 June 2020 notes.

We issued an additional $400 million at a premium resulting in an effective yield to maturity on the incremental borrowings.

2.44%, which was 43 and a half basis points tighter than the existing coupons.

We have been active issuers in the investment grade term debt market. During this period of historically low treasury rate.

This environment, along with improving spreads and the ability to repay higher rate that has allowed us to reduce the weighted average stated interest rate on our outstanding unsecured term debt by 68 basis points since December 31st 2019.

It is also worth noting that we believe are approximately $1 billion of unsecured term debt maturities in early 2022 with a weighted average coupon of three 7% rough.

Represents an opportunity to further reduce our aggregate weighted average cost of borrowing.

During the third quarter, we also accretively issued a modest amount of equity capital through the combination of the secondary offering as well as issuances from our ATM program to support the investing opportunities that Kipp mentioned in his opening remarks.

Considering these capital raises we ended the third quarter with over $6 billion of total available liquidity.

Our debt to equity ratio net of available cash of over $1 billion was 1.04 times at September 32021 down from 112 times at the end of the second quarter.

While our leverage ratio over time will vary depending on activity levels.

We remain committed to operating within our stated target leverage range of one nine to 1.25 times.

Overall, we continue to believe our strong balance sheet and financial position remains one of our most significant competitive advantages and enables us to actively invest in all market environments.

Before I conclude I wanted to mention that we have completed our prior year tax return and can now report a final undistributed taxable income spillover from 2020 of $1.06 per share.

We continue to believe that having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions and sets us apart from many other bdcs.

With respect to the fourth quarter 2021 dividend a 41 cents per share is payable on December 32021 to stockholders of record on December 15th 2021.

I will now turn the call over to Mitch to walk through our investment and realization activities for the quarter.

Thanks, Penni as Michael Smith, and I do every quarter I will focus on providing more details on our investment activity and portfolio performance for the third quarter, including some thoughts on drivers of our net realized gain performance.

I will then conclude with an update on our post quarter end activity backlog and pipeline.

Starting with our investing activity, we had a very active quarter with $3 1 billion of new commitments, 70% higher than our pre Covid 2019 quarterly average and resulting in $9 7 billion of total commitments year to date through September.

During the third quarter, we invested in 47 companies across 19 distinct industries with a weighted average EBITDA of approximately $100 million.

Although the weighted average EBITDA of our portfolio has grown over the past couple of years. It should be noted the EBITDA of the companies, we finance it this quarter range from less than $15 million to more than $500 million.

This range should provide some insight into the breath of our sourcing capabilities. We continue to see compelling value in our historic core middle markets and are finding interesting businesses with strong growth prospects that we believe will have additional finance financing needs as they grow.

One of our distinct advantages in today's active deal environment is our position of incumbency with more than 370 different portfolio companies.

Incumbency enables us to support the growth of businesses that we know well and in turn provides distinct informational and investing advantages.

In highly competitive markets, you will often see us focus to a greater extent on financing incumbent borrowers.

Over the last quarter, where the majority of our investments were to existing borrowers 60% of our third quarter transactions were with incumbent borrowers as many of our portfolio companies were involved in strategic M&A to support their growth prospects.

We believe our portfolio remains attractively positioned it is highly diversified across industries sponsors and asset classes with an average position size of only <unk>, 3%.

Our portfolio also continues to skew towards senior positions at 86% of the loans, we committed to year to date were senior secured.

By investing in senior positions and maintaining a focus on resilient industries and market leading companies, we've been able to construct the portfolio with significant downside protection for.

For example, our debt portfolio was weighted average loan to value was approximately 43% at the end of the third quarter well below the mid fifties levels seen in prior to the pandemic.

Another measure of the strong overall health of our portfolio is on non accrual rate at cost, which declined to 120 basis points since last quarter to 1.7% and is now below pre pandemic levels.

This quarter four companies were removed from non accrual and there were no new additions in short we feel really good about the overall health and credit quality of our portfolio.

I would now like to discuss some of the drivers of our long term strong credit performance over the years, we've often talked about the power of the Ares platform and driving results for ARCC.

These advantages include our strong research teams across our credit platform with over 70 professionals covering more than 60 industries.

Our access to robust deal flow or our ability to gain insight from our broad set of C suite executives.

Importantly, we believe that each of our investment groups at Ares joins ARCC and benefiting from being part of the broader platform.

Today I'd like to quickly highlight another one of those platform advantages our portfolio management team Kip alluded to this earlier, but it is a team of 28 season of individuals', which we believe is larger than the entire teams of some of our competitors and is responsible for monitoring our credits providing portfolio company valuation.

Analysis, each quarter and helping companies that may experience difficulties.

This quarter, our portfolio management team leveraging the broader Ares platform helped build upon arcc's long track record of net realized gains which in turn contributed to our continued growth in LTV.

Specifically ARCC generated a realized gain of over $100 million on it on an investment where we needed to take an active role in managing the business and supporting the strategic direction of the company over the past several years.

I mentioned this type of outcome is not unique as we have generated over $380 million of restructuring gains since our IPO.

Strong NAV performance was also helped by working with our portfolio of companies and capitalizing on the strength of the economy and the financing markets and multiple instances this quarter that positions that were held at discounts to par just last quarter, along with some that had been on nonaccrual in the past were repaid at par.

<unk>.

Now I will finish with a brief update on our post quarter end investment activity and pipeline.

From October one.

Through October 20th 2021, we made new investment commitments totaling $1 5 billion of which $1 3 billion were funded.

We exited or were repaid on $415 million of investment commitments generating approximately 5 million of net realized gains on exits.

As of October 20th our backlog and pipeline stood at roughly $1 9 billion and 149 million respectively.

Our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing.

I will now turn the call back over to Kim for some closing remarks.

Thanks Mitch.

I'll close by saying, we believe the company is in an excellent position today.

The advantages provided by our scale our platform the strong balance sheet and our highly experienced team continue to enable us to drive attractive financial results for our investors.

With our leading market presence in the growing market opportunity. We're excited about our future growth prospects our industry continues to grow and our leadership position in it is getting more embedded.

We deeply appreciate the continued support for our company and with that operator, we'd be happy to open the line for questions.

Thank you that's it.

At times, because he would like to ask a question. Please press Star then one on your Touchtone phone.

If he would like to withdraw your question. Please press Star then two.

Please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow up.

If you have additional questions you may reenter the queue.

The Investor Relations team will be unveiled will be available to address any further questions at the conclusion of today's call.

Our first question today is from Ryan Ryan Lynch with K B W. Please go ahead.

Okay.

Hey, good afternoon.

First question I had if I look at your overall origination commitment volumes.

So far year to date, including the October data that you provide you guys are well over $10 billion.

Our overall commitments, which is significantly above the 2018 in 2019 levels and so my question is.

How much of this is a function of these really strong volumes are a function of pent up demand and activity from kind of a light levels and the slowdown we had in 2020 or how much is it.

It is really.

From kind of the changing landscape that we're seeing in the direct lending market and really the proliferation of these large mega tranche deals that you guys seem to be taking a lot of share in.

How really sustainable is $10 billion of commitment volumes at ARCC going forward.

Yeah, Ryan that's kept pace. Thanks for the question. It's a good one it's obviously one that we're.

[noise] asking ourselves about and you know without the Crystal ball don't know I mean, I think it's both for the time being right. We definitely think that there's a fair amount of pent up demand coming out of Covid low rates persist and the economy remains strong. So you know this will be a record originations you're you know our view is the fourth.

Quarter is looking very busy.

The first half of 2022.

We will continue to be busy two beyond that it's really difficult to forecast, but we do see this underlying trend that you're referencing which is we believe increased acceptance of direct lenders and private capital versus the public markets frankly excitement about not even acceptance of.

And we see the industry, taking some share and we think that we're taking some share within the industry as the largest player. So it can be difficult to see but that'll be the question I think for 'twenty, two and beyond right.

Okay Yeah.

That's helpful color.

Penni, maybe just just one for you guys as my follow up you mentioned some of the primary drivers of the gains there.

Cause your portfolio to be written off this quarter performance improvement tighter spreads and an improvement in valuations for some of your equity investments.

Could you maybe just give a ballpark estimate of the overall net gains that you guys had in your portfolio how much of that was driven by write offs.

In fair value of your equity portfolio.

Sure. Yes, if you just look at this quarter what drove the fair value.

Improvement in <unk>.

You already have that came from the equity portfolio given these higher market multiples.

If you look at the kind of per share impact of I think 33 cents of net gains for the quarter was about 19 sets coming from equity.

Okay.

Got it I appreciate the time today and nice quarter guys.

Thanks Ray.

The next question comes from Finian O'shea with Wells Fargo Securities. Please go ahead.

Hi, everyone. Thank you just two.

Follow up on.

Ryan's topic, there on sort of the expanded market opportunity.

Some of these larger names how are you thinking of growing.

The SDLP.

Given it was designed for that kind of opportunity.

You still have pretty ample runway in the the nonqualified bucket.

Yeah, I think we've got a whole handful of options there and I. Appreciate the question. Obviously SDLP is a lever that we can pull.

Additional growth at Ivy Hill is something that we can pursue as well as obviously those are the two big.

Components of our of our 30%.

Allowance them today, but it's not going to be.

I'll just say doing these larger deals is not reliant we're not reliant on SDLP right. I mean, we're able to do a lot of these larger unit tranches and participate in substantial transactions with the capital base right. So all we try to refer back to is the fact that we think that this market has grown.

Lot in the last seven or eight years.

Our company in terms of assets as you know been reasonably stable. So folks said why raise equity in the past. The reason that we raised the equity as we thought it was good to help grow the company's earnings and obviously that it was good for existing shareholders and new shareholders alike, but I don't I don't think of to your question as SDLP being.

Yeah.

Tremendously impactful about.

There in regards to our ability to keep growing the company.

Sure. Thank you and just a follow up I guess a market question.

With.

Your comments on the larger addressable market.

Is there does that include you know these these very large privates.

The gala insurance type.

Hum.

Or what's the balance between that if any and just an expanded co.

Core middle market with all the new private equity money that.

Would be more likely to.

Provide you.

You know more BDC investment type yields.

Just just color on.

With the market growth how much of it is providing the right yield for the BDC industry.

Yeah, I mean look we've said we don't feel that we're sacrificing any return doing these larger transactions right. We've actually said, we think that there's a little bit of.

You know better risk reward frankly in these larger deals than what we've seen historically you know the smaller middle market businesses that we financed over the years and I think to answer your question just because of the law of large numbers I think a lot of the market growth has occurred because some of these larger transactions are now of interest.

The larger private equity funds.

They're going direct to private capital sources, instead of doing syndicated deals often willing to pay a higher price in the private markets than they are.

And what would potentially be a public market alternatives.

Just to Derisk and to know who their capital partner is and.

Have support for ongoing growth in the future. So I think it's it's it's mostly to try to answer your question I think it's a little bit of everything but I think it's mostly these larger transactions that are driving the market growth.

Got it thanks, so much and congrats on the quarter Hey, thanks, Thanks for the questions.

The next question comes from Devin Ryan with JMP Securities. Please go ahead.

Hi, Good afternoon. This is Kevin filled songs for Devon.

First question I live environment and its impact on your pricing has been a prominent conversation over the last few quarters are you still seeing continued downward pressure that began to normalize a bit.

Yeah, I mean, you'll see the yield on our investments have come down over the last few quarters I think that's typical frankly with a better economic backdrop backdrop. The competition really isn't any different I think the.

<unk> is just.

Live again.

As COVID-19 at least slowed down and become less of a risk and a lot of the economies reopen so with that you would expect with such good.

Positive backdrop on the economic front, obviously, we talked about how good our portfolio looks in terms of the growth and also the decline in non accruals I think youre seeing folks that are willing to take you know slightly lower yields interestingly, though you know that's that's coming with substantially higher purchase prices in most of the private equity transactions that were.

Seeing so we don't feel that we have.

With less attractive proposition with a slightly lower yield in the portfolio I think it's just natural it says as we come through the cycle here.

Okay I appreciate the color there and then second question just looking at Pik interest income in it.

This quarter to 14, 5% of total interest income I would assume that's driven by our recent investments that were structured with a pik component rather than the result of temporary concessions with borrowers just curious if that's correct.

That is generally correct I mean, most of it is a little bit influenced by obviously the significant repayment that we had.

And a company called OTG right there was a.

A portion of it marked below par or there were some pik concessions there and we got repaid all of our debt investments at par, which was a great outcome for us and we ever remaining equity piece outstanding. So there it's a little bit of funding. This in the numbers this quarter, but most of the Pik is coming through some of the larger junior capital investments that we've made and that whole concept.

They're providing concessions are.

Are you paying pik instead of cash for the time being is.

Largely behind us as Covid, Luckily has kind of come come through the portfolio for the most part.

Okay that makes sense and thank you for taking my questions and congratulations on a strong quarter.

Very much appreciate the questions.

The next question comes from John Hecht Jefferies. Please go ahead.

Hey, guys. Good morning, Thanks for taking my question actually good afternoon your time.

Just because interest rates are so topical I'm wondering and inflation as well I'm wondering if you guys can you remind us how.

Kind of interest rate sensitive you are and second do you have any thoughts about potential inflationary pressures and how it affects the portfolio that you guys have.

Sure I'm happy to answer that so.

Generally to to go back up to 50000 feet, we do try to remind folks obviously in most of our shareholders that own lots of different financial stocks were probably one of the least.

Interest rate sensitive.

Stocks around because we obviously run with a materially lower leverage than most financial institutions right. So as we mentioned our our leverage tends to run somewhere between you know where we are today at one one and a quarter.

And on the asset side, you know all of our assets most of our assets I should say are floating rate. So were positively inclined towards rates going up we lose a little bit on the financing side, but again, it's it's immaterial so for us Brits isn't isn't a huge consideration just as a reminder.

Two we published in our filings you know just disclosure around what modest increases or decreases in LIBOR would do too.

The balance sheet and you'll see that.

Anything.

De minimis for the time being either up and down is a very little impact on our earnings. So that's that's sort of where we cover off on the first point look in terms of you know inflation and everything that we're reading in the newspapers about supply.

Disruptions, we think they're real for sure and we've gone in and spent a lot of time scrubbing, the existing portfolio and places where they would be most.

Impactful the good news is we're underweight a lot of these sectors.

And companies that I think would be most.

Touched by that right. If you look at our largest industries it tends to be things like software and services and health care services and all of that things that really have not been impacted in any way shape or form, but we're definitely doing a fair amount of work because we are seeing them <unk>.

Supply disruptions and companies that are obviously trying to get parts over we're trying to get goods over and that has for sure.

An inflationary effect for the most part our companies are underwritten them.

To really try to waive those and that have good pricing power, we have very little.

Exposure to industries into companies, where there is no pricing power, but I think what because you read the headlines right John lots and lots of Ceos out there, saying, yeah, we're raising prices right.

We're seeing supply disruptions, we're seeing input cost inflation and our our turn is to obviously turn around and pass that onto the consumer.

Of whatever those goods or services are so I think it's real and I think it's going to last a while but I do think that we're underexposed and not as impacted as a whole host of others.

Okay I appreciate the color and the thoughts.

You also mentioned a greater percentage of non sponsored activity. I'm wondering is there is there generally a different characteristic of a non sponsored transaction from a sponsored transaction.

Yeah, I would say look the convention to keep it really simple because in these non sponsored deals youre going in as really the only institutional capital in a company, where there's no private equity. So it can be a combination of debt and equity that we're investing in these businesses. They tend to be owned by founders families entrepreneur.

Errors that arent in the I want to sell to private equity.

Or I want to sell to my competitor and exit, but theyre looking for some sort of transformational capital. So.

Typically they command much much lower leverage ratios.

And they typically come with higher returns both in terms of yield and often equity participation, but we think that's warranted I mean, we've been doing non sponsored deals for a long time and they inherently tend to be a little bit riskier third third quarter, but if youre selective and you're good at sourcing and obviously underwriting and managing those companies in those.

Relationships that can be very high reward too so.

His business 15 years ago was so private equity oriented in that that's not to say that we didn't do sponsored non sponsored transactions, but I think for US just to continue looking at growth opportunities for the company our ability to bring on more industry expertise and more sourcing to go direct with something that was important and we finally said you know we're going to we're going to.

Do that with Standalone teams, probably four or five years ago. We just haven't spent a whole lot of time talking about it but it's something that we are more active doing today, then I think we were five years ago.

Interesting about about 15% of the portfolio today Johns non sponsored for you and for others out there so.

Okay, great. Thanks Youre.

Youre welcome thanks for the questions.

As a reminder, if you have a question. Please press Star then one to enter the question queue.

The next question comes from Robert Dodd with Raymond James. Please go ahead.

Hi, good afternoon, everyone.

Congratulations on the quarter and the balance sheet actually to follow up on John's questions.

They jumped on it.

On the non sponsored I mean to your point, it's not something you've talked about a lot.

15% of the portfolio is getting material right.

So on on the when you talked about it was 30% increase in deal volume I'm kind of last four quarters worth of 2019, obviously your overall increase in deal volume of that.

Right I mean, obviously market activity.

Should we expect the non sponsor to actually grow or is it just.

Ah NIS, 50% of the portfolio is no small niche, but is it just a niche area for you or do you expect to actually grow with that maybe if the overall just launch into the market.

Yeah, I mean, I would I would guess because of the resources that we've invested obviously that it would grow we'd like it to grow or whatever be 50% of our deal flow 50% of the portfolio I don't think so right good.

Good good.

Good growth for us just as I approximate it could be kind of up to 20% to 25% of the portfolio, but really all we're trying to do is expand the origination and obviously expand the opportunity set.

Got it got it and then just following up on that my follow up question.

Okay.

You mentioned, the at a high or a tonnes, which which makes sense harvest about pilots.

What would you.

You know how would you characterize the opportunity in the non sponsored segment with income how does that work with incumbent so could you also talk about incumbency advantages, etc, which obviously you know windows a sponsor.

And those things, obviously change hands somewhat regularly if it's a sponsor backed business on the non sponsored side do they.

Does incumbencies come into play and that's one of the tools that <unk> has.

Has it been an advantage in other areas that you've grown into how does how do those two things Scott.

Yeah.

Actually I think the yeah, I actually think to your point about private equity, having the need to sell something after three to five years right that inevitably.

Creates the opportunity for somebody new in new owner donor business, but to answer your question quickly and specifically I think the incumbency advantage in these non sponsored transactions is much much higher right. So we're selling ourself as a capital provider and as a partner to these families operators.

Entrepreneurs et cetera, and once they choose us and they see the flexibility of our capital and the ability for us to scale with them you know they they tend to like us as partners and see us as being able to add quite a lot of value to their businesses. So I could rattle through a handful of different non sponsored deals.

So we've been in for 10 plus years right.

And it's just a different it's a different relationship because again at the end of the day. Your counterparty is somebody who really doesn't want to do a change of control transaction right. They just want to continue may be doing acquisitions building plants building out services capabilities et cetera, so they tend to be longer.

Got it I appreciate it thank you sure. Thanks Robert.

The next question comes from Melissa <unk> with Jpmorgan. Please go ahead.

Good afternoon, everyone and thanks for taking my questions.

Wanted to follow up on the questions around moving up market I'm wondering if the portfolio.

We're still in the 100 bps range and you know generally as you do these larger deals are you seeing any pressure on those flurry.

Yeah.

I'm, sorry, Melissa or are we seeing pressure on on what.

On the floor rates, particularly for the larger companies that Youre doing no I mean, not really Florida on some and some of the deals they've drifted from a point to 75 basis points, but we're not really seeing any pressure beyond that.

Okay.

We think about I take your point about the.

Actually appreciating the better risk adjusted returns that you're seeing with some of those larger deals.

Just in terms of sort of portfolio yield compression is that something that we should expect to persist.

It really is the market sort of expands into and private capital become more accepted.

With these larger company.

You know I I think that's the 64000 dollar question that everybody's asking right. So.

Our team has been doing this for for really long time.

As you know both.

Both at banks and then obviously it areas for the last 17 years and I would tell you that over those 17 years now.

The market's institutionalized and returns have generally come down as a whole. They obviously spiked back up when capital is less available and when competition is less frequent and and all of that but the one thing that puts a little bit of a floor on yield is the fact that most of the folks running direct lending money in <unk>.

Capital. These days don't use a lot of leverage right.

So the syndicated market for instance in loans as far as supported by highly Levered CLO buyers that are very dependent on their cost of capital and the amount of leverage they can get out whats AAA pricing is there a CLO levered eight times or 14 times right that dynamic doesn't exist. So much in direct lending. So we do think.

There's a bit of a floor and I'm hopeful that we're kind of scratching that floor right now.

Base based pricing for unit tranches. These days is kind of LIBOR 550, LIBOR 600 for really good companies and we havent seen it drift much lower than that but hopefully no. One breaks the book you know what I mean.

Got it thanks, Ken.

Youre welcome Thanks for the question.

This concludes our question and answer session I would like to turn the conference back over to Mr. Kim here for any closing remarks.

No I don't have any other than to just say thanks for all the great questions and we will follow up with you all after the calling into next quarter I appreciate the time.

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