Ares Capital Corporation Aktie

Good afternoon, everyone. Welcome to the Ares Capital Corporation's First Quarter Ended March 31, 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, April 28, 2026.

I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir.

Thank you, and good morning, 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 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.

During this conference call, the company may discuss certain non-GAAP 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's one method the company uses to measure its financial condition and results of operation. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, the 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 credit ratings and information related to portfolio companies was derived from or obtained by 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 first quarter ended March 31, 2026 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the First Quarter 2026 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.

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

Thanks, John, and hello, everyone, and thank you for joining our earnings call today. I'm joined by Jim Miller, our President; Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session.

Let me start by providing a few thoughts on ARCC's performance, current market conditions and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represents an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets. We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions. And we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment.

Let's now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes, but also diminished competition and improved lending conditions as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite.

As a result, we are seeing a reset underway with wider spreads, lower leverage levels and more attractive overall deal terms across the market. New transactions today are being discussed at 50 to 75 basis points of enhanced levels of fees and spread alongside a half to full turn of lower leverage and tighter documentation versus the second half of last year. As risk premiums widened during the first quarter, overall market activity slowed as the market searched for clearing prices during this period.

However, over the past 3 to 4 weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital. Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. direct lending platform and its significant dry powder from institutional sources positions us well to capitalize on these market conditions.

Our diverse high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies at an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's 10-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark.

Portfolio fundamentals also remained solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards and revolving credit facility utilization in line with historical norms. Our nonaccruals also remained well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption. And in fact, many are embracing AI and seeing enhanced growth.

We believe the most important question is not how much software exposure we have, but what types of companies we have invested in and what staying power, risks and opportunities our companies have through this latest technological cycle. Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers' core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs and benefit from proprietary data.

Importantly, our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million, strong cash flow and meaningful equity cushions even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves. To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in the fourth quarter of 2025 to challenge our AI risk assessment across our software-oriented portfolio companies.

Prior to engaging this firm, we conducted extensive diligence in the middle of 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials and if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution or whether it poses a direct risk to the core business, absent significant strategy change.

The consultant study found the largest differences between higher and lower risk companies to be system of record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats and control of data. The firm also assessed human dependency, data availability, risk of error and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. Their report indicated that about 85% of our software portfolio at fair value represented low risk with only a small subset of companies categorized as higher risk.

These higher-risk companies represented only 1% of reviewed names by fair value and 2% by count or only about 0.3% of ARCC's total investment portfolio at fair value. An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC's total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment in product evolution with many of these companies well positioned to adapt within the time necessary.

Of the 85% of names categorized as low risk, these companies are well positioned to adapt and in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors. While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector.

As we seek to take advantages of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile with minimal near-term maturities offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends. Importantly, core EPS taken together with $0.15 per share of net realized gains was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions.

That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and turns improving and given our strong competitive position, we continue to believe that ARCC's current dividend approximates the long-run underlying earnings power of our business. And our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for 16 consecutive years.

With that, I will turn the call over to Scott to take us through more details on our financial results and balance sheet.

Thanks, Kort. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity and conclude with details of our dividend and the taxable spillover referenced earlier by Kort. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation.

Core earnings per share was $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical with the first quarter in addition to softness from the broader credit market volatility that Kort mentioned earlier.

Now turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago. Our net asset value ended the quarter at $14.1 billion or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past 5 years and more than 30% since inception.

Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure. Reflecting our long-standing strategy of being a consistent issuer in the investment-grade notes market, we kicked off the year by issuing $750 million of long 5-year unsecured notes at an industry-leading spread of 180 basis points over treasuries, which we swapped to SOFR plus 172 basis points.

During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a 5 basis point reduction in the spread. On the topics of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector. At ARCC across our 4 credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been long-standing supporters of ours.

The weighted average length of these relationships exceeds 13 years with several dating back more than 20 years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships with most of these banks and lenders working with us not only at ARCC, but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities and performance provide us with unique and consistent access to capital across multiple markets and especially with our banking and lending partners.

Additionally, drawing on our experience successfully navigating the global financial crisis, we view the structure, duration and diversification of our funding facilities as essential factors in ensuring balance sheet stability. As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involve margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods.

Our experience through the global financial crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest rated BDC across all 3 major rating agencies with the longest ratings history, 19 years with 2 agencies and 16 years with the third and more than 15 years of experience issuing investment-grade and convertible notes. The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners.

More recently, in 2024, we further enhanced the diversity of our funding sources and broaden our lender base through the securitization market. By generally issuing only through the AA tranche, we are able to achieve similar advance rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares' strong reputation with investors. Looking forward, while market participants may anticipate tighter credit conditions and reduced access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities and deep and enduring relationships such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders, including investors, banks and other lending institutions.

Overall, our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the first quarter with debt-to-equity ratio net of available cash of 1.1x versus 1.08x last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Finally, our first quarter 2026 dividend of $0.48 per share is payable on June 30 to stockholders of record on June 15. ARCC has been paying stable or increasing regular quarterly dividends for 67 consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026.

I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I'll start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance and overall positioning. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases, lending terms may improve and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers.

Beyond the decades-long positioning of our platform around these principles, there's compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today's broader market narrative. Our own Ares quantitative research team recently examined 25 years of aggregated private credit data to evaluate the association between managers' ability to invest during periods of market-wide volatility and the subsequent levels of returns. In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated on average more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions.

While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments with 70% of transactions coming from existing borrowers. As transaction volumes slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies.

These opportunities focused on achieving attractive risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 subindustries. As Kort noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations as spreads on first lien originations in the first quarter increased by approximately 20 basis points quarter-over-quarter, while leverage levels declined by nearly 0.5 turn of EBITDA.

We ended the quarter with a portfolio of $29.5 billion at fair value, which was stable quarter-over-quarter as new fundings were offset by fair value changes and repayments. Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today's market. As part of this repayment activity, we exited 4 equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter.

As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last 21 years. These latest 4 exits generated a mid-teens weighted average realized IRR. Importantly, over the last 10 years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of S&P 500 Index.

As we've discussed previously, these minority equity investments are made selectively generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections represented approximately 7% of total interest and dividend income, which is below our historical 5-year average. As we've discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows.

From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger well-performing companies, not reactive amendments. As with all investments, PIK investments are underwritten with the same discipline as cash pay loans with a strong focus on structure, leverage and exit protections. Importantly, over our 21-year history and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x. This MOIC is a modest premium to the 1.3x MOIC on all of our exited investments since our inception in 2004.

We believe that this demonstrates that the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlates to future losses. On the contrary, it has supported our strong returns over the past 21 years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time. We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit.

Specifically, when comparing realized investments exited over the past 2 years to their respective fair values 1 year prior to exit, we found that 99% of fully paid off U.S. debt investments were realized at valuations in line with or better than their valuations 1 year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health. The financial position of our portfolio companies remains solid with interest coverage stable sequentially and improving year-over-year and leverage levels broadly stable.

Our investments remain well protected by substantial equity cushion beneath us with an aggregate loan-to-value ratio in the portfolio in the mid-40s percent range. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our nonaccruals at cost ended the quarter at 2.1%, a 30 basis point increase from prior quarter, but still well below our approximately 3% historical average since the global financial crisis and the BDC historical average of approximately 4% over the same time frame.

Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter-over-quarter and well below our historical levels. Our overall risk ratings remain stable and the share of our portfolio companies in our higher risk categories, Grades 1 and 2 remain below our 5-year average and notably lower than our portfolio companies in Grade 4, which are outperforming companies. With this backdrop of our portfolio continuing to perform well, we would note that as we have said several times in the past, we would not be surprised to see credit quality and nonaccruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue.

Shifting to the second quarter. As Kort noted earlier, market activity has remained slow as participants continue to work through price discovery. Through April 23, 2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels as measured by discussions have increased in recent weeks. Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter first lien loans.

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. While we are beginning to see deal flow pick up, we expect the slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline and portfolio management.

Supported by a well-performing, diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter.

With that, operator, please open the line for questions.

[Operator Instructions] We'll go first to Rick Shane with JPMorgan.

Look, it's obviously an interesting time. You've talked about the widening of spreads, and you've talked about better origination fees. I am curious when we look at some of the other elements of transaction structure, particularly things like covenants and control provisions if the market is readjusting as well. I think that when we sort of hear what's happened over the last couple of years, that's been one area of concern. And I'm curious if that's normalizing also.

Yes. Thanks for the question, Rick. This is Kort. I can jump in on that one and see if anyone else on the team wants to chime in. But I would say, yes, those other noneconomic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. So whether it's getting a financial covenant on companies that might have been previously on the margin of getting one, I would say that's tipping in our direction.

I don't want to overstate it. Obviously, large-cap borrowers of high quality are still able to access deals from the private credit market cov-lite. But at the margin, it's moving in our direction as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. So yes, it feels like certainly a better time. Obviously, our market moves a little bit more slowly. So we'll continue to watch and see how things change from here.

Great. Kort, if I can just ask one quick follow-up to that. So I think what I'm hearing from you is in terms of all of deal structure mean reversion. It's not like we've swung from a wildly bullish market to a wildly bearish market in terms of wider spreads, et cetera. And given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves?

I think it's probably that -- I think it's probably a little bit of 2 things. I think it's one, supply of capital and the changes that we're seeing in the flows in the retail and wealth channel. But I think it's probably also just part of what Jim said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now with some of the geopolitical developments and slowing economic growth. And that probably is also influencing people's behavior when it comes to pricing new deals. So I think it's a little bit of both of those things.

But in terms of your comments around reverting to the mean, I think that's correct. I don't think we're saying we're in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year, and it's good to see them widening. But like we said, 50 to 75 basis points of kind of total yield improvement between spread and fees doesn't indicate a blowing out of spreads.

We go next now to Finian O'Shea with Wells Fargo Securities.

Just following up on that topic. And Jim, you talked about the benefits of investing in volatility. It does -- this sort of activity on the runway does sound like the higher quality kind of deal that would reprice down when the retail vehicles, say, eventually recover and that could pressure NOI more. So as you approach book and can raise capital, how aggressive do you want to be in terms of growing into this environment?

Yes. I'll start by saying -- thanks, Fin. But I'll start by saying that I don't think we're in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best to -- when we look -- when we're in a market like this to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly, there's some period of time that will pass and you will end up in scenarios where repricing will come back to the market.

I think we're seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions, things like that. And we're doing a lot of that right now. So that is sort of how the market works. It's not as rapid as a public market. So you'll see insulation from those repricings to a certain extent, more in the private markets than in the public markets. So it's not as rapid. You don't -- because it's not as active, the volatility is not as high. You just see a little bit more stability in the bands on either side are tighter.

And then as it relates to raising capital, I mean, we'll just evaluate that quarter-to-quarter, month-to-month as we see what's in the pipeline, the nature of the market at that point in time and where the stock price is.

It's helpful. A follow-up, Scott, I appreciate your comment on the bank side of the funding arena. I think it's fair to say you're a desirable counterparty, but you've also done your job in fighting those borrowing spreads down for yourselves, and we have seen banks sort of push back. I think there were a bunch of repricings upward in, say, '22, '23. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up?

Yes. Thanks, Fin. Yes, I do think that there's potential for that. We're not seeing it at the moment. As you saw during the quarter, we actually repriced one of our facilities down a little bit. So these things will ebb and flow. I think for us, if it does move that it's not going to be just for us, it will be for the whole sector. So if that's happening, that should mean that we should be able to put pressure on the asset side, too. So our ability to take increases on our liabilities should be commensurate with increases on the asset side, but it's too early to tell right now.

We'll go next now to Arren Cyganovich at Truist Securities.

The April to date trends were quite low. You highlighted that as borrowers are trying to adjust to the new spread and document environment. What -- you mentioned that things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Or do you think that this could actually potentially pick up as you have had these conversations in recent weeks?

Yes. Why don't I try to answer that one. It's obviously really hard to predict. And I probably don't want to venture a guess as to how we're going to see transaction activity evolve from here because it just has been very up and down. Obviously, you mentioned last year, kind of similar, things really slowed down with the tariff noise and then the second half was extremely busy, and we posted record volumes. It was really hard to see that coming when we were sitting here in April, May last year.

I guess what I would say about the backlog or the -- I guess, the activity in the last few weeks since the end of the quarter, obviously, there's a little bit of a lag effect. So the stuff that we're committing to in the first few weeks of April has been sort of teed up and discussed through investment committee for weeks, if not months prior to that leading up to it. So a little bit of a lag effect. We're starting to see the comments we had in the prepared remarks referred to the fact that we're starting to see a pickup just in terms of our cadence of deals that we're seeing come through investment committee, I would say, in the last 3 to 4 weeks.

So we're at the front end of seeing that pickup, and we did want to go out and make sure that people are aware we're seeing that. But whether it's sustained or not, I think, depends on a lot of different variables out there, maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully, but that's something that's just really hard to predict. So hopefully, that helps a little bit.

Yes. No, absolutely. It's obviously something that's evolving rapidly. So I appreciate those comments. The other question I had was around the consultant that you hired, and I appreciate all the numbers and kind of fits with what you've been saying to us publicly in terms of the higher quality type of well-protected enterprise type of companies, some small risk from AI, some, I guess, medium risk as you kind of pushed -- pointed to that.

I think the biggest question that people have, and this is going to take quite a while to unfold is these companies are doing well now. They're going to probably continue to do well in the near term. But at some point, they have to be refinanced and the equity markets have repriced software down, I don't know, 40% or so. What are some of the options if you have a private equity firm that maybe bought a company at 21x EBITDA and now they're trading at 13 and maybe not want to exit those and you probably don't want to hold on to those loans through the next cycle. So maybe you could just talk about the refinancing risk and some of the options that you'll have to use whenever you get to that kind of point of refinance whenever that occurs.

Yes, sure. So obviously, a fair amount to unpack on the software topic. I guess, just specifically to the refinancing risk, number one, there already is a market that exists currently despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or 2, where the market has been able to finance these transactions. They're -- for higher-quality borrowers without AI risk, they're coming in at obviously a little bit wider spreads, but they're getting done.

We actually had one company in our portfolio that we didn't think was particularly risky, but sort of almost straddle the low to medium risk category, and we decided to not extend maturity and the lender group took us out of that name. So just as one case study of our ability to exit when there's a maturity if we're not willing to provide an extension. I guess, again, there's so many names in the book. It's hard to go kind of granular on a call like this. But I would just remind everyone that our loan to values on our software book as a whole still are very healthy and low relative to the broader book.

So we took a lot of markdowns on the equity values on our software names in our portfolios and the LTV in our debt software book still stands in the low 40s, below the LTV of the total book. The growth rate, the EBITDA growth rate of our software companies remain consistent with the growth rate of the rest of the book at 9% year-over-year. And I guess I would also say we can spend more time if people want to on the consultant study and the different categories and risk ratings. We obviously have a lot of detail there, but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower risk category versus the higher and medium risk category.

And the maturity profile actually for the higher and medium risk names is materially shorter. It's 2.4 years versus 3.9 on the total book. So the low-risk names are about 4.2 years. So when it comes to trying to mitigate technology risk, obviously, shorter maturities is better. And when -- I guess, to the final specific point of your question, when we get to the point of the maturity and if we're not willing to give an extension, then we're going to have a conversation with the owner of that business. If it's a financial sponsor, then we're going to, in most cases, probably request that a capital injection is made in order to pay down our debt and derisk us to get a maturity extension. Obviously, it's a case-by-case basis. It's hard to generalize, but we are not unfamiliar with having some difficult conversations with sponsors about needing to exit names. We've done it over a long period of time, and we feel confident we'll be able to do that again now.

We'll go next now to John Hecht with Jefferies.

Maybe a little bit of a tack on to the prior question. I really appreciate all the context you gave us around your software portfolio and understand you had a highly regarded third-party management consulting firm evaluate your exposures. I'm wondering, are you able to give us any, call it, sensitivity analysis around like impacts or disruptions to revenue as revenue models shift within the portfolio? And what that did to, call it, leverage calculations during that exercise?

I'm sorry. So just -- you're asking about how are the revenue trends changing within the different categories?

When you analyzed sensitivity or exposure to AI disruption, did that include like an assessment of potential revenue model shifts for the software companies? And if so, can you give us any, call it, materiality of the revenue shift as the industry changes?

Sure. Yes, I think I get it. Why don't I just give a little bit of color around kind of the definitions of these 3 categories, and I was anticipating we might -- people might want to go into this because I think it will help with your question. The first thing I would say is we're not seeing any significant deterioration in the performance of these companies regardless of whether they're in the low or the medium risk. I should say in the high-risk category, again, it's only 0.3% of the entire portfolio at fair value. And it actually is only 3 names in that high-risk category. One of them is Pluralsight, which people know is not performing well. So within that high-risk category, there is performance issues.

But in the medium risk and low-risk category, this portfolio as a whole continues to perform very, very strongly. So to the prior question, nothing is happening yet in the numbers. It's all about the look forward into the future that everybody is -- wants to talk about and is focused on. So maybe just on the definitions of these categories, the low-risk names are companies that were identified by the consultant and us, by the way, they validated the work that we've been doing ourselves rating these names for the past 6 months. But companies that have lots of layers of mitigants to AI risk.

And we've talked about this before, whether it's system of record positioning, proprietary data, regulated end markets, network business models, all these things that insulate a company from being disrupted. That low-risk category, these companies have lots and lots of those mitigants. And what I would just kind of say is they don't have to do a lot to prevent disruption. And they actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book, much more poised to benefit from AI than to be disrupted. The medium risk category, which is 14% of the software portfolio or 3% of the total portfolio, what I would say about this category is there are still mitigants that exist, some of those mitigants in the low-risk category, and these companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive.

So to your point, I don't know if -- it's not a revenue model change, but it's just making sure that they're evolving their product suite to incorporate AI so that they could stay competitive and ahead of the curve. And that is how I categorize those names. And really importantly, in this medium-risk category, we're not saying nor is the consultant saying there's going to be disruption. And actually, the study specifically states that many of these companies are well positioned to adapt within the time necessary to adapt. But it's just that there are less mitigants than the companies in the low-risk category. And in the high-risk category, the definition there is these companies really need to transform their business model in order to get -- in order to sort of survive the disruption risk. So I don't know if that helps with your question, John, or not. But hopefully, that color helps provide some more insight into the study that we can do.

That helps a lot. I really appreciate that. Second question is, and you talked about the deal environment, how it was -- it's temporarily been impacted by all the global stuff. But that maybe you're seeing some early indications of a renormalization. We've been waiting for a long time for this wave of, call it, private equity, call it, portfolio maturities and how there's a lot of pressure to liquidate and return capital to LPs. I'm wondering what are the -- assuming this geopolitical stuff stabilizes, is there anything obstructing that, call it, wave of potential activity beyond this? And do you guys have an opinion about when and if that wave might occur?

It feels like all the ingredients are still in place if you take out the volatility that's going on in the world in the market right now. So that -- the pressure on the private equity firms to return capital is only increasing. The hold periods are lengthening. Again, the -- even though economic growth overall is slowing a little bit in the sectors that we invest in, growth is still really strong. So I really don't see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously, all the noise around software is likely to hamstring volume within that sector specifically. But other than that, I don't really see any other barriers.

Yes. And maybe I'll add, Kort. There is a fair amount of healthy discussion dialogue in the sectors and areas that are unaffected, either with geopolitical or software. There's -- so I think there's an optimism around deal flow. It's not optimal for a private equity firm to go bring their company to market in the midst of the most intense moments. But there's a lot of interest in migrating towards companies and having -- getting invested in companies that are sheltered from some of those issues. And I think there's a lot of optimism there. So I think those will lead the way probably. And then you'll see a more active broader market. If history repeats itself, that's what we should expect to see over the next few quarters.

We'll go next now to Paul Johnson with KBW.

Credit is still relatively strong today, but I was wondering, in relation to just the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus kind of credit-specific write-downs?

Yes, happy to take that. More than 2/3 of the marks we've had around 70% are mark-to-market related rather than credit related. So the significant majority of it is from mark-to-market.

Got it. Appreciate that. And then you guys have done -- I mean, you've clearly done some extensive analysis on the book. You've provided a lot of transparency on top of that. But I was wondering if I could just ask kind of higher level on marks, more specifically on software investments. How do the discount rates, I guess, move quarter-to-quarter? And is the assumption that the fundamentals of these companies because it sounds like a lot of them still have very strong performance, is the fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lagged effect that we might expect to see throughout the year if spreads continue to widen out?

Yes. Look, I think it's -- I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It's probably a good moment in time just to express, and I said some of it in our prepared remarks, but we have an extraordinarily extensive valuation process that's worked for a really long period of time, and it's proven out to be quite effective. It's really a bottoms-up company-by-company analysis, right? And every company is distinctly different to answer that question. You have to go look at that company. You have to look at the comparables that are very specific to that company.

And that's even within software. There are so many categories that exist within software. So broadly speaking, you want to draw a parallel to the broadly syndicated market or to sort of mark-to-market issues there, but it's not something that we should do. We should just look at them one-off. So there isn't a simple answer to that question. What I will say is there's clearly an impact on EV, and it was more pronounced in software, right, for the quarter.

So the assumption is fair, but that EV doesn't just flow directly into mark-to-market on the loan, right? So -- and once again, the private market -- Kort said it, the private market is active and still active in software. And so there is some movement, but what we are looking at a lot in the analysis, which is bottoms up again, is what is the private market doing for these companies and where indications there. And so that is a better source of one of the more important variables, I should say, that go into the equation.

Yes. Maybe I'll just add one more bit of color to just further illustrate what Jim was talking about that it's not so simple. Obviously, spreads widen, that affects the value of the loans and marks should go down. But it's not that simple on a portfolio-wide basis because on each individual name, that might not occur. For instance, if we have a software company that has performed extremely well and delevered such that the pricing and the spread on that loan is actually somewhat wide relative to the risk, we don't mark that loan above par. We mark it at par.

And so when spreads then widen, that loan can stay at par because the performance indicates that the risk is still -- that the pricing is still appropriate for the risk. So that loan might not get a markdown even in a spread widening environment, whereas another software name that is more levered would get a markdown in a spread widening environment. So just one example of like [ 50 ] of why it's -- you have to do it name by name. You can't do it on a portfolio-wide basis. But obviously, we're paying very close attention to each one of these names. We've got third parties in here validating all of our marks. And as Jim said, 70% or so of the write-downs were mark related.

Got it. Appreciate that. Very good answer, very helpful answer. My last question here was just in terms of Cornerstone software that was marked lower this quarter. Medallia, which you are not an investor, not a lender to, but Medallia getting restructured this quarter. Pluralsight, which you have a very small investment, also that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies, what exactly do you think it is that those companies are lacking in terms of the challenges that they're going through today? I mean was it lack of a critical system of record, that sort of thing for these companies to be running into trouble today?

Yes, I appreciate the question. I really just think we always hesitate to dive into any individual name discussion and really start getting into trends or performance results on individual names. So I just don't think I'm going to necessarily go there and get into that level of detail. On any portfolio, when you have 600 and some names and 100 whatever, 130 software names, you're going to have some names that are going to underperform. We thankfully only have a few of them.

Pluralsight has been underperforming for a while. People understand what's going on there. Some of the other names you mentioned, performance is actually fine, more of just mark-to-market issue based on what we're seeing in the market, how the market is viewing those kinds of credits. So not everything is what it seems. A lot of it isn't really performance related. But really, other than that, I just think it's not appropriate to dive into individual name discussions.

We'll go next now to Brian McKenna with Citizens.

Great. So one more follow-up on your software exposure. How much of the $1 billion roughly of the more at-risk software investments are sponsor-backed? And then you also have the largest portfolio management platform in the industry. So I'm curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you can ultimately -- and that team ultimately drives better outcomes within this part of the portfolio.

Sure. so again, in that high-risk category, I think all of the names response are backed actually. There's only 3 names. We'll go back and check, but I believe they're all 3-year are sponsor backed.

In terms of our portfolio management and our playbook, I'm glad you raised it, something that we're -- we think is differentiating for our platform. It's something we try to highlight a lot. We have over 50-person portfolio management and restructuring team. We've operated over 21 years here through lots of different cycles, including the [ GFCE ]. We are not afraid to have tough conversations with the owners of businesses as I already mentioned, I think once on this call before. Look, the first thing we look for is if there's a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. And if the other of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. Never what we want to do. It's never the plan, but we have the expertise and the team in place to own these companies, to be patient with them to provide additional capital to come out the other side and over our history, we've generated an enormous amount of gains by doing that. Just this year, we posted a big gain on portfolio company that was a mezzanine investment that we restructured and owned for 10 years and posted a big gain on it. So there's lots of examples like that over the course of time. so it might be hard to work if I take more involvement, but we absolutely have the expertise in place to do that.

Okay. Great. That's helpful. And then if you were to mark-to-market the portfolio today to reflect quarter-to-date trends, how much of the first quarter markdowns would be reversed?

I'm not sure we're in a position to answer that one at this point in time. I think that requires a whole -- our valuation market process is extremely extensive, as you can imagine. So that would be a difficult one to address as a one-off.

Yes. And our market doesn't move as fast as the liquid market does either. So really tricky to say.

We'll go next now to Kenneth Lee with RBC Capital Markets.

Just another one 1 on the software loan side. It sounds like the private markets are still originating software loans. But for Ares in particular, Wonder if you could talk a little bit more about some of the more recently originated software loans? What sorts of economics and terms are you seeing and also roughly what's sort of like the average LTVs that you're underwriting at?

Yes, sure. I appreciate the question. There really have not been a lot there. They're just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are sort of larger kind of bellwether type software names where we can really point to and say this is where the market is. Smaller deals get price sometimes a little bit more indiscriminately if we have another lender who might just really want to own that name and can clear the deal. So I think it's really a hard question to answer. I guess I would probably say on the deals that we have seen clear the spread and fee increase on those transactions is a little bit wider than the 50 to 75 basis point average that we put out in our prepared remarks. And these are higher quality companies. It's not like -- if a software company has some kind of material question around the AI risk. That type of company is not really outraising capital right now. So these are the higher quality companies and it's a little bit wider than the average is probably what I would say.

Got you. Very helpful there. And then one follow-up, if I may, once again, just on the software side. Broadly across the portfolio there, how do you think about potential downside protection for software investments there, especially production that could potentially put a floor on recoveries. I'm thinking about, for example, intangible assets, any sorts of IP, I wonder if you could just give a little bit more color around that.

Yes. Look, again, so first of all, we are cash flow lenders in our core and always have been. And our underwriting thesis are always -- not always, but most of the time underpinned by very high degree of recurring revenues and predictability of cash flow conversion through lots of different cycles, as it pertains to software, technological cycles. And as we think about downside protection here, I think we'll just keep coming back to the fact that these companies have again, the vast majority. As we've been saying is now third parties have validated, vast majority of our companies have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues on these companies continues to be very, very high. The cash flow conversion is strong. The EBITDA growth is strong and the loan to value, again on our software book through for our debt investments is 41%. So even today after the markdowns we took on the equity values. So I think we rely on the significant amount of enterprise value cushion and the strategic value of these companies. to lots of different acquirers, either strategic acquirers or private equity acquirers for values that are well in excess of our debt if we needed to sell these companies to recover our principal. I don't know...

Maybe just one additional point. I don't know if this is what you're referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protected as part of our documentation. And I think we do a better job in private markets than the public markets do in that point.

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

While non-accruals are still relatively within low levels. It seems like there was a couple outsized markdowns, totaling almost $100 million for the quarter, and that was across just 2 names that aren't captured within the nonaccrual figure. I understand not wanting to delve into portfolio specific names. However, if your headline nonaccrual exposure metrics are capturing AI-based positions marked below $0.75 on the dollar, how are you trying to really express true exposure for mark-to-market risk in the next couple of quarters.

I was following you until the very end when the question -- the actual question came out there. So not sure exactly the point of the question. I get the -- one thing I'll say, and then maybe I'll have you rephrase it is, obviously, in volatile markets like we're in today, we see more dispersion of valuations and marks. And we see what the broadly syndicated market is doing to a bunch of names in the software space. And so that is going to be reflected in our remarks. We have to mark our portfolio based on where the comps and the market is saying, these debt positions are -- should be valued. That is -- that mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible. And so there certainly could be in a more volatile market, loan valuations that trend lower but where we still feel that the principal and interest is collectible because we're covered by enterprise value. And my guess is that, that would apply to the names that you're fighting, again, without getting into individual name discussions. So I don't know if that was specifically what you were asking, but I want to make sure that point does come across clearly.

Right. Right. So to refine the question, if you're having a position with an exposure of $350 million at cost, right, and you're having a $50 million difference quarter-over-quarter. 25% of the marks at debt, you're -- like it's not calling out the full risk to that name.

It's price -- it's valuing the loan at the level that the market today is pricing that loan at. So that's a fair value market. It is reflected in our NAV, which these markdowns, we saw NAV decline this quarter for the first time i-- in a pretty long time here at it's capital. So it's reflected in the NAV. It's reflected in the marks. It is not -- if we still deem that were covered by enterprise value, it is not reflected in the nonaccruals. Because I think the point that you're making and that is accurate. We reflected in the nonaccruals when we believe there is risk of impairment and that the full interest and principal is not collectible.

We'll go next now to Peter Troisi with Barclays.

I appreciate all the comments on the -- on funding on the call so far. I'm just wondering if you could talk a little bit more about the mix of funding. Just looking at the ratio of unsecured debt to total debt has been gradually declining. Over the past few quarters and ended March at about 59%. And obviously secured funding is always going to be cheaper for you, especially now given where BDC unsecured spreads are generally. But wondering if you had a target for the ratio of unsecured debt to total debt or maybe even to total assets and where we could expect that ratio to go over the next few quarters?

Sure. Peter, thanks for the question. I think we certainly have run at fairly high levels of funded unsecured debt in the past. I think even at the current level, you cite, it's still pretty healthy and relative to the rest of the sector. Certainly, early part of this year, post our deal, the spreads gapped out quite a bit in the unsecured market and we're fairly unattractive. Let's say, the past 2 weeks have been very productive. So certainly makes it a little better. But I think the point is we have a fair amount of liquidity on hand, and we like doing that on purpose to make sure we can be very opportunistic about our issuances. So yes, I think the way we look at it is that we've got to still do no issuance for the rest of the year and we know you have a maturity coming up, still puts us at majority funded and unsecured. So I'd say, probably our target is to make sure that a majority of our funded debt is unsecured. So it does -- I think some room to go there. But certainly, it's a more productive market than it has been.

We'll go next now to Casey Alexander with Compass Point.

I want to badge of honor for being the last question on the longest quarterly conference call in Ares Capital history. And I do have 2. First one is, in the last 6 years, we've heard multiple periods where all of a sudden spreads widen out, and it looked like it was going to be durable in better terms and better documentation. And then just immediately -- almost immediately competition came in and slammed the right back to where they were. So why should we believe that this cycle is different and that wider spreads and better terms can be a little bit more durable?

Jim and I can maybe tag team on that answer, Casey. I don't know that we're actually sitting here saying, pounding our chest saying that anybody should expect it to be more durable than in past cycles. I think we're just saying, we're seeing it widen. We are watching the factors as to what's creating the widening, which we talked about before. I think both flows within private credit and maybe risk premiums in the market. I think the other thing I should say is banks, bank behavior is also driving the widening, and we're seeing banks be less risk on in terms of new commitments. We've seen the broadly syndicated market widen out as well in terms of their implied spreads and the pricing in that market. So there's lots of different things they're creating it. Every period is different. I mean we did see wider spreads be pretty darn sustained when they started to wind down in mid-2022. And that lasted for 18 to 24 months. We saw spreads peak out at [ 650 to 700 ] and fees were 2 to 2.5 points, and that was pretty well sustained. If you're referring to. Yes, look, last year, the tariff taxing period, obviously, we garnered some premium economics through that. Right through the teeth of that period when everything was extremely uncertain and then things changed immediately when our government decided to do their announcement and things were right back on track. So really hard to predict, and I don't think we are actually predicting whether it's going to be sustained or not, I think time will tell.

Okay. And my follow-on is Pluralsight, which you were involved in Medallia, which are not involved 2 of the highest profile sponsors within the space, and 2 very large deals. And I'm just curious, internally, how has that impacted your thinking in terms of sponsor selection and also sizing of investments going forward.

I think we have good relationships with both of those sponsors. I would say on Pluralsight, the way that, that deal resulted itself with the sponsor worked consensually with us to effectuate a restructuring and hand over the keys to the lender group. We were not the lead in that lender group. We didn't need those negotiations. We were a smaller holder but they certainly behaved ultimately in the way that, obviously, we would have liked to see them support the company with capital. But they did work consensually with us. And I don't think it's materially changing our view of whether we want to work with those sponsors or not. Not every deal is going to go on to plan. And we didn't really -- again, we didn't see any sort of nefarious behavior on the part of those sponsors.

[Operator Instructions] we'll go next now to Robert Dodd with Raymond James.

SOrry, Casey, but I guess, I'm after you. A question on the management consultant hiring them, and I apologize for [indiscernible], less about the output and more about the why. I mean to your point, A year ago, there was the tariff tantrum, et cetera, and you didn't hire a consultant at that point to evaluate embedded tariff risk in the portfolio or anything like that. You did it in-house with your in-house expertise, et cetera. So my question is, is it feels different this time, right? You've hired a consultant who might be agreeing with what you said, but was there a level of complexity increase and uncertainty about the capabilities of the in-house expertise or what motivated the decision to bring in that third party when that's not typically been the patent in the past when there's been some theme, be it tariffs or something else?

Yes, I love the question. So with tariffs, it's a math-based equation pretty much, and we were able to pretty quickly speak to all of our portfolio companies, asked them to break down their cost of goods sold from -- not all of our portfolio companies, but the ones that actually import products and break down the cost of goods sold and do a quick analysis as to the impact based on various tariff rates and come up with an exposure. And we put that number out with a clear explanation of how we did it. And people seem satisfied and agreed with the analysis. And by the way, then the tariff thing went away, like we said in the prior question. This is a much more complicated situation. It's becoming apparent to us. And it's not exactly numbers based, is what I would say. Because the numbers continue to be very, very strong in the software portfolio and yet the concern really from the outside world, not from the inside world, continues to be present. Even as we continue to talk about why we feel good about the software portfolio and the underwriting we've done. And I guess I'll just remind people a couple of things. So first, 2 years ago, right around now, we had a public Investor Day in New York and [indiscernible] anybody who wanted to show up and we had a whole slide we had on AI risk and how it might impact the software business and how we felt good about our underwriting and how we've always underwritten again, mitigating against technology risk. That was 2 years ago. And that wasn't even the beginning of when we started thinking about that topic. And as we said in the prepared remarks, it was middle of last year that we started to think about bringing in a consultant because we just felt like as we kept talking about the underwriting we've done in the mitigants, the fact that it wasn't a map-based equation and the fact that everybody was looking forward and not backward meant that we should probably bring in a third party to help us validate our opinions. And obviously, we feel good about our opinions, but like any, I think, prudent investment manager, you want to test your own thesis. And you want to figure out, do we have some bias potentially because we are the ones that have been underwriting this portfolio, and we wanted to bring in a third party not only just to help satisfy the external world, but also to test around thesis. And we started viewing those parties and decided on the consultant at the end of last year. We actually had in our prepared remarks in the October earnings call, a lot of comments about AI. Again, that didn't seem to satisfy people because in February, it seemed like the world woke up and everybody thought all of a sudden, there was going to be massive explosions in software, in private credit portfolio. So I think just the continued concern by the external world, the lack of math-based formulas and the desire to test our own thesis were the reasons why we went and did it this time. And hopefully, it's helping give people a little more color around the situation.

And maybe to clarify -- if you don't mind, I'm just going to clarify a little -- maybe just the response a little bit. We often engage third parties to help us evaluate transactions, right, and sectors and white paper, new spaces, and we utilize third-party work from consultants like this as part of our diligence, as part of our ongoing review of portfolio companies, too. So that's not -- that part of it is not new. I think what -- the scale of this and maybe the disclosure or the outbound to the community is what's new here. But I do think we -- this is a part of our work in a regular way, too. So it's a combination of the circumstances correlate out. And just this is a good practice for us and we do it often.

Got it. Yes. I can understand it's part of the processes. It's not normally a footnote in the presentation. On the -- kind of a follow-up sort of related. I mean, you said the medium risk assets have about 2.4, I think 2.5-year maturity left. I mean from the review, did they -- you get a takeaway on like what's the time line for these AI risks if they happen, right? If a medium business does get impacted and it's in the next 9 months than the maturity being a year plus, a lot further out is 1 thing. If it's 5-year horizons, then most of these assets are going to be matured and possibly gone before it ever becomes an issue. So can you give us any color on like what the outputs were on like where the maturities are versus what time horizon the risks actually really exist on.

Yes. It's a good question, Robert. I guess the more detail -- the more facts we disclosed, the more questions that come up when you talk about the 2.4-year maturity. Let me tell you, there was not really a strong part of the study or conclusion that delved into the amount of time that it would take it, I'm sure, obviously, that's very company-specific and not something that can necessarily be calculated. Again, this is a very complex topic. And I think it's a great question, but not something that I'm really in a position to answer other than to say that the consultants did report, I already said it once, but I'll say it again, the medium risk company, they felt the medium-risk companies in our portfolio do have ample time to execute on their own AI strategy in order to avoid being disrupted. So that was the specific commentary, but I didn't really talk about the actual specific length of time.

And ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kort Schnabel for any closing remarks.

Great. No closing remarks. Thanks, everybody, for joining today and for your support and engagement, and we look forward to connecting with you on our next quarterly call.

Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, a replay of the call will be available approximately 1 hour after the end of today's call through May 28, 2026 at 5 p.m. Eastern Time.

You can access the replay for domestic callers by dialing 1 (800) 727-6189 and international callers 1 (402) 220-2671. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital website.

Again, thanks for joining us, everyone, and we wish you all a great day.

Good afternoon, welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December 31, 2025, Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, February 4, 2026. Over to Mr. John Stilmar, partner of Ares Public Markets, Investor Relations.

Thank you, 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. 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.

During this conference call, the company may discuss certain non-GAAP 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 the financial performance because it's one method the company uses to measure its financial condition and results of operations.

A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS 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 as well as the accompanying slide presentation including credit ratings and information related to portfolio companies was derived from or obtained from third-party sources that have not been independently verified. And accordingly, the company makes no representation or warranty with respect to this information.

The company's fourth quarter and year-end 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Fourth Quarter 2025 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation earnings release and Form 10-K are also available on the company's website. And now I'd like to turn it over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?

Thanks, John, and hello, everyone. Thank you for joining our earnings call. I'm joined today by Jim Miller, our President; Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session.

Let me start by providing a few thoughts on ARCC's performance, current market conditions and our outlook for the year ahead. 2025 was another good year for our company. We generated strong financial results, supported by our stable credit quality and growing portfolio. Our core earnings per share of $0.50 for the fourth quarter and $2.01 for the full year fully covered our dividends and drove an ROE in excess of 10% for both the fourth quarter and the full year.

Reinforcing our long-term track record of generating NAV growth with attractive dividends, we ended 2025 with modestly higher NAV per share and have now paid a consistent or growing level of regular quarterly dividends for over 16 years.

The drivers of these results are embedded in what we believe are our long-term competitive advantages, which include the experience of our team, our long-standing market relationships, the scale of our capital base and our rigorous credit standards. We remain confident that these enduring competitive advantages will continue to support compelling performance for the company in the future.

Looking back on 2025 as uncertainty around macroeconomic policies from the early months of the year subsided and pressure on private equity firms to return capital to investors mounted, we saw a rebound in transaction activity during the second half of the year. This, in turn, led to a meaningful acceleration in new investment commitments for us over the same period.

Despite a relatively tepid M&A market in the first half of 2025, we remained busy with the majority of our originations coming from incumbent borrowers as we sought to support the growth objectives of our portfolio companies.

We believe that our ability to be a steady capital provider at scale through periods of economic and capital markets volatility is especially valuable to our portfolio companies and continues to lead to further market share gains as our existing borrowers consolidate their lending relationships with us.

Specifically, across our top 10 incumbent transactions during 2025 we more than doubled our share of the overall financing. These incumbent transactions can offer attractive opportunities to increase our exposure to some of our best-performing portfolio companies. Therefore, our portfolio of more than 600 borrowers is yet another factor that we believe can drive future incumbent lending opportunities and in turn, the long-term performance of our company.

While we continue to see opportunities with incumbent borrowers into the second half of 2025, the M&A and LBO markets also gained momentum. This accelerated transaction activity and new borrowers comprised the majority of our new lending activity in the second half of 2025. Reflecting the breadth of our market reach and further expanding future incumbent opportunities, ARCC added more than 100 new borrowers to the portfolio during the year, a new record for the company.

While the broader tailwinds of increasing market activity levels helped drive higher originations to new borrowers in the second half of the year, much of this growth also came from the continued expansion of our specialized industry verticals. The deep knowledge and specialized skill set we have developed in industries such as sports, media and entertainment, specialty health, health care, energy, software, consumer and financial services ultimately results in access to differentiated deal flow, particularly in the nonsponsored channel.

Building on the momentum we have in these verticals our nonsponsored originations grew by more than 50% during 2025. Collectively, these factors supported a record year of gross originations at ARCC with $15.8 billion of new commitments in 2025. Importantly, we are maintaining our highly selective approach, supported by a widening set of sourced opportunities.

In 2025, our investment team reviewed nearly $1 trillion of potential investments, representing a 24% increase in the number of opportunities we reviewed relative to the prior year. We also see the merits of origination scale in our ability to garner attractive terms and pricing. Against a competitive market backdrop, where market spreads declined before stabilizing over the course of the year, we were able to drive a modest year-over-year increase in spreads for our first lien commitments, while also maintaining LTVs in the high 30% to low 40% range, and upholding our stringent underwriting and documentation standards.

The quality of our portfolio remains in excellent shape as our borrowers continue to demonstrate healthy overall performance. On average, our portfolio companies are growing faster than the economy and the comparable broadly syndicated loan market. In 2025, the weighted average organic EBITDA growth rate of our borrowers was more than 3x that of GDP and more than double the growth rate of borrowers in the broadly syndicated loan market.

The continued growth and stability of our borrowers also contributed to improvement in portfolio fundamentals. For example, average portfolio leverage decreased approximately 0.25 turn of EBITDA from the prior year while our portfolio's average interest coverage ratio improved to 2.2x driven primarily by lower market interest rates and earnings growth.

Our credit quality showed stability throughout the year as our nonaccruals at cost ended 2025 in line with both the prior quarter and year-end 2024 levels and our weighted average portfolio grade remained consistent throughout the year at 3.1. We also generated pretax net realized gains on investments of more than $100 million during 2025. These results extend our long track record of generating realized gains by successfully investing across the capital structure with the support of our industry-leading portfolio management team.

During 2025, we realized over $470 million of gross gains from our equity co-investment portfolio and our successful portfolio management and restructuring efforts. The exits on our equity co-investments over the course of 2025 generated an average IRR in excess of 25%, returning more than 3x our initial investment on average.

These results further support our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, these results underscore the strength of our team and the merit of our differentiated investment strategy.

Even as our overall portfolio continues to perform well, we remain steadfast in our approach to risk management and diversification. With a 0.2% average position size at ARCC we believe we are well positioned to minimize single name risk and thus, lower portfolio risk overall. We believe this level of diversification stands apart from many others in the industry, and, in our view, will contribute to further differentiation in performance between ARCC and industry averages.

Against this backdrop of strong originations and stable credit performance, let me make some comments on our dividend outlook. We believe ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates. We generally set our dividend level based on our view of the earnings power of our company. While lower short-term rates present an earnings headwind, we believe there are multiple factors that can support our earnings and thus, our current dividend level for the foreseeable future.

First, we believe our dividend level was set at an achievable benchmark for today's interest rate and competitive environment. Second, our balance sheet leverage remains low, below 1.1x net debt to equity leaving meaningful capacity relative to the upper end of our 1.25x target range. Importantly, as we prudently grow the portfolio above 1x earnings will also benefit from the lower management fee rate on the marginal portfolio. Third, we see incremental growth opportunities from 2 of our most strategic investments, the Senior Direct Lending Program and Ivy Hill Asset Management. And as market activity increases, our ability to invest across the capital structure has historically provided us with higher returning opportunities.

Fourth, we expect continued healthy credit performance considering the current economic outlook, the strength and stability of the current portfolio and the team's track record over more than 20 years. Finally, we have more than 2 quarters of spillover income, which provides an additional cushion to help support dividend stability in the event that our quarterly core earnings temporarily dip below the dividend.

In closing, 2025 was a great year for ARCC. We believe our results for the fourth quarter and full year will continue to show differentiation in a market where there is already increasing dispersion in financial results. With this momentum, I believe we are well positioned for a successful 2026 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet.

Thanks, Kort. This morning, we reported GAAP net income per share of $0.41 for the fourth quarter of 2025 compared to $0.57 in the prior quarter and $0.55 in the fourth quarter of 2024. For the year, we reported GAAP net income per share of $1.86 compared to $2.44 for 2024. We also reported core earnings per share of $0.50 for the fourth quarter of 2025 compared to $0.50 in the prior quarter and $0.55 for the same period a year ago.

For the year, our core earnings per share of $2.01 compared to $2.33 for 2024. The decrease in core earnings year-over-year was driven in large part by the decline in base rates. Importantly, in 2025, our core EPS remain in excess of our dividend in all 4 quarters, and we generated 10% core ROE for the year, which was in line with our historical average since inception.

Looking forward, as mentioned in previous calls, it's important to consider the timing of contractual rate resets in our floating rate loan portfolio on our core earnings. Changes in base rates typically take about a quarter to be fully reflected in earnings. Therefore, assuming all else equal, the decline in base rates during the fourth quarter will create about $0.01 per share of earnings headwind for us in the first quarter of 2026. As a reminder, there typically is seasonality in our business as origination volumes generally tend to be slower in the first quarter, than in the fourth quarter. Capital structuring service fees, which are tied to origination volumes typically follow the seasonal pattern as well.

Now turning to the balance sheet. Our total portfolio at fair value at the end of the fourth quarter was $29.5 billion, which increased from $28.7 billion at the end of the third quarter and $26.7 billion a year ago. Our net asset value ended at $14.3 billion or $19.94 per share, down 0.35% from a quarter ago and up 0.25% from a year ago.

Shifting to our debt capital. We're proud of what we accomplished in the past year by continuing to grow and strengthen our best-in-class balance sheet. In total, we added new gross debt commitments of $4.5 billion in 2025, a new record for the company. That progress was driven by consistent and leading execution across multiple funding channels, starting with our unsecured notes. We were active in the unsecured notes market during the year, issuing $2.4 billion of investment-grade bonds, marking our second most active issuance share since our inception. Notably, we remain the highest-rated BDC by all 3 of the major rating agencies.

Consistent with our long-term strategy of being a regular issuer in investment grade notes market, we began 2026 by issuing $750 million of long 5-year debt at an industry-leading spread of 180 basis points over treasuries, which we swapped to SOFR plus 172 basis points. We have also been the beneficiary of broader investor support as more than 75 new investors have participated in our bond offerings over the past 12 months through this transaction.

We were also active with our diverse bank capital providers, expanding our credit facilities by $1.4 billion over the course of 2025 while also reducing borrowing spreads by approximately 20 basis points on average. We are proud of the relationships we have with over 40 banks, many of whom have been long-term and growing supporters of ARCC.

And finally, we continue to benefit from Ares' long-standing reputation as a top-tier manager and 1 of the largest CLO issuers in the market. That positioning helped us execute our largest on-balance sheet CLO in our history, with $700 million of debt price in December at a blended cost of SOFR plus 147 basis points. Beyond the efficiency of this transaction, our execution further broadened our funding mix by accessing the strong demand for rated asset-backed financing secured by a significantly diverse high-quality portfolio of assets.

Collectively, our floating rate financing helped the company capture the benefits of lower borrowing costs should market rates decline further. Nearly 70% of ARCC's borrowing today are floating rate compared to approximately 50% at year end 2024.

Overall, our liquidity position remains strong, totaling over $6 billion including available cash on a pro forma basis for the post year-end activity that I just mentioned. In terms of our leverage, we ended the fourth quarter with a debt-to-equity ratio, net of available cash of 1.08x and versus 1.02x a quarter ago, which still leaves us with meaningful headroom relative to the upper end of our target leverage ratio of 1.25x.

We continue to believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Furthermore, we appreciate the continued support of all of our debt investors and lenders, and we look forward to building on these partnerships in the year ahead.

Finally, our first quarter 2026 dividend of $0.48 per share is payable on March 31 to stockholders of record on March 13. ARCC has been paying stable or increasing regular quarterly dividends for 66 consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026.

I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I will provide some additional details on our fourth quarter investment activity, our portfolio performance and our positioning at year-end and then conclude with an update on our post-quarter-end activity and backlog.

In the fourth quarter, our team originated over $5.8 billion of new investment commitments, which is up more than 50% from the fourth quarter of 2024. This brought our total new commitments for the year to $15.8 billion, marking a new annual record for ARCC. About half of our new originations in the fourth quarter supported M&A-driven transactions, such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment.

Reflecting on our broad market coverage across the lower, core and upper parts of the middle market, our fourth quarter originations included companies with EBITDA ranging from under $20 million to over $800 million. Additionally, we made commitments to companies across 21 industries and 58 sub industries, demonstrating the benefit of our critical focused origination team and identifying specialized opportunities, which Kort touched upon earlier.

We ended the year with a record $29.5 billion portfolio at fair value, a 3% increase from the prior quarter and 10% increase from the prior year. As of year-end 2025, our strong and growing portfolio remains well diversified across 603 different borrowers. The number of companies in our portfolio has also increased nearly 10% over the past year and 72% over the past 5 years, further enhancing our diversification.

The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average and our top 10 investments, excluding our investment in IHAM and the SDLP comprised approximately 11% of the overall portfolio which is less than half the average concentration of our relevant peers.

The scale of capital available at Ares and ARCC supports our ability to execute our origination strategy and invest across the middle market, while also mitigating the impact of negative credit events in any one borrower on the credit performance of the company.

The financial position of our portfolio companies remain strong. Our portfolio's average interest coverage ratio of 2.2x increased 10% quarter-over-quarter and 15% year-over-year. The portfolio's average leverage level also showed strength, declining about 0.25 turn of debt-to-EBITDA from year-end 2024 and remaining stable with Q3 levels. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remain low and stable at approximately 44%.

Our portfolio companies continue to demonstrate growth in their profitability. The weighted average EBITDA of our underlying portfolio companies demonstrated organic growth over the last 12 months, expanding 9% year-over-year. This organic growth rate remains in line with our 10-year average and was more than double the EBITDA growth of the borrowers in the leverage loan market of approximately 4%.

When looking across the different segments of our portfolio, we continue to see healthy performance. We are observing positive EBITDA growth in excess of the broader economy across both senior and junior capital investments as well in both large and small companies.

We are also seeing outperformance through our industry selection as the top 5 largest industries in our portfolio, including software, are experiencing faster EBITDA growth than the aggregate portfolio. The organic growth rate of our borrowers underscores what we believe is one of the many merits of not being a benchmark-style investor as we are able to be selective not only with the companies we are financing, but also with the industries we target more generally. Supported by these underlying portfolio trends, the credit performance of our portfolio remains strong.

Our nonaccruals at cost ended the quarter at 1.8%, in line with prior quarter and prior year levels. This level remains well below our 2.8% historical average since the global financial crisis and the BDC historical average of 3.8% over the same time frame. Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio and well below our historical levels.

Our overall risk ratings remained stable throughout 2025, and the share of our portfolio companies in our lowest risk category grades 1 and 2 totaled 3.8% at fair value, remaining 180 basis points below our 5-year average. While our overall portfolio continues to perform well, we remain vigilant in monitoring our portfolio for underlying credit issues and seek to be proactive in addressing any issues as they arise.

Shifting to 2026, we've had a strong start to the new year. Our total commitments through January 29, 2026, were nearly $1.4 billion, an 11% increase as compared to commitments closed in January of last year. Additionally, our backlog as of January 29, 2026, stood at $2.2 billion, which is more than 17% greater than the reported backlog at January 28 of last year. 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.

Furthermore, we are closely watching current market conditions to see if the choppiness in retail capital flows impacts the competitive landscape in our favor. In contrast to managers that have concentrated their fundraising in retail-oriented products, we believe managers such as Ares, with both significant institutional and retail sources of capital possess a more stable base of committed dry powder. This allows Ares and in turn ARCC to be a consistent capital provider with the scale in the market through changing periods.

As we look to the future, we believe we are well positioned to capitalize on an expanding market opportunity, supported by the collective expertise of our team and our differentiated approach. These advantages have underpinned both our leading investment performance and stock-based returns. Since our inception in 2004, our stock-based total returns have outperformed the KBW Bank Index, BDC peer averages and the S&P 500 by approximately 40% or more.

Most recently in 2025, ARCC generated more than 600 basis points of additional total return versus the BDC average as measured by the VanEck, BDC ETF. As always, we appreciate you joining us today. And we look forward to speaking with you again next quarter.

On behalf of the executive team, I'd like to thank our team for the hard work and dedication that led to another strong year for ARCC. With that, operator, please open the line for questions.

[Operator Instructions] We'll take our first question from John Hecht with Jefferies.

You guys did -- you mentioned the position you have in software. You also mentioned that software continues to grow faster than the pretty strong rates of growth elsewhere in the portfolio. but there's a big emerging fear in the market about the impacts of AI on that type of business performance. I'm wondering, do you guys -- are you eyeing that emerging subject and do you have any points to make on how you think it's positioned in that regard?

John, thanks for the question. Very glad that this is the first question of the day because obviously, there's a lot of noise going on out there. And I think we really want to make sure that we hit this hard and address anyone's questions and spend real time making sure that people understand our thesis in the space and how we built our portfolio.

Our strategy going forward. So look, I think the first thing I want to say is we feel very good about our software book. And we don't feel any differently this quarter than we did last quarter despite all the noise in the market, the fundamentals and the underpinnings of our portfolio and our underwriting haven't changed. And we did make a lot of comments last quarter in our prepared remarks on earnings call about AI in our software book, and people could certainly refer back to that as well.

But I think I'll spend a little bit of time and sorry if it's a little long-winded, but I want to really make sure that we frame up our strategy for people today.

So the first thing to just sort of remind people is we started investing in the software space about 15 years ago or so here at Ares Capital. And from the beginning, the #1 risk that we identified in the software space was technology risk and obsolescence risk. And so we said to ourselves, if we're going to have a thesis in the space and build a book, we really want to make sure that every single software company we put in the portfolio is highly resistant to technology risk.

And obviously, AI is probably the most disruptive technology risk that we could have imagined. And it absolutely is going to disrupt a lot of software companies, and I don't want to sugarcoat it. But we still believe strongly that we've constructed a portfolio that will remain highly resistant to this risk.

So I think maybe I'll just outline a few characteristics that we've always looked for in our software companies and that we obviously continue to raise the bar on and look for even more in our new investments. So -- but the first thing is that we primarily look to invest in foundational infrastructure software for complex businesses, right? This is software that sits at the center of the technology stack and powers all core businesses, right?

The last type of software, in our opinion, that a company would look to switch out because that all of your downstream systems that feed off this software might also be at risk. So we like this kind of software where the entire business and operations of the customers are dependent on the accurate functioning of this system. So that's kind of probably the most important point, number 1.

We're also looking for software companies and a lot of our software companies do this. We're looking for these companies that collect and own proprietary data and they collect this data and build this data over many years of serving their customers and then they use the data as a core part of their value proposition when they deliver the software, right? So we call this a data moat and it's important to mention that AI is not a database. AI doesn't house data, it can't replicate proprietary data. So we really believe that these data-enabled software companies will prove resistant and these types of companies, you'll find a lot of these types of companies in our portfolio.

We also are looking for software companies that serve regulated end markets like health care, financial services, as a couple of examples. There's lots of these regulated end markets, where the need for accuracy and auditing of information is really high and the penalties for lack of compliance can be severe, right?

So John, you think about like Jefferies is not going to rip out its core infrastructure software and replace it with an AI-based solution anytime soon in our opinion. We think it's going to take a really long time for companies that are in these types of industries to gain enough trust in any kind of new product, if ever. So that's a really important point as well.

Obviously, we always talk about diversification in our strategy in so many different ways, and that applies to our software companies as well in terms of their customer bases, right? So we're looking for software companies that have very diverse customer base. So even if some customers do switch to maybe an AI-generated software solution, others will remain and they create sort of this long tail of cash flow that will hopefully survive, and we really do not see quick and binary outcomes that occur when you have this kind of diversified customer bases, right?

And it sort of leads into the next point to remind people about, which is, we are lenders to these companies with maturity dates. We're sitting at the top of the capital structure. We have all the assets as collateral, including intellectual property. So there's lots of ways that we can look to recover our principal if things do start to get disrupted. And this is just a very different place to be sitting in, in the capital structure than sitting down in the equity, right?

So if you look at some of the metrics on our software book, they're extremely healthy. The book itself is also highly diversified with lots and lots and lots of different position sizes none of which is outsized in any way. These software companies are very large and established businesses, right? The average EBITDA on our software book is $350 million. That's above the average in our portfolio.

You mentioned, John, in your question, the growth rate of our software businesses remain really strong. The software book, the LTM EBITDA growth in the software book is growing at a faster rate than the overall average EBITDA in our book, even through the recent quarter. The loan to values, and this is maybe one of the most important points, the loan to values on our software book, our software loan book is 37% on average. That's below the loan to values on our overall book, and there is just an enormous amount of equity cushion below these loans that sit in the first loss position beneath us.

So there really would have to be a whole lot of value destruction that would occur before we, as a lender would lose $1, right? So again, sorry for being long-winded I really want to make sure we're getting clarity out on this topic.

And maybe the last point I'll just say is we've got an incredible team of resources here at Ares. We've got a software vertical within our credit business that consists of a bunch of investment professionals that only do software credit investing. We've got an in-house AI team at -- a company called Bootstrap Labs, which we acquired a few years ago, which is a venture capital firm that's been investing in AI for more than a decade and we use all of these resources to help us evaluate every new deal we do as well as during our quarterly valuation process to assess the risks and the marks that we're taking on all of these names. I don't think everybody does that. So that's something that's pretty unique to Ares. And hopefully, it gives people confidence in the marks and the risk in the portfolio.

So look, as we sit here today, we're obviously watching everything going on up there playing close attention, don't want to sugarcoat it, but we really see minimal near-term risk to our software portfolio and I'd say, very manageable, medium- to longer-term risk in the book.

That is very helpful, and I appreciate the color because I do think it's an important topic. Follow-up question is you guys have an active pipeline, strong growth year-over-year. You mentioned, I think, 50, about half of them were buyout sponsor-related stuff, anything to characterize the other half? And how that paints the picture for how you think the market is firming up for the duration of '26.

Yes. I mean, there's still a lot of unknown activity on existing portfolio companies, right? So that makes up usually the bulk of the remainder of the deal flow. Us just putting capital into support continued acquiring of added EBITDA. So those are good uses of capital. We have not seen a real big resurgence of dividend transactions. There have been a few, obviously, private equity firms looking to return capital or going to test the market on dividends.

But I wouldn't say that, that's a huge driver of our deal flow right now. It's really the add-ons. Obviously, there are refinancings still going on. But most of the sort of refinancings and spread sort of reductions have worked their way through the system and spreads have been really stable now for better part of a year or so that's not been a huge driver.

There also have been some refinancings out of the broadly syndicated market, where, obviously, the broadly syndicated market can be a little bit volatile at times or maybe a sponsor just want -- values having certainty of capital in all environments and has come to us to take out a deal that currently is in the broadly syndicated market. So it's probably the preponderance of the other activity.

We'll take our next question from Finian O'Shea with Wells Fargo -- and actually, we'll move next to Doug Harter with UBS.

I guess as you guys look at this current environment, clearly, Ares as a platform has a lot of advantages over a relative valuation GAAP versus your peers, how do you think about potentially playing offense and taking advantage of market weakness in this type of environment?

Yes. Great question. We certainly get excited about those types of opportunities. Historically, when there have been any kind of periods of dislocation or volatility, that's been a strength for our industry in private credit and certainly for us at Ares, especially since our capital base is much more diversified than a lot of our peers. And so the stability of our capital and the ability for us to sort of fill gaps in the market is a big advantage. So I think we'll see what unfolds from here. But to the extent that there are any pockets of changes in supply of capital. I think we stand to benefit. I mean, we just talked about software at length.

I certainly might expect that the broadly syndicated market will have a hard time providing financing for some software businesses. And if there's very high-quality software companies that meet the standards I described earlier, I would venture a guess that the cost of capital for those companies probably has gone up a bit. And I think we might be excited to provide that type of financing to the very best of those companies.

So we'll -- again, we'll see what unfolds. Obviously, there's been some changes in the environment for some of the retail flows. And that could also create some changes in competitive behavior that we're watching closely, as Jim said in his prepared remarks, and we feel like we're in a great position capital-wise to step in.

And now we'll move to Finian O'Shea with Wells Fargo.

So a follow-up on John's question on software. Just to pushback on a couple of those points for the steward of argument. The risk, I think, is presented pretty widely is still a few years out. You have a good feel of resistance in the book as you outlined. But what sort of developments are you looking out for that would threaten even the more, say, foundational enterprise SaaS place? And do you see any progress toward those risks from AI in real time or if not, why so confident that, that will take a very long time.

Yes. Thanks, Finian, and I would love to off-line [indiscernible] and debated at length. I think it's really hard though for me to see a scenario where we would find any kind of real dramatic risk or change in our view toward those core kind of enterprise software businesses or those regulated industries. Obviously, just talked at length about all the reasons why.

I think for us, what we're focused on is the businesses that can be disrupted or -- I'm not going to say our portfolio is entirely clean. We have a very small amount of portfolio companies that could be disrupted, and that's where we're spending a lot of our time and focus and working with the financial sponsors and getting ahead of any kind of potential situation. It's not in those core enterprise software businesses. So I'm challenged right now to come up with scenarios where we would really see that get disrupted.

But I think the areas that we do think can get disrupted and where we're trying to be really disciplined on new transactions are kind of more single-function software apps that sit on the edge of the tech stack. Certainly, any kind of software that creates or delivers content because AI is fantastic at creating content.

So we'd be extremely careful about those. Data analysis or visualization type companies. AI is exceptional at summarizing data and spitting out all different types of reports and synthesizing those. So I think -- I just think those are the areas that are more at risk and again, very, very small exposure in our portfolio for those. So sorry, not a great answer, just can't come up with risks to those core enterprise businesses.

Appreciate that. Hard to envision. Follow-on the dividend. I appreciate the color there. It feels like there'll be like a pretty good tailwind, even though the structuring fees are lighter in today's environment, as been the volume. The deployment has obviously been fantastic. Does that sort of need to continue in your outlook or guidance? Or does that maybe moderate and something else offsets that impact? .

Yes. Yes. I mean there are so many variables and things that change all at once, right? So it's hard to sort of look at 1 variable or 1 driver and just say if that changes what happens. One thing I do want to say on the structuring fee point is the fees were actually consistent during the quarter.

We had another quarter where we had some transactions that we fronted for and sold right after closing. And so that dilutes the fee percentage, the sort of stated fee percentage, but actually, the fee percentage on a constant basis, if you just look at the dollars that we're holding in the book was constant quarter-over-quarter. So just to hit that one.

But look, I think if the spread environment stays where it is now, which is obviously tight and we see rates potentially continue to fall a little bit like the curve shows, then we're going to want to have a lot of volume like we did this quarter in order to produce good results. And I don't see any reason why that wouldn't be the case that we'd see that kind of volume if the spread environment and the economic environment kind of stays where it is.

If volume falls off, I would think there would be other things that are happening in conjunction with that, which maybe is less supply of capital in our space, therefore, maybe spreads widen, maybe fees widen, certainly what we saw in 2022 and 2023, coming off a super high volume year in 2021 and everything was getting tight spreads widened 150 basis points volume fell off, but we obviously had a fantastic period of performance at Ares Capital through 2022, 2023 despite the lower volume. So I just think it's really hard to pick 1 variable. So hopefully, that helps answer the question.

We will take our next question from Casey Alexander with Compass Point.

I do want to expand on that. I mean you did give a little bit of color on broadly syndicated market and what that could cause to happen with spreads in software, but I'm curious in that we've had some at least psychological market dislocation going on since before you guys reported your third quarter results as a result of the diamond comments and whatever -- and this has continued to be a -- picked up a lot on the media on the minds of investors left and right.

So I'm curious why haven't we or are we about to see a widening of spreads in general, normally in a period of dislocation such as this we usually see that happen fairly quickly. And in this event, it hasn't happened. And I would add, I think, inflows into the nontraded market are slowing down. So I'm just curious on some comments as to why we haven't seen spreads widen or if you think they're about to.

Yes. Great question, Casey. Probably 2 points I'd make on the events you mentioned. So when we saw some of that volatility a quarter or 2 ago when first brands Tricolor and there was concerns about credit quality and potential blowups, the BSL market winded out for a pretty short period of time. And it actually did recover pretty quickly. And the fourth quarter became active again for the BSL market and spreads kind of tightened back in that side of the market.

So I just -- it was too short-lived is what I would say, to drive real impact on the private market. And as you know, I'm sure there's a lag in our market. We often see the broadly syndicated market will move up and down, and our market takes a little bit of time to react to that, which is, by the way, one of our value propositions in our market is we don't gyrate as much, and our capital is more stable for our borrowers, and we take our time to make sure that any spread movement in the broadly syndicated market is going to be more sustained.

So I think that's just what we saw to the first event you mentioned last year. We were thinking there would be maybe a more sustained period, but it just didn't really prove out. On the nontraded flows, absolutely something we're watching really closely. Again, what I would say on that 1 is that's pretty new. So it's really in the last month or 2 max that we've seen those flows change. And it's not like they are on a net basis, moving wildly negative. They are really on the whole, just kind of moving. You're seeing redemptions, but you're still seeing inflows. So they're kind of -- the money is not flying into those funds like it was before, but it's still remaining pretty stable in terms of the funds that are there.

I do think if it stays like that, it will impact competitive behavior for our peers that are more concentrated to that channel. And at Ares Capital and Ares Management, I should say, we've been purposeful about not becoming too concentrated into that channel so that we can take advantage of maybe those kind of changes in competitive behavior. So again, if it stays like that, I expect it to change things, and that could absolutely be a catalyst for spread widening, but it's just too soon, and we're really anecdotally not -- we haven't seen enough volume come through the system. It's January, seasonally the slowest month of the year, but we're watching it closely. Hopefully, that helps.

Yes, it does. My follow-up is, it's been a while since the stock has traded below NAV. And certainly, the recent market turmoil there's been a catalyst for that. I'm sure investors would love to hear our view has always been that if you're willing to take capital from the market when you're trading at a premium to NAV, you should be willing to give capital back to the market when you trade at a discount. You guys do have a $1 billion share repurchase program. I think investors would like to hear your willingness to deploy the share repurchase program depending upon how volatile the markets get.

Yes. Good question. I guess the only thing I'd say on that, Casey, is just we have purchased shares back in the past. So it's not something that we're not unwilling to do and it's always on the table and something that we're looking at and discussing with our Board based on where the stock is trading. So other than that, I probably don't want to speak too much or give much -- any kind of forward-looking statements about what we might or might not do on that front other than to say that we have done it and we're always open to it.

We will take our next question from Arren Cyganovich with Truist.

This will probably show my lack of knowledge in the tech sector but I'm going to give it a shot as you mentioned the average EBITDA for the software portfoliocompanies is over $350 million and they've been growing. When I look at public software companies that have been facing a lot of pressure, EBITDA is not really a metric that they use in terms of valuation because I guess they're in a higher growth phase. I was wondering if you could just describe some of the differentiation between the software that you own versus what we might be looking at in the public markets?

Yes. I don't know that it's all that different. I just think it's a difference between equity and debt thesis, right? When we're thinking about the investment strategy. So we, as lenders, are looking at the underlying cash flow of these businesses to support our loan and get us paid our money back. So we're very focused on EBITDA. The equity markets and publicly traded companies are focused on forward growth to justify their valuations, and there have been extremely high expectations of future growth. And I think as you start to see some of that growth temper that is driving a lot of the falloff in values in the public market. And that's why those public companies are always pointing to revenue metrics and growth metrics, because I just think those investors are more focused on that. But I don't think there are necessarily different types of companies.

We have seen, obviously, in the lending space, over the last 5 or 6 years, the development of recurring revenue loans where there are lenders that will lend against the revenue and the forward growth, not necessarily the EBITDA or the forward achievement of EBITDA. We have been very conservative on that, and I didn't even really mention that as part of the overall -- the intro I did on the software but anther data point to even point out around our strategy, which is we've been much more conservative around recurring revenue lending than I think a lot of our peers, and it's less than -- it's like less than 2%, 1% to 2% of our book right now, is recurring revenue loans, and that's also extremely diversified.

We've had a strategy of building that book with a bunch of very small positions. So that we can watch that space develop and see how it would perform. By the way, it's actually performed quite well. And those loans have actually converted to the EBITDA loan. So it's actually been a good space. But we've been very conservative on that. So hopefully that helps answer the question.

It does. I still need to do some reading on the sector since it's not my area of expertise. But as a follow-up, the -- we've been waiting for the M&A markets to really open back up in the IPO markets to kind of open back up to free up some of the investments that the private equity have been holding on for longer periods. Do you feel like the software pressure is going to weigh on that time line for 2026 and maybe what other areas outside of this kind of story, other sectors, do you see within your pipeline that might be able to take up some of that slack.

Yes. I mean, I think it obviously might impact in the software space, right? So -- and especially for the -- your prior question around valuations in the public market. And when you're a private equity firm looking to buy a software company, you're obviously going to rethink value. And a lot of private equity firms that own the existing companies pay pretty high prices. So I certainly do expect there could be a bit of a widening of the gap on bid-ask spreads on new buyouts in the software space.

That being said, I still think there's going to be really attractive add-on opportunities for existing portfolio companies to potentially take advantage of lower valuations and I think that will be a good opportunity for us to deploy into the space and certainly take private opportunities on -- in the software space, given lower valuations will probably tick up if I had to venture a guess.

So there's some offsetting factors, I think, within that industry. I mean in terms of the rest of the economy, again, fundamentals feel strong. Growth rates are good. And I don't necessarily see that spilling over into other areas of the economy. I think the ingredients are in place, given the sort of long in the tooth nature of the hold periods on a lot of private equity funds that just continues to extend. And given the apparent confidence in the overall economy for -- on the part of buyers to step up and buy new companies. So I think we still feel optimistic on the rest of [ the year ].

We'll move next to Brian McKenna with Citizens.

Okay. So maybe one more on the team of software. I think all focus recently has clearly been around the negatives from AI and no one is really talking about maybe the potential upside for your portfolio companies from AI and leveraging AI, specifically, those companies away from software. So I'm curious, when you look across your portfolio today, is there any way to think about what percent of your portfolio companies could actually see more tailwinds from AI than headwinds over time? And then is there actually a scenario where your portfolio collectively is experiencing more net benefits longer term? .

Yes. Thanks so much for asking, Brian. I -- we're lenders. So we're always focused on downside risks. But 100%, there is upside. And I think that is missing from the discourse here in the public, which is it sort of almost feels like people think big software companies are sitting there heads in the sand, asleep at the switch, while AI is creating competitive threats and they're not doing anything. And it couldn't be further from the truth. We have great dialogue with our software companies. They are all working on augmenting their products with using AI solutions or just using AI to create additional software modules and tools to add on to their core infrastructure software. And that's actually going to help some of these core infrastructure software businesses create new products to bolt on and upsell faster than they might otherwise have been able to do. And they already have that leg into the customer via the core enterprise.

So I 100% think it's going to be a boom to some of our companies. Obviously, as lenders help us get our money back maybe faster, but doesn't -- is not a ton of upside as a lender but back to our equity co-investment strategics, which talked about a lotin the prepared remarks certainly could be really helpful on those equity co-investments that we have made selectively into some of those software companies.

Okay. And just one more for me. Just taking a step back and looking at the industry, it's clearly getting larger and larger and more competitive and there's really A long list of firms that can write large checks in the market okay? So I think having intellectual capital and really a full suite of value-added capabilities are becoming that much more important.

So you guys clearly have this. You noted some of the strong expertise that exist across your deal teams and just the platform more broadly. But when you look at some of the differentiated deals you're winning in the market today, how much of the -- how much of those are a function of kind of these full suite of capabilities, if you will, and really the capabilities away from just being a provider of capital. And just trying to think through that a little bit more.

Yes, it's all about those capabilities and not just about being a provider of capital. So it's a combination of so many different things. I think first and -- the amount of people and the talent that we have on our origination and investment team. We do believe we still have the largest investing team in the direct lending industry. And that means we have a lot of people out there calling on companies trying to source opportunities.

And that deal flow takes longer to germinate and result in an actual transaction. We could be out talking to a CEO or management team or Board of a non-sponsored company for years building a relationship and there might not be any transaction to do. And then all of a sudden, they want to do something, and they pick up the phone and call us because we've been building that relationship.

So this is something that does not happen overnight. It takes a really long time to build those relationships and lead to this kind of deal flow. And so it starts with the team, starts with those touch points, but then it also combines with the fact that, that team is out there offering a huge amount of flexibility of products, right? We're not out just saying we can be your senior lender, your bank. We're saying we can be your junior capital provider. We can give you equity co-investments, we can start as a mezzanine lender and then down the line if you want a senior lender, we can become that lender.

So we're really trying to explain to these companies that we can be their capital provider for the next 10 to 20 years, not just the next 3 to 5 years. And I think that really resonates. So it's all those things combined. It's not really just 1 thing. And I do think we're ahead of our peers in that respect.

We'll take our next question from Robert Dodd with Raymond James.

A quick 1 for me, maybe. Obviously, you feel very comfortable with the underwriting process you're doing on software and you've got a well-thought-out thesis there. You seem also optimistic that maybe spreads will widen in that market if the BSL market becomes less inclined to finance new software LBOs, et cetera. I mean, so looking at that, would that make software even more attractive to you from a risk-return perspective? And would you be looking to potentially increase your allocation to software over the next, call it, 12 to 24 months?

Yes, 2 questions, Robert. Look, we will have to see what unfolds. I think, is what I would say. I don't can go in so many different directions in terms of -- yes, how wide spreads get, right? What types of companies are looking to raise capital. So there's just so many different things that can go into that, but I don't know that I want to necessarily speculate. We are big on diversification. As we said, over and over in so many different ways and software is our largest industry category. We're very comfortable with it. But at the same time, we like diversification. So maybe I'll just leave it at that, and we'll see what the market gives us.

We'll move next to Kenneth Lee with RBC Capital Markets.

Just 1 on the broader industry. The recent OCC FDIC changes to the leverage loan guidance for banks. Do you expect to see any kind of potential for a meaningful change in over the competitive landscape over time based on the change in guidance there?

Yes, Ken, that's definitely something we're watching closely. I don't think so. The reality is the leverage lending guidance that was put in place a while ago hasn't really been enforced. And so I think the relaxing of that guidance is not necessarily going to change behavior. I think the larger driver of regulatory behavior on banks is the regulatory capital requirements and the capital charges that banks see if they make a loan into our market. And that still remains punitive and it's not changing. So I just don't think the leverage lending guidance change is going to make a difference.

Got you. Very helpful there. And just 1 quick follow-up for me. On some of the recent deals you've been seeing or some of the new investments in terms of the terms and documentation that you're seeing there, any changes more recently and more specifically, have you been seeing any loosening of, for example, like EBITDA add-backs or any other terms there?

Not really, no. If anything, I would say there's probably a heightened focus on documentation terms just given some of the headlines around LME transactions in the broadly syndicated markets and the looser documentation that exists in that market, there's been a little bit more of a spotlight that's been put on that.

And so I think it's actually been a good thing for our space. It's woken up more of our peers to the importance of focusing on documentation. We've made that a priority here for years now. And it's a critical part of our investment committee process. We will walk away from transactions based on documentation terms. Not really seeing a big change of that, if anything, getting better.

We'll take a next question from Paul Johnson with KBW.

I know you have been fairly conservative with the ARR structures in the past, as you said. But is there any sense of like the number or the percent of your software book that is below profitability today?

Below profitability, you mean negative EBITDA?

Yes, correct.

I don't have the numbers in front of me, but I can't imagine that there would be another software company in our portfolio outside of those ARR loans that would be negative EBITDA. And in fact, I would also venture a guess that many of those ARR loans have positive EBITDA as well for 2 reasons. Number one, when we do a new ARR loan, in a lot of cases, they still have positive EBITDA, but it's not necessarily enough EBITDA to maybe justify the amount of debt. So you look at it on a revenue basis, and they're growing 50% a year, and it's going to be a lot of EBITDA in a year or 2. But it's not like everyone is negative EBITDA. Some of those are actually positive EBITDA at the outset.

But then secondly, others, ARR loans in our portfolio have been in there for a number of years and have achieved the growth that they were expecting. And so now they are meaningfully positive EBITDA. So I mean very, very, very small, almost de minimis amount, I would say, of our software book has negative EBITDA.

Got it. That's very helpful. And then last, I would just ask on the PIK portfolio, which has been a good portfolio for you guys historically. I'm just curious though within the debt side of some of the PIK assets, is there a tilt toward software within that portfolio? Or has that generally been just as diversified as the broader portfolio?

Yes. It's around the same. We did take a look at that. And the -- I'll say 2 things. Number one, the percentage of the software book had a slightly higher percentage of PIK in it. But the PIK in that software book is, I want to say, 99%, maybe even 100%, structured at the upfront at the outset of the investment, not amendment PIK, right?

And that's an important thing on the overall PIK book that we talk about all the time and try to disclose, which on a consistent basis, which again this quarter on our overall PIK book, it's roughly 90% of the PIK interest and dividends was structured at the outset of the investment and purposely done only 10% is amended PIK. And then so again, in the software book, it's almost 100% is structured. So again, it goes back to the point that we're just not seeing weakness in the software book at all. So we don't have the need to provide any amended PIK there.

[Operator Instructions] We'll move next to Derek Hewett with Bank of America.

So how large are you willing to grow both the SDLP and Ivy Hill over the next year or so, kind of given the more favorable economics versus the core portfolio. And then are there assets on the balance sheet today that could potentially be sold down to those entities?

Yes. Thanks, Derek. So I'd say, if you look historically, we've had an investment in Ivy Hill go as high as 11%, and I think SDLP as high as 7%. So these are probably a good estimated guardrails for now. So we certainly value those 2 assets quite a bit and agree they're very strategic to us. And you're right, there are pretty high yielding particularly in a low yield environment.

So I certainly see -- you saw us grow this quarter. So I think there's a certainly in our playbook to continue focusing on those investments over the course of this year. And yes, we did see in the fourth quarter, we did sell assets in Ivy Hill, and so that is certainly -- there's certainly more assets on the balance sheet we could move to -- I'd love to move down to Ivy Hill over time.

Yes. I don't think we want to -- there's not really a stated cap or target that we manage the business towards. Again, I think we want to see how the market develops, what kind of transaction activity there is, where spreads go, all of those factors work into it. The only real cap would be the 30% nonqualifying asset cap. So that would be the sort of governor on the top end.

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

Great. Well, thank you all for joining us today. and for your continued support and engagement. And we look forward to reconnecting with you on our next quarterly call. So until then, stay well, everyone, and have a great day.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately 1 hour after the end of the call through March 4, 2026 at 5 p.m. Eastern to domestic callers by dialing toll free 1 (800) 839-4018 and to international callers by dialing 1 (402) 220-2985. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of Ares Capital's website.

Good afternoon, everyone. Welcome to Ares Capital Corporation's Third Quarter Ended September 30, 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, October 28, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team. Please go ahead, sir.

Great. Thank you, and good afternoon, everyone. 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 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. During this conference call, the company may discuss certain non-GAAP 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 operations. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS 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 on 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 warranties with respect to this information. The company's third quarter ended September 30, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2025 Earnings Presentation link of the homepage of the Investor Resources section of our web page. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?

Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President; Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. I'd like to start by highlighting our third quarter results, and we'll follow that with some thoughts on current market conditions and our positioning. This morning, we reported strong third quarter results with stable core earnings of $0.50 per share, exceeding our regular quarterly dividend and generating an annualized return on equity of 10%. GAAP earnings of $0.57 per share increased almost 10% sequentially and included robust net realized gains from the exit of a previously restructured portfolio company as well as several equity co-investments.

These outcomes led to another quarter of NAV growth, marking the ninth NAV increase in the past 10 quarters and underscoring our position as one of the few BDCs with consistent and growing dividends and cumulative NAV per share growth over the last 10 years. Let me start with our views on the market environment and how we are positioned. New issue transaction volumes are returning to a more normalized pace, driven by greater clarity on tariffs and the direction of short-term interest rates and narrowing bid-ask spreads on buyouts. With this healthier market backdrop, we saw a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than in any month this year.

We also received an increase in requests from advisers who are running sale processes and looking for our indicative terms and pricing. Amid a firming market for M&A and Ares's leading presence in U.S. and global direct lending, we reviewed more than $875 billion in estimated transactions over the last 12 months, which was a record for us and supports our view that the market continues to expand. As a reminder, we view our origination scale, which enables us to be highly selective as a critical driver of our long-term credit performance. The breadth of our origination platform provides the opportunity to pass on transactions when we cannot find acceptable documentation, terms or pricing.

Our scale and sector specialization enhances our market knowledge and underwriting capabilities while also providing us a real-time view of relative value in the market. These factors contributed to net deployment for ARCC of $1.3 billion in the third quarter, more than double the prior quarter, while remaining highly selective on the transactions we pursued. Our focus on investing in the highest quality credits continues to support strong fundamental credit metrics. The last 12 months organic EBITDA growth for our portfolio companies remains in the low double digits, which is well in excess of market growth rates.

Our interest coverage increased further to over 2x and weighted average loan to values continue to be in the low 40% range. Our strong credit quality is also evidenced by our declining nonaccruals on a quarter-over-quarter basis, along with net realized and unrealized gains and growth in NAV per share for the third quarter. We also take comfort in our portfolio's focus on domestic service-oriented businesses, which mitigates risks associated with tariffs, shifts in government spending and other recent policy changes. Our third quarter net realized gains reinforced our long-term track record of generating over $1 billion of net realized gains in excess of realized losses since our inception over 2 decades ago.

Our differentiated results stem from our extensive origination capabilities, allowing for selectivity and strong underwriting as well as our large and experienced portfolio management team, which focuses not just on minimizing losses, but also on maximizing returns when situations don't go as planned. We also benefit from our deliberate equity co-investment strategy that has generated attractive returns over time. Our third quarter results illustrate the value we provide to our shareholders from realized equity gains. Most notably, we recognized a $262 million realized gain on the sale of Potomac Energy Center, a previously underperforming investment that was on nonaccrual in the past and was then restructured and ultimately owned by ARCC. With the restructuring of Potomac's balance sheet, the incremental capital we invested, our proactive management of the company and patience, we were able to achieve an IRR of approximately 15% on our investment rather than incurring a loss.

We also generated net realized gains from the exit of 3 equity co-investments, generating over $30 million in realized proceeds and representing a 2.5x multiple on our original invested capital and an average gross IRR in excess of 30%. This supports our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, our net realized gain performance, both this quarter and cumulatively underscores the strength of our investment strategy and deep portfolio management capabilities that drive differentiated results for our investors. As I noted earlier, we believe our portfolio remains healthy and demonstrates solid underlying credit trends.

With respect to risks recently in the headlines, we have no exposure to First Brands or Tricolor nor do we have any exposure to non-prime consumer finance firms like Tricolor. Following the recent events at First Brands, we have been asked about whether our portfolio companies use receivables financing and if such financing poses any hidden risks for us. We do not believe there are hidden risks in our portfolio from the small number of portfolio companies that may use receivables financing. Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement, along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post close, it is typically subject to strict parameters and is monitored during the life of our investment.

These structural safeguards are a core part of our documentation standards and in our view, represent one of the strengths in our documentation, especially in comparison to the broadly syndicated market. Like First Brands and Tricolor, another topic that has been in the headlines recently is software and the potential risks posed by AI. Let me make a few comments on how we have carefully constructed our software portfolio over 2 decades of investing in this sector and why we believe AI is much more of an opportunity than a risk for our software borrowers. As a starting point, our software loans are financed at what we believe are conservative leverage levels with an average loan-to-value ratio of only 36% and none of our software loans are currently on nonaccrual. Our focus is on financing large, market-leading and well-capitalized software companies with strong growth prospects.

As an example, our software portfolio companies have a weighted average EBITDA of over $350 million, and they continue to demonstrate strong double-digit EBITDA growth over the last 12 months. Our borrowers are generally backed by leading sponsors in the software industry who not only have substantial capital resources, but are also proactively investing in their platforms to embrace the changes and potential prompted by AI. While we believe AI excels at analyzing data and generating high-quality content, it typically does not provide the foundational infrastructure required for critical business operations or systems of record. These functions still rely heavily on traditional software systems that can securely store data and facilitate complex transactions.

We have, therefore, historically focused almost entirely on financing software companies that operate B2B platforms and typically serve highly regulated industries, leverage proprietary data or deliver repeatable, consistent results core to business operations. Importantly, these companies are deeply embedded within customer operations and also benefit from high switching costs given the risk of business disruption from moving to alternative vendors, which, in our view, provides additional layers of durability and resilience against potential AI disruption. While we believe AI poses minimal risk to our software loans, advancements in AI remain an important component to future value creation for these businesses. For example, insights generated by AI can enhance these foundational systems by improving analytics, user experience and operational efficiencies while serving as a valuable complement and not typically a replacement for mission-critical software.

Importantly, these views reflect Ares's ongoing collaboration among our highly experienced software investment team, our in-house software analysts and Ares' in-house AI experts at BootstrapLabs, a leading AI-focused venture capital investment team that joined the Ares platform a few years ago. We leverage our entire platform to drive credit decisions on each software transaction we consider as well as in our quarterly valuation and risk assessment processes led by our portfolio management team. Now before turning the call over to Scott, let me address our outlook on our future earnings potential and dividend levels in light of market expectations for further declines in short-term interest rates. We believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future despite the potential headwinds to earnings posed by lower short-term interest rates.

As a starting point, in the third quarter of 2025, our core earnings continued to exceed our dividend. Second, during the last period of rising short-term interest rates in 2022 to '23, we intentionally set our dividend at a level equivalent to a 9% to 10% ROE, which is a level we have historically achieved through different interest rate cycles over the last 20 years. We set the dividend at this level because we believe we can sustain this level of profitability through market cycles. The third point worth highlighting on this topic is what we view as our unique financial position with multiple levers to expand earnings or offset headwinds solely from falling market rates.

Notably, our balance sheet leverage remains around 1x, which is well below the upper end of our target range of 1.25x, giving us ample flexibility to drive higher earnings by supporting prudent growth using our efficient sources of capital. We also believe there is growth potential to capitalize on higher-yielding opportunities within our 30% nonqualifying asset basket, including through strategic investments like Ivy Hill and SDLP. Additionally, given the prospects for a more active environment alongside our origination scale, we believe there is potential for increased velocity of capital, which could drive additional capital structuring fees to further support our earnings.

Lastly, the historical strength of our earnings and credit performance has provided us with $1.26 per share in spillover income, which is equivalent to more than 2 quarters of our current dividends. We believe this level of spillover income gives further visibility to our investors since it provides a cushion to support our quarterly dividends in the event of temporary shortfalls in our quarterly earnings. In summary, we had a strong quarter with healthy credit performance and financial results that demonstrate our enduring competitive advantages. And 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.

Thanks, Kort. This morning, we reported GAAP net income per share of $0.57 for the third quarter of 2025 compared to $0.52 in the prior quarter and $0.62 in the third quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.58 for the same period a year ago. This is the 20th consecutive quarter of our core earnings exceeding our regular dividend, demonstrating our ability to consistently cover our dividends. Drilling a bit more into the net realized gains that Kort highlighted earlier, we generated $247 million of net realized gains on investments during the third quarter, which represents our second highest net realized gain quarter since our inception and brings our cumulative net realized gains on investments since inception to approximately $1.1 billion.

Similar to last quarter, we incurred capital gains taxes related to certain of the net realized gains, which amounted to $72 million in the third quarter. 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 net realized gains on investments remained a healthy $175 million for the third quarter. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $28.7 billion, which increased from $27.9 billion at the end of the second quarter and $25.9 billion a year ago. Shifting to our funding and capital position. We have remained active in adding capacity, extending our debt maturities and reducing costs in our committed facilities. In July, we added nearly $500 million of additional capacity across our credit facilities.

We also reduced the drawn spreads on 2 of our credit facilities by 20 basis points each to 180 basis points over SOFR and extended the maturities on both to July 2030. We continue to benefit from our long-standing banking relationships, which are supported by our scale as well as our long-term track record through cycles. The significant diversification of our overall portfolio also has direct benefits for our credit facilities, enhancing the attractiveness of the collateral pool that supports the facilities. For context, our asset-based bank credit facility advance rates are generally similar to the AA-rated tranche of a typical middle market CLO. It is important to highlight that a AA middle market CLO tranche has never defaulted.

With this low level of risk, the current bank capital framework supports a return on capital for our banks that is significantly more attractive than if the banks held the individual loans directly on their own balance sheets. Beyond the systemic benefits that this type of lending provides, the banking system as a whole, the strength of our relationships and economics that we can provide to our banks further strengthens our ability to be an investor through all cycles. In addition to our continued engagement with our banking partners, we also further expanded our nonbank capital sources in September by issuing $650 million of unsecured notes priced at 5.1% and maturing in January 2031.

These notes were issued at a spread inside of our previous notes issuance in June. Consistent with our recent offerings, we swapped this issuance to floating rate, therefore, positioning our funding costs to decrease with expected declines in SOFR. As a reminder, ARCC remains the highest rated BDC across the 3 major rating agencies. In addition to the strategic advantages embedded in our funding, our overall liquidity position remains strong, totaling $6.2 billion, including available cash. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.02x. We believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies.

Finally, our fourth quarter 2025 dividend of $0.48 per share is payable on December 30 to stockholders of record on December 15. ARCC has been paying stable or increasing regular quarterly dividends for 65 consecutive quarters. In terms of our taxable income spillover, we finalized our 2024 tax returns and determined that we carried forward $878 million or $1.26 per share available for distribution to stockholders in 2025. As Kort stated, we believe our meaningful taxable income spillover provides further support for the long-term stability of our dividends and continues to be one of our significant differentiators. I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance and our positioning. In the third quarter, our team originated over $3.9 billion in new investment commitments, an increase of more than 50% from the previous quarter. About half of our originations supported M&A-driven transactions such as LBOs and add-on acquisitions, which highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Further reflecting this broader trend of growing M&A, approximately 60% of our third quarter originations were with new borrowers, a shift from the past few quarters where the majority of our originations were from incumbent borrowers. We believe the shift reflected an influx of high-quality companies coming to market in the early part of a potential M&A cycle.

Our origination activity continues to underscore our broad market coverage. About 1/4 of our new investments were made in companies with EBITDA below $50 million, which highlights our strong presence in the core middle market and lower middle market as well as the more visible upper middle market. On the upper end of the market, we led the $5.5 billion financing for the take-private transaction of Dun & Bradstreet, the largest private credit LBO recorded to date. This well-established, high-quality company with strong recurring cash flows chose Ares to lead their financing as an alternative to the syndicated markets due to our flexibility and execution certainty.

Alongside this increased activity, our credit spreads remained stable. Our new first lien commitments in the third quarter were completed at spreads that were consistent with the prior quarter and actually 20 basis points higher than the prior 12-month average. We achieved these pricing results with attractive risk profiles as well as the spread per unit of leverage on first lien loans completed in the third quarter was the highest in more than a year. Our broad origination team and flexible approach continue to drive our ability to source opportunities with differentiated yield profiles, including the selective use of PIK preferred investments. In the third quarter, we generated an IRR in excess of 20% on the exit of 3 preferred PIK investments.

These PIK preferred securities are invested in large established companies with an average EBITDA of roughly $480 million. Our PIK preferred investments have a low double-digit fixed rate yield and implied loan-to-value ratios in the 50% to 60% range. On average, we value these investments at 98% of cost at the end of the third quarter. Reflecting a more active market environment, we experienced increased repayments through change of control transactions, including from investments that were accruing PIK income. As a result, and as disclosed in our cash flow statement, these full repayments generated PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter. Shifting to our portfolio. Our $28.7 billion portfolio at fair value increased nearly 3% quarter-over-quarter and over 10% year-over-year, further underscoring the extent of our origination scale at ARCC, even during the slower transaction environment experienced in the market over the past year.

Our portfolio continues to be highly diversified across 587 companies and 25 different industries. This means that a single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding our investments in SDLP and Ivy Hill is less than 2% of the portfolio. We believe our emphasis on portfolio diversification and industry selection reduces the frequency and impact of negative credit events on the company. As Kort mentioned, the credit quality of our portfolio continued to demonstrate strength and resilience in the quarter. Our nonaccruals at cost ended the quarter at 1.8%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same time frame.

Our nonaccrual rate at fair value also decreased by 20 basis points to 1%. Finally, on credit, our Grade 1 and 2 investments representing our lowest 2 rating buckets in the aggregate declined from 4.5% to 3.6% of the portfolio at fair value quarter-over-quarter and our portfolio companies' average leverage levels and interest coverage ratios both improved when compared to last quarter and the prior year. The health of our portfolio is also reflected in the profitability and growth profile of our borrowers. In the third quarter, the weighted average organic LTM EBITDA growth of our portfolio companies was again over 10%. Importantly, this EBITDA growth rate was more than double that of the broadly syndicated market based on a second quarter analysis done by JPMorgan.

Additionally, both our sponsored and nonsponsored companies are growing EBITDA at consistent rates. As a reminder, we believe our industry specialization has allowed us to further penetrate the nonsponsored market as well as service the sponsored market in a differentiated way. Further to my earlier point on our extensive market coverage and its role in attracting strong, high-performing companies within the middle market, we continue to see healthy growth across the lower core and upper middle market segments of our portfolio. Importantly, size is not a distinguishing factor of performance in our portfolio as companies with EBITDA of less than $25 million had EBITDA growth that was modestly higher than the rest of our portfolio.

Looking ahead, we are seeing healthy transaction activity levels so far in the fourth quarter. Our total commitments for the fourth quarter to date through October 23, 2025, were $735 million, and our backlog reached a new record of $3 billion as of October 23, 2025. 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, our strong earnings this quarter are underpinned by many durable advantages that we believe continue to drive differentiated results for our investors.

In today's environment, we remain focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation and being highly selective around deal flow. We remain confident that sticking to our long-standing principles will support our ability to continue to capitalize on new opportunities and build on our track record of strong performance. We are proud that our declared fourth quarter dividend of $0.48 per share extends a record of over 16 straight years of stable or increasing regular dividends for our shareholders. As always, we appreciate you joining today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions.

[Operator Instructions]. Additionally, the Investor Relations team will be available to address any further questions at the conclusion of today's call. With that, we'll go first this afternoon to Finian O'Shea with Wells Fargo.

Kort, I just want to hit on a couple of your inputs on dividend coverage. One, with the sort of traditional levers, more on-balance sheet leverage, more perhaps junior or alpha laden opportunities. Can you remind us if on an allocable capital framework, ARCC is different to have more of this stuff tilt toward it versus ACIF as the market opens up for this kind of opportunity? Or should the 2 vehicles continue to become essentially the same going forward?

Yes. Thanks, Fin. Yes, both vehicles will get allocated any kind of deal based on the available capital math, and that is an allocation policy that we've had in place for a very long time and has not changed. Obviously, those types of transactions have been more muted of late, but I do think as we see overall transaction activity increase and in particular, changes in control activity and even potentially as rates do decline further, that hopefully will create more junior capital opportunities. We've seen that be a product of those kinds of trends in the past. And ARCC will certainly get its fair share of those transactions.

I appreciate that. And just to be clear, like that -- maybe I could have worded it better. That math is the same overall for a percentage of allocation to the more junior or plus 700 or sports equity and so forth?

Yes. I would also just say that ACIF has a different yield profile than ARCC. So that's also part of the decision-making in terms of the assets that may go into those funds as well.

But yes, if you're talking about different types of assets, whether it's sports and media or infrastructure assets or any kind of assets, it's all based on mandate of the fund, of which ARCC obviously has an extremely diverse and flexible mandate and then available capital. And so that's how those deals get allocated. And ARCC, obviously, being our most flexible vehicle gets a sliver, gets a piece of almost everything we do.

I appreciate that. And if I could do one on the spillover component. Can you give us color on how big of an input that would be to support the base dividend? Would you run it all the way down before cutting the base dividend or halfway down? Is there sort of a target or threshold there as to how much support that would be? And that's all for me.

Yes, Fin, I mean, I don't -- look, first of all, we have a lot of confidence as we talked about in prepared remarks of covering the dividend in the foreseeable future. And we're running lots of different modeling scenarios, including base rate declines as forecasted in the curve or further declines, all different kinds of scenarios, obviously, liability costs. And we just feel very confident. So I don't know that I really want to speculate in terms of where we would be in the instance well into the future that, that doesn't hold up. But I think the reason why we talk about the spillover income is because it does provide additional stability to the dividend if needed, if core earnings temporarily drops below the dividend level. We have rarely seen that in the course of our history. But the amount of spillover hopefully just provides a lot of comfort for shareholders. But I don't think it's worth speculating as to all the different scenarios that could occur and how much of that spillover we might need to use.

We'll go next now to John Hecht at Jefferies.

You guys gave a lot of information about the market and your sustainable competitive advantages in the call. But if you kind of step higher level, I'm wondering how you -- thinking more about broadly in the industry, how would you describe competition in light of the fact that spreads are fairly narrow, there's a lot out there, but also over the last few weeks as there's been a couple of [indiscernible] that have probably caused some disruption or reverberations industry-wide. Kind of how do you -- the 1-minute kind of explanation of your perspective of industry competition?

Yes. Look, I think it's a competitive environment as it's always been over our 21-year history. It's just sometimes new competitors come in, some competitors leave. Obviously, we've seen as the industry has matured and we've moved upmarket, certain competitors compete upmarket with us. We have a different set of competitors that compete in the middle market and in the lower middle market. We've talked a lot about how we believe we are the only scaled direct lender that competes across lots and lots of different markets.

And then when we go into our non-sponsored origination in the various industry verticals, we see a whole another set of competitors. So it's really hard to generalize. The events of the last few weeks, I would say it's a little too early to say. But so far, there's been no real significant impact to the competitive landscape. If you're talking about just the news around Tricolor and First Brands and a few of these issues that are cropping up in the broadly syndicated market. It's not really impacting our market that much so far. And again, I think it probably does highlight that our documents and protections and our credit selection is differentiated relative to the broadly syndicated market. So long-winded answer of saying a little too early to say and no real impact so far.

I'll add one thing, Kort. We also get the benefit when the broadly syndicated market does see [ reberations ], as you said, that's a great time for private credit. Those are moments in time where we can take market share from the broadly syndicated market and people are looking for that certainty. So those moments and sometimes they're short a week or 2, sometimes they're a month or longer. Those moments tend to be quite favorable for us.

Yes, that makes sense. And second, a nonrelated question, I'm just curious if there's an update on some of the, call it, regulatory opportunities like AFFE. Just I haven't heard much about that for a few months, and I'm wondering if there's anything to discuss there.

Nothing all that meaningful, John. I mean there was some temporary excitement around progress that had occurred down in Washington on that front. But it's hard for us to get too excited because we've seen it kind of go up and down in its momentum over the last few decades, frankly. So we try not to read in too much to the movements kind of month-to-month or even year-to-year.

We'll go next now to Arren Cyganovich at Truist Securities.

Just following on the line of questioning about where are we in the cycle? Is it a late cycle where it got tight credit spreads. You laid out a lot of reasons why things continue to go well for you with EBITDA is rising at your portfolio companies, a lot of activity. What are some of the guideposts that you're looking for that would maybe cause you to be a little bit more strict in terms of your underwriting? And what are some of those things that we might be able to monitor from afar?

Yes, it's not too complicated. I mean, certainly, underlying EBITDA growth or potential reductions in that growth would be something we would look at. We're always looking sector by sector as well. We talk about the overall portfolio average EBITDA growth, which again remains double-digit growth and bounces around here and there, but still remains really strong. But we're looking underneath the hood there at all the individual industries that are driving that growth, and we're not really seeing any trends in certain industries that would lead us to believe that there are points of weakness in any kind of individual sector.

So if we did see those, we would certainly point those out. But that would be #1 on the list. Obviously, overall access to capital, the flow of credit in the markets. Historically, when you see credit start to seize up, that can also then flow through and create problems for businesses and lead to downturns. Again, we're seeing that actually go the other way now in terms of increased activity in the M&A market. Our transaction volume and opportunities remain really strong. So that would be something else to look for. But again, no signs on the horizon there. So I don't -- there's nothing we're seeing here at Ares Capital that would tell us that we're nearing the end of any kind of cycle.

Certainly, from an M&A standpoint, the M&A cycle, I think we feel like we're at sort of an early end of a new cycle that's beginning. And you can see that in our origination numbers this quarter, which tilted toward 60% new borrowers for the first time in a long time, usually trending around 50% or even more in the last year or 2, 30%, 40%, went up to 60%. Change of control transactions were over half of our originations. So I think the M&A market really is picking up. And I think that's also a sign that people feel good about the stability of the economy, where we're going, underlying businesses, and we're seeing that reflected in that transaction volume. So that would be my answer to your question.

Yes. No, that's very helpful and largely what I would have expected, but it's good to hear you said. And the second question is kind of a quicker one, but the -- you had commented on September being one of the busiest months, but spreads on first lien for your investments in the third quarter actually rose a little bit. It seems a little bit backwards. Obviously, not a big amount. I think you said 20 basis points, but just curious as to those dynamics.

I think the dynamics are that it reflects the broad origination funnel that we are able to capitalize on here by virtue of being managed by Ares Management and all the different deals that we're able to see come into the platform and originate. I mean it's -- yes, I'm glad you pointed it out. Look, we put out $3.9 billion of gross originations in the third quarter at an average spread of SOFR plus 560 and that went into borrowers at an average leverage of 4.8x. So we certainly feel like it is a good investing environment to be in despite the fact that it is competitive like we talked about before. We think we have meaningful competitive advantages in terms of the types of deals we see, and it will be interesting to compare our originations and those metrics that I just put out relative to our competitors as we see people put out earnings over the coming weeks.

We'll go next now to Melissa Wedel at JPMorgan.

I think from our conversations, it seems like what's been driving some of the price action in the industry the last few months has been concerns about 2 things. One is earnings power and the second would be credit. I think you've addressed the credit, you're not seeing anything thematic and certainly showing up in the nonaccrual rates. I was hoping to dig in a little bit more on the earnings power and follow up on some of the levers that you talked about earlier that you could pull. One of the things you talked about was being a bit below the top end of your target range in terms of portfolio leverage of 1.25. Given that you have bandwidth there to increase leverage at the portfolio level, I'm curious how you're thinking about using the at-the-market program, especially as share prices have declined.

Yes, sure. Thanks for the question. So I think as you probably can see, we've been reducing the amount of at-the-market issuances over the last 3 quarters. So we went from $400 million to $500 million a quarter down to, I think it's $300 million last quarter, down to $200 million this quarter. So that's been influenced by a view that we are operating slightly below the midpoint of the range on leverage, that 0.9 to 1.25x range and our desire to get a little bit more into leverage here over time. Again, we do like the position that we're in at 1x. It's a conservative place to be. It positions us well to capitalize on opportunities in the market. As Jim mentioned earlier, maybe there's an opportunity the broadly syndicated market seizes up. We want to be in a position to have that kind of financial flexibility. But we do think it's appropriate to potentially start moderating that ATM, which is what we've done over the last several quarters, not to say what the future will hold, but that's been our view. So I don't know too much more to say on that topic, Melissa, but hopefully, that's helpful.

It is, and I appreciate that. And then in terms of further optimizing the nonqualifying asset bucket, I'm curious if there's anything in particular or forthcoming in the near term on that? And if not, maybe more generally, would you think about additional assets there that would be similar to your current exposures in IHAM or SDLP? Or would it be a different type of exposure? And just how you're thinking about that sort of longer term?

Sure. Yes, sure. One good piece of news that we certainly are happy to report is on the SDLP joint venture, which is that we did recently amend the documents in that joint venture and our relationship with our liability providers or the joint ventures liability providers to lower the cost of capital on those liabilities, which did result in a 100 basis point increase in the yield on the SDLP that you can see in our numbers on a go-forward basis. So I think that will provide a nice boost to the return on that program. I think our ability to increase the utilization of SDLP and to help IHAM hopefully achieve more growth as well will partially be based on the overall transaction volume in the market and our ability to originate, which again has been increasing. So that gives us confidence that we should be able to better utilize some of those joint ventures and structures within our 30% basket. I think, Melissa, that's probably -- hopefully, does that answer your question? Or is there something else you were getting at there?

No, that is helpful.

We'll go next now to Casey Alexander at Compass Point.

My first question, and it might sound a little convoluted, but we've gone through this mini hysteria created by the wet blanket of the words private credit thrown over the entire arena as if it's all encompassing. So first of all, you should change the name of what you do and take the words private credit out of it. But I'm wondering if this mini hysteria, did you notice any even temporary stall in the market? There's so much over the last couple of quarters of there were more loans leaving the directly originated private credit arena for the broadly syndicated market. Have you felt some relief from that because clearly, the banks have been twisting themselves into knots over this. And also, spreads have been at all-time tights, which, again, doesn't presuppose a real credit crisis. Does it feel like you might see new origination spreads in the broadly syndicated market widen out a little bit, which would also allow you some more spread relief?

Sure. Thanks, Casey. So a few things in there. I think, first of all, yes, much -- too much noise made about the banks and private credit and fighting over assets. I really think that, that is way overstated. We, as an industry, have been both working together with banks and competing with banks on transactions for decades. This is really nothing new. It's just that I think the dollar amount of the transactions as an industry that we're now providing have gotten to the point where it's starting to get more attention. But the dynamic is really nothing all that new. Banks are great partners for us. They provide leverage facilities on a lot of our funds, including obviously ARCC.

And there are movements in the market from time to time where borrowers are more apt to lean toward broadly syndicated transactions, sometimes borrowers more apt to lean toward private credit transactions. The longer-term trend is obviously borrowers moving more toward private credit transactions because of the value of certainty knowing that the capital is going to be there in all market environments.

And every time we go through a period of volatility where the broadly syndicated market gets choppy and maybe can't support its borrowers or banks get hung on transactions that they're looking to syndicate that just reinforces that long-term trend and makes it so that borrowers are more apt to consider private credit even when banks are back in the broadly syndicated markets back. So the banks broadly syndicated market this year. But on the whole, more transactions were still done in the private credit market than the broadly syndicated market. So I think on that, not much more there to add, Casey, but we can get more into it if there's something specific that I missed there in that part. I guess on the question about spread widening, I think you were -- sorry, maybe restate the spread question again.

Well, just before we had this mini hysteria over private credit driven by 2 loans that went bad, spreads were at all-time tights. So I'm just wondering if you've seen -- and a lot of that driven by really aggressive bidding in the broadly syndicated market, have you seen any deals in the broadly syndicated market that might indicate that they're widening out a little bit because you guys do, to a certain extent, price against that market.

Yes. Well, I think Jim actually made that point, which is it could create that opportunity. It's a little early. I just think it's a little early. I'm not going to say that we've really seen that cause an effect exactly yet where all of a sudden, we're seeing deals chip our way because of that. But certainly, that would -- could potentially be an outcome. I think what really matters is how long and sustained the sort of concern or dislocation or spread widening in the broadly syndicated market lasts because our market one of the benefits of our market, I think, certainly for borrowers is that we don't move in lockstep with the broadly syndicated market, right? We lag a little bit. We're a little bit more stable. We take a longer-term view because we're holding these assets. We're not looking to sell the assets. So we're not going to move up and down 25, 50 basis points in line with the broadly syndicated market when it moves. So I think time will tell. We'll just have to wait and see.

All right. And I do have one follow-on. I think that's a great answer, though. In the recent developments, you pointed out that in your exits, you recognized total net realized losses of $67 million. Can you tell us where that was relative to their third quarter marks? I mean is there likely to be an unrealized offset to that because they were close to the marks? Or is there some difference in there?

They're pretty much right at the marks.

That's what I assume since it was so close after the end of the quarter.

We'll go next now to Doug Harter with UBS.

Hoping you could talk about your expected pace of exits in the near term and how that might influence the kind of the velocity of portfolio turnover and fee income you can generate?

It usually moves kind of in lockstep with overall transaction volume in the market and new originations. So we've talked about that in the past, too. People get sometimes a little concerned when transaction volume declines like we saw in the second quarter of this year, but then exits decline as well. So they kind of move together and the net number really is, I think, a more important number to look at. Obviously, this quarter was very strong on a net basis as well, over $1 billion, even though the exits did increase. So I don't know that I can provide anything super insightful there other than just to say it kind of moves together with overall transaction volume.

We'll go next now to Robert Dodd with Raymond James.

In talking about supporting earnings power, et cetera, I mean one thing that stood out to me this quarter is other income looked quite high. I mean, by any historic standards. I mean that's not usually where the origination fees go, but it could be amendments, can be consulting. Can you give us any idea like what drove that? And is that now going to be more geared to just what activity is rather than -- which obviously drives the capital structuring fees? Or has there been more of an effort to seek out like consulting kind of fee arrangements? And maybe is that going to be an ongoing story in terms of one of the tools to support earnings power?

Yes. Thanks, Robert. That's mainly typically like transaction or like amendment type fees. So I would not necessarily say that's replicatable every quarter. So really more onetime in nature. The capital structure fees are really more indicative of the origination volume.

Yes. Got it. On the AI question, I mean, like you mentioned, you have the in-house think tank for lack of a better term from several years back. How has that changed over the last couple of years. How you go about underwriting software? I mean you laid out in the prepared remarks all the ways you do it currently. But I mean, is that fundamentally in any way different today because of the in-house AI expertise? Or is it just always been that way?

Yes. No, great question. Look, I think multipart answer. Number one, it's always been that way in terms of our desire to provide capital to software that is foundational and infrastructure-like in its business model, i.e., software that is highly ingrained in the workflows of its customer base that powers off of -- and a key part of its value prop is off of a proprietary database. And in a lot of times, software that is provided into highly regulated end markets that are extremely reliant on high-quality data and accuracy of data and auditability of data. So that has always been our strategy in software for decades.

And so that really hasn't changed. I think what -- over the last few years, when -- with the rise of AI and obviously, our focus -- our focus on making sure that our portfolio is defensively positioned and certainly, any new investment we make is defensively positioned. Obviously, we're spending a lot more time thinking now about what AI is good at and what it's not good at to ensure that we continue to build a portfolio that is resistant to disruption. And when you think about what AI is good at, it's really good at creating content, can create amazing content so much faster than humans can.

It is very good at analyzing and synthesizing lots of data. It doesn't actually house the data. It's not a database, but it can synthesize lots of data. And so you want to make sure that you're not investing in software companies that are simply providing content, learning modules delivered over software that can be disrupted. So those are the kind of areas we're trying to make sure that we're staying away from or software companies that are just analyzing third-party data. That would be something to stay away from. I think we want to make sure we're still very focused on providing software to companies that are actually powering businesses and are entrenched in businesses and are infrastructure like in their nature.

We'll go next now to Paul Johnson with KBW.

Just one a little bit further on Doug's questions for exits, but I'm just wondering if you have any sort of updated outlook, I guess, in terms of monetizations and sort of further gains from realizations this year or if the Potomac intermediate kind of represents more of the meaningful opportunity there near term?

Yes. Look, I think, obviously, our strategy is to leverage our portfolio management team to make sure, as I said in the prepared remarks, we are not only avoiding losses, but capitalizing on potential opportunities to make big gains. Potomac is a great example, but it's not the only example over our history, and I can certainly guess that it's not going to be the only example going forward into the future. I can't give forward-looking guidance or remarks about what might be the next big gain, obviously. But I guess what I would say is we provide a lot of disclosure for all of our investors in our SOI, in our 10-Q and 10-K, and you could see every investment we have, the nature of that investment, you can see the investments we have that are restructured where we own equity or own the businesses outright via those restructurings. And that could provide some clues as to what might be sitting in the portfolio that could provide future gains. But I'd venture a guess that, that will not be the last one that you guys will see.

Appreciate that. Very helpful. And then last one is just kind of higher level I had. But we see like a mega financing deal like the EA SPORTS JPMorgan-led deal there, LBO financing. Does the deal of that size do enough, I guess, to kind of soak up any sort of oversupply of capital in the financing markets? Or is kind of the reality we would need to see a number of those to really accelerate sort of a balance of the supply and demand of capital in the private credit market.

Yes, I think it helps. I mean I don't know if that one deal alone is going to move markets. You probably need several, but that's a lot of capital. So I think if we start to see -- and again, it's just emblematic of what I said earlier, the markets are functioning very well. The credit market money is flowing, buyouts, new buyouts are happening. And if we start to see a number of these larger buyouts, I do think actually that will start to potentially widen spreads, soak up demand in the broadly syndicated market, move deals back our way. So every deal like that, I think, helps.

In the market, we're seeing a fair amount of the regular way activity, but we're also seeing a regular cadence of larger transactions, right? That's becoming more common. Records are broken over and over again, but it's really more about the regular cadence of large transactions that helps absorb the capital into the market.

We'll go next now to Kenneth Lee at RBC Capital Markets.

Just one for me. And you touched upon this in your prepared remarks around receivables financing and more broadly, I guess, when you look at any kind of off-balance sheet financing, I wonder if you could just remind us how does Ares Capital avoid such situations? And more specifically, how are they flagged during the due diligence process when you're making new investments?

Yes. Well, so they're flagged during the due diligence process by an exhaustive analysis of all of the company's liabilities on balance sheet and off balance sheet. We obviously have in almost every transaction, we do new transaction. We have a quality of learnings provider that's coming in and doing a third-party report, scrubbing numbers, asking lots and lots of questions. Companies are required to disclose their liabilities to us as part of the reps and warranties. So it is [indiscernible] at the outset and at the underwriting of the transaction. And then on a go-forward basis, we have protections in the document. We have baskets that limit securitization facilities, which includes factoring of receivables and all different sorts of off-balance sheet liabilities, and those baskets are tight.

And we talk a lot about the baskets in the private credit market or the documents in the private credit market being tighter than the documents in the broadly syndicated market. And this is just one very good public example of something where the broadly syndicated market documents were a little bit looser. And I don't expect that you would see that occur in one of our transactions.

We'll go next now to Sean-Paul Adams at B. Riley Securities.

Most of my questions have already been asked and answered. But on the portfolio grade, the weighting improved quarter-over-quarter and the median nonaccruals declined. Do you view any general improvements in the economic environment? Or is it just a reflection of the runoff of nonaccruals from the portfolio?

I think the economic environment is pretty stable. So I think it's just the runoff of a couple of the nonaccruals. The number obviously bounces around a little bit quarter-to-quarter. The movement wasn't anything extreme. So I don't think there's much to read into there.

Got it. And as a quick follow-up, on spreads, you guys talked about this pretty in depth, but there is a race towards the bottom. Is there a kind of a bottom that you're envisioning as far as spread level declines just among the general economic environment for deal flow?

Yes. I mean it's just hard to prognosticate and look forward and say where everything is going to go. I guess I'd just point to you a couple of things. Number one, spreads for the last 3 quarters now have been stable in the market. So it feels like we've found a bottom for now. And I think that's due to just overall transaction activity starting to come back. I think it's also due to just the fact that private credit managers have dividends to pay, and we sort of found where this floor seems to be at least now for the last 3 or 4 quarters. So that's one important point to look at. Again, I would probably just remind people, our third quarter originations showed spread widening, modest, but some spread widening. I talked about it already. We put out $3.9 billion at [indiscernible] 560 at 4.8x leverage. So that feels like a pretty good environment to be investing into and doesn't really suggest that we are in a race to the bottom type environment. But like I said, not going to sit here and really try to predict too much what's going to happen in the future.

We'll go next now to Ethan Kay at Lucid Capital Markets.

Maybe nitpicking here a little bit given very solid results, but dividend income came in a tad bit softer quarter-over-quarter. It looks like the distribution from Ivy Hill was stable. There were some exits of equity positions that you guys talked about, which ostensibly is a factor there. But can you talk about if there was maybe anything else that might have contributed to that kind of evolution in dividend income? And then as a quick follow-up, can you kind of remind us of the sensitivity of IHAM dividend to changes in interest rates given the fact that it's largely underlying -- the underlying is largely floating rate debt.

Yes. On the dividend, yes, you hit it. There's a couple of things there. There were some nonrecurring dividends that we got last quarter, but we also just saw some of the exits of our preferred yielding preferred equity that exited the quarter. And so the dividend income came down with those 2 factors. I will note that most of those preferred investments that paid off were picking. So it certainly helped the collection of our PIK, which I know has been a hot topic with investors as of late.

Yes, we didn't even really hit that, but we had a great PIK collections quarter. I knew we do get a lot of questions about that, and that obviously just occurred with pickup in transaction volume. And I think on the Ivy Hill question, I think you're asking about sustainability of Ivy Hill dividends and interest rate sensitivity. I mean, obviously, yes, Ivy Hill invests in floating rate assets. They have floating rate liabilities as well. And we think about the Ivy Hill dividend very similarly to the ARCC dividend, where we think there are reasons why we think it's very sustainable. One thing I'll point out is like the ARCC dividend, Ivy Hill is currently outearning its dividend pretty materially in the third quarter, we were about 107% dividend coverage at Ivy Hill. And there also exists $130 million of retained earnings down at Ivy Hill as well. So we feel like there's a lot of reasons why that dividend should be sustainable in all different kinds of environments.

[Operator Instructions]. We'll go next now to Brian McKenna at Citizens.

So credit quality remains resilient. And as you mentioned, nonaccruals still well below that historical 3% average. But why do you think credit has been so resilient outside of any broader macro reasons? Is it where your exposure sit from a sector perspective, how you structure deals and price risk? Or is it being driven by greater levels of scale? And as your platform gets bigger and bigger, it's really just driving better outcomes for all stakeholders through the cycle.

Yes. Thanks, Brian. All of the above for sure. I think as a reminder, one of the benefits of running a BDC is we don't have to manage to an index. So we can select industries that are defensive and that work well for credit investing. So we've avoided a lot of industries that have been showing softness of late. And we've been leaning into industries that are very consistent growers. And so I think certainly, industry selection and industry diversification as well have been really important drivers of our outperformance on credit.

And then certainly, look, you mentioned scale. So I have to take the opportunity to hit on that. The scale of our platform is unmatched and our ability to originate an incredibly broad amount of deals into our system allows us to be very, very selective, right? The more opportunities we can see, the more selective we can be and the better able we are to find the market-leading companies, the best companies in all of these different industries and then choose to invest in those companies and then pass on the other opportunities.

If your funnel is more narrow, obviously, our job is to put money to work. And so you're going to put money to work into lower quality companies. So that larger funnel, I think, is a huge advantage comes from our scale, comes from our size of our team, the tenure of our team as well, the fact that we've all been working together for such a long time. And I think just the DNA in our system around underwriting and credit has been passed down and just continues to get reinforced throughout the year. So I think you hit on all the reasons, Brian, but thanks for giving me the opportunity to talk more about them.

Yes, sure thing. I appreciate the context as always. And then just one quick one, if I may. And you touched on this a little bit, but looking back historically at periods of volatility, really when liquidity dries up, how much incremental spread on average have you been able to capture in those environments? I appreciate every period of volatility is a little bit different, but I'm trying to figure out, is there a way to quantify this dynamic? And ultimately, how much incremental ROE is generated from these types of situations through the cycle for ARCC?

I don't know there's a way to really quantify it just because everything is so different. It all depends on so many different factors, right? It's what's the broadly syndicated market doing, what are base rates doing? How bad do people feel about the dislocation? I mean a couple of examples just to point to recently with the Liberation Day and the tariffs back in April, there was probably a multi-week period where we were able to capture 50 basis points of increased spread and maybe another 50 basis points of increased upfront fee. So call it, maybe 75 basis points or so of total yield.

But that wasn't very long lasting, but there were certainly a couple of transactions that were going into signing that we were able to move terms on and rightly so because it was an uncomfortable and a difficult period to be investing in for most people. And then you look back in the period in 2022, late 2022 and early 2023, I think we saw spreads widen by 150 basis points back then and fees probably widened by 100 basis points upfront fees, and that was more driven just by banks exiting the market, the broadly syndicated market shutting down entirely because banks were hung on transactions as rates rose and they couldn't sell them. And so that just created a huge imbalance in the competitive landscape and the supply of capital. So really, it's just -- those are 2 recent examples of very different movements in spread and for different reasons, and it's just really hard to generalize.

Mr. Schnabel, it appears we have no further questions this afternoon. Sir, I'd like to turn the conference back to you for any closing comments.

Okay. Great. Thank you all for joining us today and for all your continued support, and we look forward to seeing you on our next quarterly call.

Thank you, Mr. Schnabel. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.

Good afternoon. Welcome to Ares Capital Corporation's Second Quarter Ended June 30, 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, July 29, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team.

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.

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. 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.

In addition, reconciliation of these measures may also be found in our earnings release filed this morning on Form 8-K with the SEC. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, which 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 June 30, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Second Quarter 2025 Earnings Presentation link on the Home page of the Investor Resources section.

Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I'd like to now turn the call over to Mr. Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?

Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President, Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&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. We extend our deepest condolences to the families and loved ones of the victims and to our friends and colleagues at Blackstone, KPMG, NFL, Rudin 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 will follow that with some thoughts on current market conditions. 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 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. 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 loan 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. 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 566 borrowers, extensive market relationships and strong balance sheet positions us as a valuable partner to many market participants despite reductions in overall M&A volume.

We saw this dynamic play out in the second quarter as nearly 3/4 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 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 remain proactive with our extensive sponsor relationships and continue to grow our presence among nonsponsored borrowers in our targeted industries. Despite overall declines in reported middle market M&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, 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 & Bradstreet, which is expected to close in the third quarter. Dun & 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 enabled 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 12 months. Supported by this underlying growth, borrower leverage levels are below our 5-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-accrual, these levels still remain well below with our historical average and that of 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 evaluation team of approximately 50 dedicated professionals. We believe the deep credit experience on 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.

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 3x multiple of our initial invested capital and generating a gross realized internal rate of return in the mid-20% 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.

Thanks, Kort. This morning, we reported GAAP net income per share of $0.52 for the second quarter of 2025 compared to $0.36 in the prior quarter and $0.52 in the second quarter of 2024. We also reported core earnings per share of $0.50 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.

Going a bit more into the net realized gains that Kort highlighted earlier, we generated [ $117 million ] of net realized gains on investments during the second quarter bringing our cumulative net realized gains on investments since inception to nearly $900 million. Related to certain of these gains, we incurred $44 million of capital gains taxes. As you may have noticed, we now break out these amounts separately on our income statement to make it 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 $27.9 billion, which was up from $27.1 billion at the end of the first quarter and up from $25 billion a year ago. Shifting to our funding capital position. 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 million of long 5-year unsecured notes, at a new issues spread to treasuries of 175 basis points, marking the tightest 5-year new issue spread achieved by BDC 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 million, bringing the total facility size to $5.4 billion. Extended the end of revolving period and the maturity date to April 2029 and April 2030, 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 an additional $100 million to this facility. With this latest increase, we've expanded our revolving credit facility by nearly $1 billion since the first quarter of 2025. This momentum is carried through to our other credit facilities. So far, in the third quarter, we extended and upsized 2 of our other credit facilities by a combined [$400 million] and reduced the draw on spreads on each by 20 basis points.

Overall, pro forma for this post-quarter activity as well as the repayment of our July 2025 notes 2 weeks ago, our liquidity remains very strong, totaling nearly $6.5 billion, including available cash. We believe we are well positioned, particularly since we have no debt maturing for the remainder of this year. In terms of our leverage, we ended the quarter with a debt-to-equity ratio, net of available cash of 0.98x, consistent with the quarter ago.

We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio of company commitments, which remain a significant source of deal flow as well as investment opportunities in new portfolio companies.

Finally, our third quarter 2025 dividend of $0.48 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 64 consecutive quarters. In terms of our taxable income and spillover, we currently estimate we will have $878 million, or $1.29 per share, available for distribution to stockholders in 2025.

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 of spillover. We believe our meaningful taxable income and 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.

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 $2.5 billion 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 Kort 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 million to over $500 million in EBITDA, we are able to select what we believe are the most compelling credits across a multitrillion dollar total addressable market in the U.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 million 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 $27.9 billion portfolio at fair value continues to be highly diversified across 566 companies in 25 different industries. 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 SDLP 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 company's exposures and available mitigants, we feel incrementally better about the risks posed by potentially higher tariffs and our portfolio company's strategies to address them.

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 size. Companies with EBITDA of less than $100 million and those with greater than $100 million of EBITDA, all exhibited double-digit organic EBITDA growth over the last 12 months.

Our non-accrual rates continue to be well below historical levels but did tick up modestly at cost from 1.5% to 2%, and on a fair value basis from 0.9% to 1.2% since last quarter. On a cost basis, these metrics remain below our 5-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 time frame.

Looking ahead, we remain confident in the calibre 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. Our total commitments for the third quarter to date through July 24, 2025 were $1.1 billion, and our backlog as of July 24, 2025, stood at $2.6 billion.

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 16th consecutive year of stable or increasing regular dividend. 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 Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities.

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

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, towards 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, 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 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 that point of stability in terms of spreads now for 3 or 4 quarters in a row. And then yes, the volume really does seem to be picking up. Again, the story on volume was a little bit mixed throughout the quarter, first half, a little bit of an air pocket as people are 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.

Very good. And for a follow-up on the off-balance sheet vehicles, the 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? .

Yes. 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.

We'll go next to Doug Harter with UBS.

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 continue going to issue new equity off of the ATM?

Yes, 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 million-ish this quarter via the ATM versus $400 million to $500 million-ish in the prior few quarters.

Again, you never know where the markets are going to go, and it's crucial for us in our competitive advantage and value proposition to have capital for our existing borrowers and for potential new borrowers in all market environments. 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 and we think good for our shareholders.

Obviously, with 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 of $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 1x leverage. In fact, it probably just gives us a lot of financial flexibility going forward to take advantage of whatever kind of market environment we encounter. So long answer, but I guess it comes back to what I said in the beginning, which is it's a balance.

We'll go next to Robert Dodd with Raymond James.

On the credit side, if we can, I mean you added a couple -- a few more names to non-accrual but a couple of those were new, right? I mean [PRG] and KBS had defaulted before and been restructured and now they're back. So can you -- is it -- those are obviously kind of club deals.

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 that becomes a problem again. Any color there?

Yes, I appreciate the question, Robert. And you're absolutely 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. 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 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, and when we see a little bit of 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. The non-accrual number can bounce around a bit quarter-to-quarter and as 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.

Got it. Got it. And then 1 more, if I can. 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? Or was that opportunistic given the volatility in the liquid loan markets that obviously we saw in Q2?

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. IHAM is a strategic vehicle and they have demand for assets, and it felt like a good time to sell some assets down. So really nothing specifically opportunistic about the fact that we did it this quarter versus prior quarters.

We'll go next to Arren Cyganovich with Truist.

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 broaden out into the core and lower middle market as well.

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 is dislocation, then we kind of broadened back out and you look at the average EBITDA of our new borrowers that will bring into the portfolio that's kind of come down through 2024, we moved 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.

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

No, I understand. I understand. Look, yes, we have a stated range of [0.9% to 1.25%]. And so it's a little bit toward the lower bound of that range. I think we feel -- we feel great about the fact that we're well covering the dividend delivering by stable results, while keeping that leverage level toward the low 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.

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 -- we already need it right now, and I think it puts us in a nice spot. So obviously, transaction 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.

We'll go next to Casey Alexander with Compass Point.

I appreciate your commentary about spreads. I'm wondering, you're getting a little bit better pipeline filled. 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.

Yes. Look, the laws of supply and demand would suggest that if more deal flow comes into the market, spreads should widen modestly. I guess I would say I don't think we're unhappy with where spreads are. Total -- you have to 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, unitranche's and low double digits on low to mid-double digits, even on junior debt assets.

And so 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 imbalance. So I guess I would just again say we're not -- we feel like this is a good investing environment. And also, if you look at leverage levels that exist in our current portfolio and where we're investing in 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.

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. Was there any onetime in that? Or was that just based upon growth of the vehicles?

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

Do you have -- about how much was that nonrecurring?

About $10 million of it.

Okay. Great.

It just coming off of our equity co-investment portfolio. Every now and then, we get dividends on those equity co-investments.

We'll go next to Kenneth Lee with RBC Capital Markets.

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 segments more recently, how did 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? I just want to get a little bit more color around that.

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. But maybe generally, 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 in terms of EBITDA lower than what we're seeing in comparable large-cap companies. So that's kind of -- I try to answer the question.

Okay. Very helpful there. And just 1 quick follow-up, if I may. In terms of the equity co-investments, the exit side, I presume they were not driven by Ares Capital. They were not discretionary. 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?

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 and 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 get really too much forward-looking guidance around what to expect going forward? Sorry for that.

We'll go next to Melissa Wedel with JPMorgan.

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?

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 losing manufacturing or other measures.

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 to get in any material way. 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. And I guess I should also mention that 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, 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 service 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.

Okay. And then just to clarify, it sounds like some of the price increases are happening already.

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. It 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.

Got it. And my last question I wanted to follow-up on the capital injection or the additional investment into IHAM 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, the IHAM. So I'm just curious how we reconcile those 2 -- the flows into Ivy Hill this quarter and then apparently out of the sub-loan in 3Q.

Yes. So we do have a -- just a reminder, we 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 able to send some of the proceeds back to us post quarter end.

Is that clear? I mean it's similar to equity, it's just more recycle -- it allows us to recycle.

[Operator Instructions] We'll go next to Sean-Paul Adams with B. Riley Securities.

Touching Back on Ivy Hill, it seemed there was a slight shift in the gross commitment portion for first lien senior 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?

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.

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

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

Ladies and gentlemen, this concludes our conference call for today. If you missed the part of today's call, an archived replay of the call will be available approximately 1 hour after the end of the call through August 29, at 5:00 p.m. Eastern Time to domestic callers by dialing 1(800) 695-1624 and to international callers by dialing +1 (402)530-9026. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website.