Ares Capital Q2 2025 Earnings Call Transcript

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Provided by Quartr
July 29, 2025

Key Takeaways

  • Positive Sentiment: Strong Q2 core earnings of $0.50 per share drove a 10% annualized ROE and supported sequential and year-over-year NAV per share growth.
  • Positive Sentiment: Ares realized $117 million of net gains on investments, including equity coinvestment exits at a 3x multiple of capital and mid-20% IRRs.
  • Positive Sentiment: Liquidity remains robust at nearly $6.5 billion, aided by a $750 million five-year note issuance at tight spreads and an upsized $5.4 billion revolver.
  • Neutral Sentiment: Transaction reviews rose 20% quarter-over-quarter and the Q3 backlog stands at $2.6 billion, suggesting potential for increased origination activity.
  • Negative Sentiment: The nonaccrual rate ticked up to 2% on a cost basis, reflecting a modest rise in idiosyncratic credit events despite remaining below peer averages.
AI Generated. May Contain Errors.
Earnings Conference Call
Ares Capital Q2 2025
00:00 / 00:00

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Operator

Good afternoon. Welcome to Ares Capital Corporation's Second Quarter Ended 06/30/2025 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded on Tuesday, 07/29/2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets' Investor Relations team.

John Stilmar
John Stilmar
Partner and Co-Head of Public Markets Investor Relations at Ares Management

Great. Thank you very much, and good afternoon, everybody. 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.

John Stilmar
John Stilmar
Partner and Co-Head of Public Markets Investor Relations at Ares Management

Ferries 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. During this conference call, the company may discuss certain non GAAP measures as defined by SEC Regulation G, which include factors such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding the financial performance because it's one method that the company uses to measure its financial condition and the results of its operations. A reconciliation of GAAP net income per share, the most directly comparable GAAP measure to core EPS can be found in the accompanying slide presentation for this call.

John Stilmar
John Stilmar
Partner and Co-Head of Public Markets Investor Relations at Ares Management

In addition, reconciliation of these measures may also be found in our earnings release filed this morning on Form eight ks with the SEC. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, has arrived from third party sources and has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's second quarter ended 06/30/2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the second quarter twenty twenty five earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10 Q are also available on the company's website.

John Stilmar
John Stilmar
Partner and Co-Head of Public Markets Investor Relations at Ares Management

I'd like to now turn the call over to Mr. Cort Schnabel, Ares Capital Corporation's Chief Executive Officer. Cort?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President Jana Markowitz, our Chief Operating Officer Scott Lemm, our Chief Financial Officer and other members of the management team, who will be available during our Q and A session. Before we begin today's call, I want to take a moment to acknowledge the tragedy that occurred at 345 Park Avenue, just a few blocks from our New York office. This senseless act of violence has deeply affected our community, and our hearts go out to everyone impacted.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

We extend our deepest condolences to the families and loved ones of the victims and to our friends and colleagues at Blackstone, KPMG, NFL, Rooting and others who work at 345 Park Avenue as well as the brave NYPD officer who lost his life protecting the building. In times like these, we are reminded of the importance of standing together as a community with compassion, resilience and support for one another. We are keeping all who have been affected in our thoughts. Let me now turn to our second quarter results. I will begin with a few quarterly highlights and we'll follow that with some thoughts on current market conditions.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

This morning, we reported solid second quarter results, delivering stable core earnings of $0.50 per share, representing an annualized return on equity of 10%, consistent with the prior quarter. Additionally, our net asset value per share increased both sequentially and year over year. The growth in our net asset value per share was supported by earnings in excess of our dividend and robust net investment gains, including strong net realized gains from our equity co investment portfolio. These results support our position as one of the few BDCs to consistently generate NAV per share growth since our IPO. We are pleased with our profitability and the continued strength of our portfolio, particularly in light of the tariff related volatility that led to economic uncertainty and reduced investment activity during the second quarter.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Let me now discuss what we are seeing in our markets and our positioning. The second quarter began with policy driven volatility, which temporarily slowed transaction activity, particularly in the liquid markets. During the early part of the quarter, we remained active, while traditional market participants retrenched and were not underwriting many new transactions, if any at all. We believe our ability to transact in varying market conditions and provide certainty in uncertain times, yet again reinforced our value proposition and allowed us to garner enhanced terms and premium economics. As volatility subsided later in the quarter, the liquid credit markets reopened.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Overall financing activity began to rebuild and has returned to a more normalized pace. As we have discussed many times in the past, we benefit from periods of volatility as our broad portfolio of five sixty six borrowers, extensive market relationships and strong balance sheet positions us as a valuable partner to many market participants despite reductions in overall M and A volume. We saw this dynamic play out in the second quarter as nearly three quarters of our gross commitments were from the incumbent relationships. We continued to serve as a stabilizing force for our existing portfolio companies who are increasing their borrowings with us and enabling us to take share from other established lenders. For example, across our 10 largest transactions with incumbent borrowers in the second quarter, we more than doubled our previous lending commitments.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And in doing so, increased our wallet share with these borrowers, which we view as some of our highest quality opportunities. As our track record illustrates, we believe we can generate attractive risk adjusted returns and enhance our overall credit quality by supporting the capital needs of our existing portfolio companies. Beyond expanding our commitments with our existing borrowers, we remained proactive with our extensive sponsor relationships and continued to grow our presence among non sponsored borrowers in our targeted industries. Despite overall declines in reported middle market M and A and transaction activity, we are continuing to review a growing number of opportunities with the number of transactions we reviewed increasing 20% quarter over quarter. This growing level of opportunities reviewed should support greater investing volumes in the future.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And it is particularly notable that June accounted for nearly half of the quarter's transaction activity. This momentum gives us visibility into a potentially more active second half of the year. As we have discussed in the past, we believe we are one of the only direct lenders with a meaningful presence across each of the lower, core and upper middle markets. More recently, we have been particularly active in the upper end of the market, providing certainty of capital to potential borrowers in the face of market uncertainty. For example, as you have probably seen in media reports, we will serve as the lead left arranger for the largest private credit LBO on record with the take private of Dun and Bradstreet, which is expected to close in the third quarter.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Dun and Bradstreet is a long standing high quality company with strong recurring cash flows and this transaction clearly demonstrates our scale and leadership position in the market. We believe our ability to be a meaningful capital provider to larger borrowers alongside those in the core and lower middle market remains a notable differentiator for our platform. Importantly, we believe that the breadth of our origination capabilities is one of the key contributors to our long term credit performance as it enables us to see a broader view of the market opportunity and then be highly selective in choosing where we invest. Shifting now to our existing portfolio. We are continuing to see healthy overall performance as our borrowers' weighted average organic EBITDA growth rates accelerated further into the double digits over the last twelve months.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Supported by this underlying growth, borrower leverage levels are below our five year average and the portfolio average loan to value remains in the low 40% range. We also take comfort in the fact that our portfolio is focused on domestic, service oriented businesses that in our view carry lower policy risk from tariffs and other recently proposed and implemented government policies. While we ended the second quarter with a modest uptick in non accruals, these levels still remain well below both our historical average and that the broader BDC peer group. We remain highly confident in our ability to manage these idiosyncratic situations as we have an experienced veteran portfolio management and valuation team of approximately 50 dedicated professionals. We believe the deep credit experience of our team and our differentiated strategy of investing across the capital structure is a cornerstone of our track record and supports our generating realized gains well in excess of realized losses on our investments since inception.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Specifically in the second quarter, we continued to build on this track record of gains in excess of losses as we exited several of our equity co investments, realizing a 3x multiple of our initial invested capital and generating a gross realized internal rate of return in the mid-twenty percent range. In summary, we demonstrated stability amid significant market uncertainty in the second quarter. As we've seen in past periods of volatility, we believe these environments continue to reinforce our resilient business model and strong competitive positioning. We believe our consistent execution, disciplined approach and differentiated platform leave us well positioned to navigate evolving market conditions and to capitalize on emerging opportunities. With that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Thanks, Cort. This morning, we reported GAAP net income per share of $0.52 for the 2025, compared to $0.36 in the prior quarter and $0.52 in the 2024. We also reported core earnings per share of zero five zero dollars compared to $0.50 in the prior quarter and $0.61 for the same period a year ago. The stable core earnings are consistent with the general stability we have seen in yields, which for our portfolio essentially remained flat with the prior quarter. Drilling a bit more into the net realized gains that Court highlighted earlier, we generated $117,000,000 of net realized gains on investments during the second quarter, bringing our cumulative net realized gains on investments since inception to nearly $900,000,000 Related to certain of these gains, we incurred $44,000,000 of capital gains taxes.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

As you may have noticed, we now break out these amounts separately on our income statement to make them easier to identify. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our realized equity gains have delivered attractive returns for our investors. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $27,900,000,000 which was up from $27,100,000,000 at the end of the first quarter and up from $25,000,000,000 a year ago. Shifting to our funding and capital position.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

We have remained active in adding capacity, extending our debt maturities and reducing our costs. In June, following a recovery in the capital markets from earlier volatility, we issued $750,000,000 of long five year unsecured notes under new issue spread to treasuries of 175 basis points, marking the tightest five year new issue spread achieved by BDCs since the beginning of the second quarter. We also continue to benefit from the deep and strong relationship we have with our banking partners. During the second quarter, we upsized our largest revolving credit facility by $880,000,000 bringing the total facility size to $5,400,000,000 extended the end of revolving period and the maturity date to April 2029 and April 23, respectively, and reduced the drawn spread on the facility by more than 20 basis points. Subsequent to quarter end, we added a new banking partner, contributing additional $100,000,000 to this facility.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

With this late increase, we've expanded our revolving credit facility by nearly $1,000,000,000 since the 2025. This momentum has carried through to our other credit facilities. So far in the third quarter, we extended and upsized two of our other credit facilities by a combined $400,000,000 and reduced the drawn spreads on each by 20 basis points. Overall, pro form a for this post quarter activity as well as repayment of our July 2025 notes two weeks ago, our liquidity remains very strong, totaling nearly 6,500,000,000 including available cash. We believe we are well positioned, particularly since we have no debt maturing for the remainder of this year.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

In terms of our leverage, we ended the quarter with a debt to equity ratio net available cash of 0.98 times, consistent with a quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments, which remain a significant source of deal flow as well as investment opportunities in new portfolio companies. Finally, our third quarter twenty twenty five dividend of zero four eight dollars per share is payable on September 30 to stockholders of record on September 15. ARCC has been paying stable or increasing regular quarterly dividends for sixty four consecutive quarters. In terms of our taxable income spillover, we currently estimate we will have $878,000,000 or $1.29 per share available for distribution to stockholders in 2025.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

In addition to our core earnings, continuing to be in excess of our current dividend as seen by the net realized gains this past quarter and the potential for further net realized gains, we remain optimistic we will further enhance our taxable income spillover. We believe our meaningful taxable income spillover provides further long term stability for our dividends and is a significant differentiator for us. I will now turn the call over to Jim to walk through our investment activities.

Jim Miller
Jim Miller
President at Ares Capital

Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance and our positioning. In the second quarter, our team originated over $2,500,000,000 of new investment commitments as our long standing relationships with existing portfolio companies enabled us to remain active during the second quarter with incumbent borrowers accounting for 74% of our commitments. As Cord also mentioned, we believe we are the only direct lender that focuses on the upper, core and lower middle markets, which in our view drives differentiated deal flow. By making new commitments to borrowers ranging from under $10,000,000 to over $500,000,000 in EBITDA, we are able to select what we believe are the most compelling credits across a multi trillion dollar total addressable market in The U.

Jim Miller
Jim Miller
President at Ares Capital

S. The scale and broad market coverage of our investment team, which includes more than 200 investment professionals, supports our ability to invest in attractive risk adjusted return opportunities across varying market environments. While our gross commitments were lower than the prior quarter, reflecting the reduced market activity through much of the quarter, the decrease was less pronounced than in the liquid loan market and our net fundings of $644,000,000 were more than double the prior quarter's level. These results contributed to a 3% quarter over quarter increase in the overall size of the portfolio at fair value. Our $27,900,000,000 portfolio at fair value continues to be highly diversified across five sixty six companies and 25 different industries.

Jim Miller
Jim Miller
President at Ares Capital

This means that any single investment accounts for just 0.2% of the portfolio on average. And our largest investment in any single company, excluding our investments in SVLP and Ivy Hill, is less than 2% of the portfolio. Our emphasis on portfolio diversification mitigates the impact of negative credit events in any one company or industry. On that point, our portfolio management team is monitoring our portfolio on an ongoing basis for potential impacts from changing domestic and foreign policies and geopolitical shifts among a multitude of other potential risks. With respect to tariffs, as we learn more about our portfolio companies exposures and available mitigants, we feel incrementally better about the risks posed by potentially higher tariffs and our portfolio companies strategies to address them.

Jim Miller
Jim Miller
President at Ares Capital

The health of our portfolio is reflected in the 13% weighted average LTM EBITDA growth of our portfolio companies, up modestly from 12% last quarter and broad based across industries and company sizes. This strength is further supported by the low leverage and strong and stable interest coverage of our portfolio companies. Notably, we see consistently strong performance across company sizes. Companies with EBITDA of less than $100,000,000 and those with greater than $100,000,000 of EBITDA, all exhibited double digit organic EBITDA growth over the last twelve months. Our non accrual rates continue to be well below historical levels, but did tick up modestly at costs from 1.5% to 2% and on a fair value basis from 0.9% to 1.2% since last quarter.

Jim Miller
Jim Miller
President at Ares Capital

On a cost basis, these metrics remain below our five year average and our historical average since the great financial crisis. Relative to other BDCs, our non accruals at cost are 180 basis points below the BDC average over the same timeframe. Looking ahead, we remain confident in the caliber of our team, health of our portfolio and strength of our positioning. In the third quarter, we are seeing transaction activity recovering to pre tariff levels. As a result, our backlog remains healthy.

Jim Miller
Jim Miller
President at Ares Capital

Our total commitments for the third quarter to date through 07/24/2025 were $1,100,000,000 and our backlog as of 07/24/2025 stood at $2,600,000,000 As a reminder, 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. In closing, we're encouraged by the normalization of transaction activity so far, as well as the consistency of our core earnings in the second quarter, which continues to exceed our $0.48 per share dividend. Our declared third quarter dividend of $0.48 per share marks our sixteenth consecutive year of stable or increasing regular dividends. We're proud of this track record and remain confident in our ability to sustain a steady dividend supported by our earnings power and significant undistributed spillover income. As always, we appreciate you joining us today and we look forward to speaking with you in the future. With that, operator, please open the line for questions.

Operator

The Investor Relations team will be available to address any further questions at the conclusion of today's call. We'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is open. Please go ahead.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Hey, everyone. Good morning. First question on the activity picking up. Can you talk about any improvement terms spreads and upfront fees and how might that drive an NOI improvement on the go forward? Thanks.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes, sure, Fin. Thanks for the question. Yes, look, I'd say although there was some volatility intra quarter on terms and we saw things improve a bit in the beginning of the quarter, toward the back half of the quarter, spreads kind of tightened back to where they previously were back in the first quarter. So I would just reiterate the theme of stability in overall spreads and terms and total yields in the new investment environment. Obviously, who knows what the future holds.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

We're certainly in a little bit more of a volatile time. As we tried to highlight in the prepared remarks, volatility can be good for us. So if we see that in the future, then there will be an opportunity for potentially improved terms. But so far, I would just say we're seeing stability, which I would say over the last several quarters now, we do seem to have kind of found point of stability in terms of spreads now for three or four quarters in a row. And then, yes, the volume really does seem to be picking up again.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

The story on volume was a little bit mixed throughout the quarter. First half, a little bit of an air pocket as people were digesting some of the tariff related news. But as we mentioned in June, really saw a lot of momentum and our commitments post quarter end were very strong.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Very good. Thanks. And for a follow-up on the off balance sheet vehicles, SDLP and Ivy Hill, those are a little smaller as a percent given the growth of ARCC, but seeing if you can hit on the ability or likelihood to expand those back to historical averages or peaks or wherever you might see fit? Thanks.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes. Both of those vehicles are strategically important vehicles for us. And I guess I would say I wouldn't be surprised if they grow more from here.

Finian O'shea
Finian O'shea
Director, WFS Research at Wells Fargo Securities

Okay. Thanks.

Operator

We'll go next to Doug Harter with UBS. Your line is open. Please go ahead.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Thanks. As you think about taking advantage of the growing pipeline that you talked about or deal activity you talked about, how are you weighing the balance between maybe taking leverage up versus continuing to issue new equity off of the ATM?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

I think it's a balance and it's something that we're obviously always monitoring quarter to quarter. We do think that it is strategic for us to raise capital via the ATM program when it's available. And obviously, this quarter we moderated it a bit relative to prior quarters, given the transaction volume was a little bit lower. So $300,000,000 ish this quarter via the ATM versus $400 to $500,000,000 ish in the prior few quarters. Again, you never know where the markets are going to go, and it's crucial for us and our competitive advantage and value proposition to have capital for our existing borrowers and for potential new borrowers in all market environments.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And as a reminder also when we're raising equity via the ATM program, we're doing that at a premium to book, which is accretive to NAV as we think good for our shareholders. Obviously, the volume being a little bit lighter than we had hoped in this past quarter, we weren't able to get more into leverage. But again, core earnings at $0.50 a share still feels very good and stable and well covering the dividend. And so it doesn't really bother us that we are operating around one times leverage. In fact, it probably just gives us a lot of financial flexibility going forward to take advantage of whatever kind of market environments we encounter.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

So long answer, but I guess it comes back to what I said in the beginning, which is it's a balance.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. I appreciate that. Thank you.

Operator

We'll go next to Robert Dodd with Raymond James. Your line is open. Please go ahead.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Hi, guys. Congrats on the quarter. On the credit side of Wakanda, I mean, added a couple a few more names to Nonaccrual, but a couple of those weren't new, right? I mean, PRG and KBS had defaulted before and been restructured and now they're back. So can you it those are obviously kind of near club deals.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Is it getting harder because you've got a really good track record of doing this, but is it getting harder to restructure a club asset correctly the first time? Or is there anything systematic in there because it's relatively unusual for you guys to have an asset that gets restructured and then becomes a problem at GET. Any color there?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes. I appreciate the question, Robert. And you're right. Interestingly, a couple of those names we added, by the way, a handful of names, a little less than a handful of names to the non accruals. And yes, a couple of those names had been restructured, so a little bit unusual.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

But I would say, I don't think there's anything to read into there. It's not really about the club nature of those transactions. It's really about the underlying companies. And I guess what I would say about the increase in non accruals is, it's obviously something we're paying close attention to, but I would say that there are really not any underlying trends within these handful of names that we added that we can really discern that would tell us there's any pockets of the economy that are showing certain weakness relative to other pockets. Obviously, we're always looking for those kinds of trends in our portfolio.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And when we see a little bit of a tick up like this, it gets our attention, but they're really just idiosyncratic factors that are affecting each. So I don't know that I'd read too much into it. Non accrual number can bounce around a bit quarter to quarter and has, if you look back over the last many quarters. And on an absolute basis, it's still at a pretty low level and below our historical averages and the industry averages. So it's not really something that's giving us a lot of concern at this point, but certainly we're paying close attention to it.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Got Got it. Thank you. And then one more if I can, not technically a follow-up. On Ivy Hill, you injected some more capital into Ivy Hill this quarter. Is that part of just kind of the long term growth plan?

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Or was that opportunistic given the volatility in the liquid loan markets that obviously we saw in Q2?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes, good question. It is just part of the long term growth plan normal course. We did take a little bit of a pause on selling assets for a few quarters prior to this one. But for that reason, we felt like it was the right time to sell some more assets. Again, part of our policy, normal course, IAM is a strategic vehicle and they have demand for assets and it felt like a good time to sell some assets down.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

So really nothing specifically opportunistic about the fact that we did it this quarter versus prior quarter.

Robert Dodd
Robert Dodd
Director - Finance at Raymond James Financial

Got it. Thank you.

Operator

We'll go next to Arren Cyganovich with Truist. Your line is open. Please go ahead.

Arren Cyganovich
Arren Cyganovich
Senior Analyst - Specialty Finance at Truist

Thanks. You mentioned that in the activity that you're seeing recently has been a little bit more skewed to the upper middle market, which makes sense given the volatility. But as you talk about the activity in the pipeline looking pretty strong for the second half, are you seeing that broaden out into the core and lower middle market as well?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Sorry about that. Yes, we are seeing it broaden out for sure across all different types and sizes of companies. Again, one of our, I think, big advantages is the broad origination and you'll see us move around a bit based on the opportunities that we're finding in the market. And it's interesting in 2022 and 2023, we moved up market significantly when there was dislocation, then we kind of broadened back out. And And you look at the average EBITDA of our new borrowers that we're bringing into the portfolio, that's kind of come down through 2024.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

We need a little bit more down market this quarter. The average EBITDA ticked back up again a little bit. But if you look at the pipeline and the post quarter end commitments, it is more broad based, which again is another sign to us that suggests there should be some nice momentum going into the second half of the year.

Arren Cyganovich
Arren Cyganovich
Senior Analyst - Specialty Finance at Truist

Got it. And I just want to follow-up on the leverage question. I certainly understand and appreciate balancing the equity issuance, etcetera. The leverage, it's not at an extremely low level, but it is lower than what typical peers would have. Is there specific reason that you're at that level, just the broader volatility in global economy?

Arren Cyganovich
Arren Cyganovich
Senior Analyst - Specialty Finance at Truist

Just curious as to what would give you a little bit more confidence to raise that up a little bit. And I'm not saying a lot, just one point

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

No, two something like I understand. I understand. Look, it's yes, I think we have our stated range of 0.9 to 1.25. And so it's a little bit towards the lower bound of that range. I think we feel great about the fact that we're well covering the dividend and delivering nice stable results while keeping that leverage level toward the lower end of the range because I think it does, as you pointed out in the question, give us a lot of flexibility going forward to capitalize if there is a pickup in transaction activity or more volatility that might provide an opportunity to take advantage of better terms in the market.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

So actually, I can kind of like the fact that we're operating with this amount of flexibility and it's just another lever that we would have to help earnings to the extent that we need it, but we don't really need it right now. And I think it puts us in a nice spot. So obviously, volume was a little bit slow. It's not like we are managing the business to this leverage level, which is kind of happens to be where we're ending up and we kind of quite like it.

Arren Cyganovich
Arren Cyganovich
Senior Analyst - Specialty Finance at Truist

Okay. All right. Thank you.

Operator

We'll go next to Casey Alexander with Compass Point. Your line is open. Please go ahead.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Yes. Hi. I appreciate your commentary about spreads. I'm sorry, I must be failing my piano lessons. I appreciate your commentary about spreads.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

I'm wondering, you said you're getting a little bit better pipeline fill. Is it your view that a real and dynamic increase in deal activity would help push spreads out to a little bit more attractive levels? Or is there just so much capacity out there that it's really hard for spreads to make much of a move?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes. Look, the laws of supply and demand would suggest that if more deal flow comes into the market, spreads could should widen modestly.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

I guess I would say, don't think we're unhappy with where spreads are. Total you have look at total yields and with base rates being where they are now and then you combine upfront fees and spreads, we're earning high single digits on lower levered first lien senior assets, unit tranches and low double digits on low to mid double digits even on junior debt assets. And so over the course of history, those are pretty good total absolute returns. Historically, it's been the case that spreads move around if base rates come down, spreads widen, base rates go up, spreads can tighten, they kind of move against each other and that creates some balance. So I guess I would just again say we're not we feel like this is a good investing environment.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And also if you look at leverage levels that exist in our current portfolio and where we're investing new assets, they've been very stable over the last several quarters and not anywhere near the high end of our historical range of where we're investing in new leverage levels. So on a risk adjusted return basis, we feel pretty good. But yes, certainly, we're hopeful that more transaction activity could lead to some spread widening, but hard to predict.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Thanks for that. Just a maintenance question and I'm sorry if I missed this, a couple of distractions, but a pretty good jump in dividend income quarter over quarter.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Was there any one time in that or was that just based upon growth of the vehicles?

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Yes.

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Thanks for the question. It's a mix. I mean, definitely had a little bit of increase just from the recurring portion of the portfolio, but there also is a nonrecurring portion as well, which does tend to happen on occasion. So that's what drove that.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Do you have about how much was that non recurring?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

About $10,000,000 of it.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Okay, great. Thank you.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Just coming off of our equity co investment portfolio every now and then we get dividends on those equity co investments.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

All right. Thank you.

Operator

We'll go next to Kenneth Lee with RBC Capital Markets. Your line is open. Please go ahead.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Hey, thanks for taking my question. As you look across your pipeline of potential originations there and it sounds like you've been seeing a lot more of the upper end of the segment more recently. How do the relative pricing and returns for the smaller scale or more core middle market segment compared to the upper? Are you seeing more attractive returns in any particular segment? Just want get a little bit more color around that. Thanks.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes. It's not just spread and yield, it's also leverage levels. And I would say it's a spectrum, right? As you get into smaller companies, leverage levels are generally a bit lower and spreads are generally a bit wider. I don't want to get too specific on terms because it is a range and don't want to mislead in any way.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

But maybe generally, I would say you're seeing probably 50 basis points, if not more yield incremental yield on sort of smaller sized companies versus larger sized companies. But again, the leverage levels can also be several turns lower, turns of EBITDA lower than what we're seeing in comparable large cap companies. So that's kind of how to to answer the question.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Okay. Very helpful there. And just one quick follow-up, if I may. In terms of the equity co investments, the exits, presume they were not driven by Ares Capital. They were not discretionary.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

I just want to double check that. And to the extent that they have any visibility, is there any potential outlook for further equity realizations or is it primarily driven by the sponsors? Thanks.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Definitely primarily driven by the sponsors, not a lot of control that we have. We're not obviously in the control equity business. So they are a little bit sporadic. But if you look over a long period of time, obviously that's been a huge differentiator for us in our strategy of building that diversified portfolio so that we can offset our losses with gains. And in terms of looking forward, probably can't comment or give really too much forward looking guidance around what to expect going forward. Sorry for that.

Kenneth Lee
Kenneth Lee
Vice President at RBC Capital Markets

Okay. Got you. Very helpful there. Thanks again.

Operator

We'll go next to Melissa Wedel with JPMorgan. Your line is open. Please go ahead.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Good afternoon. Thanks for taking my questions. Just to follow-up on a couple of things. I wanted to go back to the comments made about the impact of tariffs on portfolio companies. Are you still estimating a roughly mid single digit exposure across the portfolio to companies that could be impacted by tariffs sort of before any mitigating factors?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Yes. Glad you asked, Melissa. It's actually I think we're feeling better this quarter than we were last quarter. So we spent a lot of time if you remember last quarter, it was all fresh and we were kind of reacting pretty quickly. But we spent a lot of time through the quarter speaking to all of our impacted portfolio companies, understanding their ability to mitigate the tariffs via pricing actions or moving manufacturing or other measures.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And I think our portfolio companies feel quite good about being able to pass through pricing. People are starting also to look about look into moving manufacturing, although that hasn't really started yet any material away. I think people are still waiting to see where the final tariff rates shake out. But the visibility these companies have into the mitigating actions feel pretty good. So I guess I should also mention there have been some new tariffs that have come out obviously and there's a lot of change still going on, but in some of these specific sectors with steel and whatnot.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

And we looked into our portfolios and we really don't have a lot of exposure to those types of sectors and materials. We're sort of investing in mainly service oriented businesses. So we're happy to say that actually the high risk names in our portfolio, we think now are a low single digit percentage of the portfolio relative to the mid single digit that we talked about last quarter.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Okay. Thanks for that update. And then just to clarify, it sounds like some of the price increases are happening already?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Starting to a little bit. Obviously, the tariffs there was a pause on a lot of the tariffs and the effects of them are just starting to flow through now. But I think what we found is that our companies have reached out to their customers and had discussions about pending price increases and are feeling relatively good about the responses they're getting. So I don't know if it's actually like broad based actions that have been pushed through yet, but kind of just starting now.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Got it. Thank you. And my last question, I wanted to follow-up on the capital injection or the additional investment into IAM this past quarter. I also noted that one of the comments on the in the deck about exited investments post quarter end included a sizable amount in the subordinated loan to IAM. So I'm just curious how to how we reconcile those two the flows into Ivy Hill this quarter and then apparently out of the sub loan in 3Q?

Scott Lem
Scott Lem
CFO & Treasurer at Ares Capital

Yes. So we do have just as a reminder, have a subordinated loan with Ivy Hill that sometimes uses effectively as a working capital line for Ivy Hill. And so we use that to put capital in there and then they were to send some of the proceeds back to us post quarter end.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Okay, got it.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Yes. Thank

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

Is that clear? Mean, it's similar to equity, it's just more recycle. It allows us to recycle.

Melissa Wedel
Melissa Wedel
VP - U.S. Equities Research at JP Morgan

Yes, makes sense.

Operator

We'll go next to Sean Paul Adams with B. Riley Securities.

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

Touching back on Ivy Hill, it seemed there was a slight shift in the gross commitments portion for first lien loans, which I'm guessing is largely a reflection of Ivy Hill repayments. So it was just an allocation rebalancing. But when you are looking at the balance of Ivy Hill, will there be more of a long term shift in the target asset classes to balance the growth targets or a change in the target for first lien?

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

No. Ivy Hill has a first lien investment strategy and that will continue to be the primary thrust of their strategy. We really don't anticipate any strategic changes.

Sean-Paul Adams
Equity Research Analyst at B. Riley Securities

Got it. Thank you.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Cord Schnabel for any closing remarks.

Kort Schnabel
Kort Schnabel
CEO at Ares Capital

No closing remarks. Thanks everybody for joining and we'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes our conference call for today. You missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through August 29 at five p. M. Eastern Time to domestic callers by dialing 9024 and to international callers by dialing

Executives
    • Kort Schnabel
      Kort Schnabel
      CEO
    • Scott Lem
      Scott Lem
      CFO & Treasurer
    • Jim Miller
      Jim Miller
      President
Analysts
    • John Stilmar
      Partner and Co-Head of Public Markets Investor Relations at Ares Management
    • Finian O'shea
      Director, WFS Research at Wells Fargo Securities
    • Douglas Harter
      Equity Research Analyst at UBS Group
    • Robert Dodd
      Director - Finance at Raymond James Financial
    • Arren Cyganovich
      Senior Analyst - Specialty Finance at Truist
    • Casey Alexander
      Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
    • Kenneth Lee
      Vice President at RBC Capital Markets
    • Melissa Wedel
      VP - U.S. Equities Research at JP Morgan
    • Sean-Paul Adams
      Equity Research Analyst at B. Riley Securities
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