Ares Capital Corp

NASDAQ:ARCC

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon. Welcome to Ares Capital Corporation’s Second Quarter Ended June 30,2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, July 28, 2021.

I will now turn the call over to Mr. John Stilmar, Managing Director of Ares Investor Relations.

[John Stilmar, Managing Director, Investor Relations]

Thank you and good afternoon. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as the accompanying documents contain Forward-Looking Statements and are subject to risks and uncertainties.

The Company’s actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that the 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 operation. A reconciliation of core EPS to the net per share increase or decrease in shareholders’ equity resulting from the operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representations or warranties with respect to this information.

The Company’s second quarter ended June 30, 2021 earnings presentation can be found on the Company’s website at www.arescapitalcorp.com by clicking on the second quarter 2021 earnings presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation’s earnings release and 10-Q are also available on the Company’s website.

I will now turn the call over to Mr. Kipp DeVeer, Ares Capital Corporation’s Chief Executive Officer.

[Kipp DeVeer, Chief Executive Officer]

Thanks, John. Hello, everyone, and thank you for joining the call today. I’m here with our Co-Presidents, Mitch Goldstein and Michael Smith; our Chief Financial Officer, Penni Roll; and several other members of the management team. I want to start by highlighting our strong second quarter results and I will provide some thoughts on the current market and the company’s positioning.

This morning, we reported second quarter core earnings of $0.53 per share, up from $0.43 per share last quarter and $0.39 per share a year ago. This was the second highest core earnings results in the company’s history. Our leading market position drove record new commitments of $4.9 billion for the quarter, which in turn led to robust interest and fee income. Our second quarter GAAP earnings per share of $1.09 increased from $0.87 last quarter and $0.65 a year ago. Very good portfolio company performance and favorable market conditions drove our investment valuations higher. And we witnessed both realized and unrealized gains. As a result of these positive factors, our net asset value grew to a new record of $18.16 per share. Given the higher level of earnings we’ve been generating consistently, and our positive outlook for the business, we increased our quarterly dividend from $0.40 per share to $0.41 per share. Let me now provide a high-level overview of current market conditions and how it’s influencing our investment activity.

As we have all witnessed, the economy is in the midst of a strong recovery. And this is driving higher levels of transaction activity in our market. Announced private equity deal activity in the US is on track for the highest level in over a decade. And corporate M&A activity remains robust as companies are focusing on expanding or adding new verticals to complement their existing business models. Greater than 70% of our new commitments in the second quarter were driven by corporate or sponsored M&A.

Today, Ares capital is the largest BDC and our company as you know is managed by one of the largest global direct lending platforms in the market today, we are witnessing more and more companies increasingly seeking the flexibility of our capital, the certainty of closing we can provide and the long-term partnership approach that we can deliver with our financing solutions. We believe the sound approach we delivered throughout the pandemic, and the recovery seems to be paying substantial rewards for further enhancing our already strong market presence. The other trend of supporting our growth is the widening of our market opportunity as the private markets continue to scale.

We’re seeing larger companies increasingly seek direct lenders with scale, particularly those like ARCC they can commit to meaningful hold sizes and transactions. While these larger borrowers are valuing the speed, benefits, and certainty of clothes that we can provide compared to a bank or syndicate lead solution 2020 showed that having a consistent, well capitalized capital provider like us as a financing partner is of great value.

We believe that many of our competitors were not open for business during the pandemic, and market participants took notice that we were very active throughout this period. This has enabled us to gain share, as the private markets continue to grow on the upper end as an alternative to traditional market providers. As a result, we’re continuing to source attractive relative value investments in both the middle and upper ends of our market.

As we commit larger amounts to larger companies in our book, the weighted average EBIDTA of our originations for the quarter was 30%, higher than the prior two-year average. And our overall portfolio weighted average EBIDTA doubled over the past three years, to an average of $146 million. While larger companies have a greater impact on the dollar value of our portfolio, we continue to maintain our interest in the core middle market, where we have focused most of our investing activities over the years. By number of companies our portfolio is well distributed in terms of size of borrower, with the majority of our loans go into companies with EBITDA below $100 million.

Remaining active within the core middle market allows us to form relationships with a broad spectrum of companies and create significant positions of incumbency. This incumbency in smaller companies allows future origination opportunities with these portfolio companies as they grow. We believe these advantages are delivering further market share gains for us, as new commitments for the past three quarters are 30% higher than Ares Capital’s historical record for annual deployment. We believe this increasing activity is not only driven by the scale of the capital solutions that we provide, but also by our differentiated sourcing opportunities that come from 17 years of cultivating relationships with borrowers and sponsors.

In the second quarter incumbency positions in existing portfolio companies accounted for 63% of the number of commitments made during the quarter, and repeat sponsors accounted for 95% of our sponsor backed investments that we made. As these advantages continue, we were able to increase both the quantity and the size of our investment opportunities. In the second quarter, we saw a 31% increase in our number of transaction opportunities, and a 47% increase in the estimated aggregate dollar amount of deal activity when compared to the quarterly average for the past five years.

The growing breadth of our pipeline allows us to see a larger and more diverse set of investment opportunities, which ultimately allows us to be highly selective. We continue to finance only approximately 5% of the new deals we review. Ultimately, we believe our competitive advantages, and careful credit selection results in a highly diversified and attractively positioned portfolio. As Michael will discuss later in more detail, our portfolio continues to perform well with weighted average EBITDA growth of 12% over the last 12 months, lower non-accruals at cost, reduced watch list names and continued valuation improvements.

Let me now turn the call over to Penni to provide more details on second quarter results and some other updates on our financing activities.

[Penelope Roll, Chief Financial Officer]

Thanks, Kipp. Good afternoon, everyone. Our core earnings per share $0.53 for the second quarter of 2021 or driven by a strong level of capital structuring service fees from record new originations and our capital markets activities, as well as higher recurring interest in dividend income driven by our net portfolio growth in the past quarter. Our GAAP earnings per share was $1.09 for the second quarter of 2021, including net realized gains on investments of $0.14, and net unrealized gains of $0.56. The net unrealized gains primarily reflect performance improvement and higher company valuations in certain of our equity investments, as well as continued tightening of credit spreads on our loan book, relative to the end of the previous quarter.

At June 30, 2021 our stockholder’s equity grew to $8.1 billion, resulting in a record net asset value per share of $18.16, an increase of 4% from a quarter ago, and nearly 15% since the second quarter of 2020. Our total portfolio at fair value at the end of the quarter was $17.1 billion, and we had total assets of $18 billion. As of June 30 2021 the weighted average yield on our debt and other income producing securities at amortized cost was 8.8%. And the weighted average yield on total investments at amortized cost was 7.7% as compared to 8.9% and 7.9%, respectively, at March 31, 2021.

At June 30, 2021 79%, of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates 88% of the remaining floating rate investments had an average LIBOR floor of approximately 1%, which is well above today’s current one- and three-months LIBOR rates. Shifting to our capitalization and liquidity, we had an active quarter focused on raising additional debt, extending debt maturities and reducing our cost of debt.

During the quarter, we took advantage of a continued historically low-rate environment and issuer friendly conditions in the investment grade market. We issued $850 million of two and seven eight unsecured notes maturing in June 2028, which was a record low coupon for us or any BDC for a seven-year issuance. We also had the opportunity to reopen our existing July 2025 notes and issuing an additional $500 million at a premium which resulted in an effective yield to maturity of just over 2% on the incremental amounts. Besides the unsecured notes issuances during the quarter, we also upsize our revolving credit facility by $269 million to $4.2 billion, upsize our SMBC funding facility by $75 million to $800 million, along with pushing out its maturity to May 2026.

And lastly, repriced our BMP funding facility down to LIBOR plus 180 basis points. Considering these activities, we now have committed secured revolving facilities of $6.9 billion, with a fully funded weighted average borrowing rate of LIBOR plus 180 basis points, and a weighted average remaining maturity of nearly four and a half years. We ended the quarter with nearly $5.7 billion of total available liquidity and a debt-to-equity ratio, net of available cash of $325 million of 1.12 times up from 1.02 times at the end of the first quarter. While our leverage ratio will vary over time depending on activity levels, we will continue to work to operate within our stated target leverage range of 0.9 to 1.25 times.

Overall, we continue to believe our strong balance sheet and financial position remains one of our most competitive advantages and enables us to actively invest in all market environments. Before I conclude the increased third quarter dividend of $0.41 per share is payable on September 30 2021 to stockholders of record on September 15 2021.

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

[Michael Smith, Co-President]

Thanks, Penny. I’m going to spend a few minutes providing more detail on our investment activity and portfolio performance for the second quarter of 2021 and also provide an update on post quarter and activity and our backlog and pipeline. During the second quarter, our team originated a record $4.9 billion of new investment commitments to a diverse set of high-quality companies across 19 distinct industries.

As Kipp mentioned earlier, the continued growth in our platform has allowed us to expand our addressable market opportunity and be a meaningful solutions provider to a broader array of companies. We continue to focus on the highest quality credits, which positions as well to finance what we believe are the most attractive transactions and companies. While the market remains strong. We find the market very investable and believe the strategic advantages around our size and scale have enabled us to find compelling investments with strong risk adjusted returns.

Shifting to our portfolio, we continue to construct a highly diversified portfolio, which currently has 365 distinct portfolio companies and an average hold position at fair value of only point 3%. The portfolio is well diversified across industries sponsor and asset classes. Additionally, we believe the portfolio is attractive as it relates to the enterprise value of the companies we provide financing, with a weighted average loan to value of approximately 47% at the end of the second quarter. Portfolio performance continues to be strong, benefiting from the many competitive advantages of the platform and from our upmarket focus.

In the second quarter, our portfolio companies with greater than $100 million of EBIDTA had growth rates that were more than three times those of companies with EBIDTA below $50 million. It is also worth noting that the weighted average EBIDTA growth for our four largest industries, inclusive of software and software services, healthcare services, commercial and professional services, and durables, which represents about half of the portfolio it’s for fair value had EBIDTA growth rates 35% higher than the portfolio weighted average growth rate in aggregate. This underscores our approach of overweighting large companies in what we believe are the most attractively positioned industries and sectors of the economy is furthering enhancing our performance.

While the weighted average portfolio grade at fair value remained effectively unchanged last quarter at 3.0. The number of companies that have been graded as either one or two declined by 40% compared to the levels experienced a year ago. Furthermore, our nonaccrual rate at cost declined from 2.9% from 3.3% last quarter, and is nearing pre pandemic levels. The number of companies on nonaccrual status remains flat, with one removal and one addition. Before concluding with the discussion of our pipeline and backlog, I wanted to quickly comment on this quarter’s increase in NAV, which was driven by both strong portfolio performance and net appreciation in investment values.

A majority of the quarter’s portfolio appreciation was supported by improved valuation of our equity investments. The source of this appreciation highlights a key differentiator for the company versus many other BDC and direct lending funds in the market in terms of portfolio construction. We believe a modest equity co investment portfolio and attractively structured preferred equity positions along with our expertise of taking equity positions in certain restructurings all help drive significant value creation for our shareholders alongside our long and stable debt portfolio.

I will finish with a brief update on our post quarter and investment activity and pipeline. From July 1 through July 22, 2021, we made new investment commitments totaling $470 million, of which $430 million were funded. We exited or were repaid on $267 million of investment commitments, generating approximately $31 million of net realized gains on exit. As of July 22, our backlog and pipeline stood at roughly $1.4 billion and $110 million respectively. Our backlog contains investments that are subject to approvals and documentations and may not close or we may sell a portion of these investments post-closing.

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

[Kipp DeVeer, Chief Executive Officer]

Thanks a lot, Michael. In our view, the company is performing well on all levels. We’re generating robust earnings, making attractive new investments with compelling risk adjusted returns, experiencing improving credit performance, and enjoying growth in our net asset value. The increase in our quarterly dividend is a reflection of the optimism that we have around earnings power and the strength of our competitive position in the market. And while we acknowledge the COVID19 pandemic and the challenges that have brought are not completely over, we have a positive view for 2021. And believe the current environment provides a great backdrop for Ares Capital and for our shareholders.

That concludes our prepared remarks. We’re happy to open the line for questions, operator.

[Operator]

[Operator Instructions] Our first question today will come from Ryan Lynch with KBW. Please go ahead.

[Ryan Lynch, KBW]

Hey, good afternoon. Thanks for taking my questions. First one I had was regarding the dividend. You guys have had the $0.01 dividend increase. You guys announced this quarter, which was really nice to see and kind of shows the earnings power you guy’s project going forward. But as I look going forward, you guys ended 2020 with some pretty large spill over income. And then as I look at the result in 2021, you guys have two very large gains, which is obviously good.

Now a lot of those were unrealized. And I know there’s difference between tax and GAAP accounting, but it looks like you guys may be in a position at some point, you know, rolling into late 2021 or 2022 to potentially need to pay out a meaningful amount of maybe special or supplemental dividends down the road. Does that thought process sound correct? And also on that, what is your philosophy in terms of potentially paying out special or supplemental dividends because different BDCs have taken different approaches to paying out, large ones are paying out, smaller ones over time or doing to kind of a core and supplemental just thoughts around that would be helpful.

[Kipp DeVeer, Chief Executive Officer]

Hey, Ryan, good afternoon. It’s Kipp. So I was going to kick this to Penny, just for the technical points, because there’s some reasonably complicated accounting and for the act stuff, that frankly, she’s better at describing than I am and then perhaps I’ll come back on and just give you some thoughts more broadly about the dividend increase and thinking around specials. But Penny, do you want to answer Ryan’s first question directly? If you would?

[Penelope Roll, Chief Financial Officer]

Yes, sure. So Ryan, on the just technical point, as a Rick, we can spill over enough earnings kind of as long as it doesn’t exceed our current dividend payout level, which if you do a run rate on the $0.41 and $1.64. And we ended last year with $1.04. I agree with your comment that we have a lot of additional things happening, that would indicate that we could be growing the spill over this year. But I think we still have room between roughly the $4 we spilled over last year and the run rate we’re currently paying. So I think we have some flexibility.

So from a technical point of view, I don’t think you’ll see us in a position this year where we are required to pay something out, like others have stated that they need to do to make sure they have met the requirements. So we won’t be in a position to I guess, as you said, be required to pay something. Still have some cushion there. So maybe with that Kipp, I’ll turn it back to you for thinking about how we look at it more philosophically.

[Kipp DeVeer, Chief Executive Officer]

Yes. Thanks, Penny. That’s great. So Ryan, obviously this it’s, you know, with the dividend increase. Imagine this was front of mine, you know, at our board meeting and our discussion amongst the management team, and raising. The dividend increase for us was exactly as you laid out here. We’ve over the last however many quarters but it’s a lot consistently out earning the dividend on a on a core basis. And we’ve always insisted on the core earnings for the most part meeting or exceeding the dividend on a quarterly basis.

And your comment about optimism that’s likely to continue is reasonable, right, which is obviously why we’re trying to show the trajectory of a regular dividend increase this quarter, for the first time and obviously are hopeful for the future. Personally, I think that the management team has taken the tact that that looking at specials is probably best done around tax clean-up at your end, and the philosophy has typically been to retain some spill over income. And I’ll acknowledge that, you know, it’s pretty significant at this point. So, we don’t have a real determination today. But we do have determination to take a look at that at year end.

In terms of philosophy, you know, we’ve tended to pay specials out if we choose to pay them over a longer period of time just to reward shareholders that have been with us for a while, but obviously, also to continue to, you know, keep shareholders interested in the company rather than sort of provide a onetime reward. So I think it’s something for the future. Not as much for today. But the great news is, you know, we’re materially out earning, you know, the dividend on both a core and certainly on a realized sort of distributable income basis, and it’s something that we’re going to continue to work through.

[Ryan Lynch, KBW]

Okay. And yes, I appreciate the technical commentary and Kipp, I appreciate the philosophical commentary on the dividend. The other question, my follow up question I had was probably directed it, you Penny. You know, over the last several years, and really, even the last several quarters, you guys have really continued to boost your liability structure to really probably having to invest in class structure. And a lot of that has come with very attractive unsecured debt offerings. It feels like the whole entire investment grade BDC market is also coming into its own, you’ve really over the last several years, and really specifically the last several quarters.

So I’m just curious, though, I saw you guys increase and upsize some of your credit facilities recently. I was just wondering, what was the thought process behind that? Because at some point, it seems like given the strength of the investment grade market for the BDC space and your guy’s ability to tap it, it would seem that would make sense. And maybe downside some of those because there is a cost of those unfunded commitments and given kind of how your guy’s access to it market, it seems like, you know, it may make sense to reduce those a little bit because you got dropsy paid flexibility, but just wanted to hear your thoughts on that kind of philosophy?

[Penelope Roll, Chief Financial Officer]

Yes, I mean, that’s a great question. I mean, if you look at just where we are growing to maybe part of is keeping a little perspective of the size of our balance sheet, because if you go back a year ago, we were about $15 billion and today, we’re $18 billion with growth prospects. You know, particularly as we’ve just seen, the amount of opportunities we’ve had, you know, this year for investing in our space. So we do have the need to have, I guess, flexible financing. And we think having available capital in the context of revolvers is important because you want flexibility of funding deals, repaying deals, if we raise additional capital, we want an immediate use of proceeds.

So we’re not sitting in cash. So that revolver allows us to have that flexibility around the movement of money in and out of the balance sheet around our investing activities. So the question then, you know, if you look at where, we are today on pricing? I think I mentioned in my comments that if you look at the aggregate committed revolving capital, the funding rate is LIBOR plus 180, on a weighted average basis, which is still pretty compelling in the context of where LIBOR is today, but does arguably compete with the low end of where you could invest our issue in the investment grade market.

So, we think it’s important to have both we are happy for the opportunity to lower our cost of term debt funding as we’ve taken advantage of the markets. We know those have been slow over time. But right now, I think the reason why we’ve seen us issue more in that space is to take advantage of that historically low-rate environment that we’ve all been experiencing. I think it’s healthy for our balance sheet to have the ladder of maturities that we build, but we want them financial flexibility with the revolvers in a growing balance sheet. And the reality is, it doesn’t cost a lot to carry that unfunded commitment. We’re probably paying somewhere between, you know, 35.50 basis points in the unfunded so I kind of look at that as a low price to have that flexibility that we’ve grown to enjoy around the way we built the capital structure.

[Ryan Lynch, KBW]

Okay, I understand. I appreciate the time today, and really nice quarter guys.

[Operator]

Our next question will come from Finian O’Shea with Wells Fargo. Please go ahead.

[Finian O’Shea]

Hi, good morning, Kipp, about the capital raising in the space. A lot of that now is coming from players that are both larger, and perhaps more importantly, ramping up into direct lending. Can you talk about what that’s done on the larger market side of origination? And then does it push you to respond with more aggressive fundraising yourself on the Ares platform?

[Kipp DeVeer, Chief Executive Officer]

And I’ll take the second piece of it, we’re not doing anything differently in terms of capital raising, you know, we’ve got a fair amount of dry powder across the platform in the US whether it’s the BDC, or elsewhere, so I don’t think we’ll be making any big changes in terms of how we’ve raised capital historically, going forward. Look, I mean, there’s, I think, one player in particular, as folks who have read the press that have been raising a tremendous amount of capital, you know, outside of the public BDC channel, but targeting our markets, it’s had a modestly, you know, negative impact on the market in terms of pressure on spreads pressure on terms and that kind of stuff.

But for us, it’s been at the margin, you know, there’s a little bit of concern, but I say that all the while, you know, having just obviously created, you know, the most significant originations quarter in the company’s history, so, I’m not all that concerned, I really still believe that we have, you know, the best set of relationships out there, you know, the longest track record in the public BDC space, and just a great you know, competitive position from which to play into, we look at, you look at a lot of deal flow across a lot of industries, you know, some of its sponsored, some not, and we built real capabilities there just to make sure that, you know, at times where we see a competitive pressure like that, you know, we have the ability to walk away from deals that aren’t fits for us. Because we have so much deal flow coming, you know, concurrently and, and behind it, you know, and that’s always been the philosophy.

So, for us, it’s just continuing to really diversify and build that origination platform. So, you know, we can drive strong originations. And you know, despite some of the pressures this quarter, and maybe last quarter from, you know, that potential competitor, I think you’re referring to, you know, we’ve had two really good origination quarters and a company’s growing, the earnings are growing, and obviously, we were able to push a dividend increase as well, this quarter, which is great. So it’s not a high level of concern at this point. But we’ll acknowledge.

[Mitchell Goldstein, Co-President]

Hey Kipp, it’s Mitch. The only thing I would add is, and we’ve mentioned this over the years is, one of the advantages we’ve developed over the last decade and a half is in any given quarter, you know, 40% to 60%-plus of our gross originations comes from our existing book of business. And I think that was sort of the case this quarter. And so that tends to be our least competitive dynamics. And so when that quantum of originations comes from an existing book of business, you sort of as Kipp said, can be more selective when the competitive factors tend to get increased versus a more selective market.

[Kipp DeVeer, Chief Executive Officer]

Yes. Thanks, Mitch. That’s a great point.

[Finian O’Shea]

Yes, thanks, everyone. That’s helpful. Just to follow up on Ivy Hill, pretty similar, consistent asset side, but it looks like you’ve had a couple vehicles roll off in the past few quarters. Would you say that is anything to see there in terms of besides Ivy Hill underneath that is in your or I guess, how would you describe what’s happening with your strategy there? Your growth plans there?

[Kipp DeVeer, Chief Executive Officer]

Yes, I mean, you know, I say this over and over again, when we get asked about Ivy Hill and Mitch is very close to it can chime in too, but you know, Ivy Hill has been an unbelievably successful portfolio company of ours, and one that we’ve, you know, continued to grow since its inception. So, you know, from time to time, you’ll see some vehicles roll off, but they tend to, you know, come with ramps of new vehicles.

So our goal there is for continued growth, continued investment in that company, because the money we’ve invested there is obviously generating great returns. In this quarter, we did sell some assets to them as you know they’re looking to ramp new things. And obviously, the dividend that I think was increased, it was either last quarter of the quarter before is stable from the last quarter this year, and we wouldn’t expect any changes. I mean, we continue to be excited about investing in that company, and they’re generating great returns.

[Finian O’Shea]

Great. Thank you.

[Operator]

Our next question will come from John Hecht with Jefferies. Please go ahead.

[John Hecht, Jefferies]

Good morning, guys. And thanks for congratulations on another good quarter. First question is just kind of basic modeling question. And I know this capital structuring fees can vary quite a bit, depending on kind of end market activity. But based on your comments, it seems that you know, and also Mike’s comments about the pipeline support, this seems like the deal environments pretty strong. So is it reasonable think that that line item will be elevated relative to call it his recent averages for at least a quarter or two?

[Kipp DeVeer, Chief Executive Officer]

It’s not all. Hey, John, by the way, thanks for the question. It’s not all that out of line, right. So I mean, the majority of the new fees, the fees coming in are linked to obviously the new fees that were originations. This quarter did like some in the past experience a couple of larger transactions where maybe there is a hold, along with our participation on a larger deal. But look, I mean, it’s right around 2% of new commitments, which is about the average if you look back historically. So as you think about modeling, while the numbers high, you know, I think the numbers high, mostly driven by the fact that the originations number was so significant.

[John Hecht, Jefferies]

Okay, that’s helpful. And then the second a little bit of a higher-level question, you kept the builder last several years, you guys have been talking about kind of the opportunity set, given that the banks were the average high yield size offering might have been increasing, and so forth.

So maybe kind of you were able to capture some incremental market share there. You seem pretty constructive in your comments about the deal flow now. And the opportunity set I’m wondering is anything changed at the banks doing anything? Either more or less aggressively that would change that kind of thesis and or are there other markets, maybe larger loan sizes that you guys can go after? You know, kind of how is the opportunity set evolved over the past year and a half or so?

[Kipp DeVeer, Chief Executive Officer]

Yes. I mean, I think with COVID – you know, that I wouldn’t say the banks have materially changed their behavior, I think what has happened is, you know, larger and larger pools of thing, assets, obviously, ones that we manage, and ones that, you know, some of our competitors manage, have taken market share, right, and these larger club deals at the upper end of the middle market, or I guess what, historically was the upper end of the middle market just seem to be more frequent, right, and the borrowers that are looking for solutions are finding them valuable, certainly, they’re finding them unbelievably valuable during sort of that COVID. And slow recovery from COVID period where doing a deal with a few partners, and you knew that it would get done well, really was valuable.

And the point on the competition, I think, we’re seeing more and more, we’re gaining market share is one of the leading players because we can obviously lead deals, we can structure them, we’ve got the capacity for substantial holds, the quality competitors that we see in the space are doing the same thing. And I think they’re gaining market share too. And that’s coming probably at the expense of the smaller syndicated transactions, which is or at the upper end of our mark.

And I think the more capital we have, the less we’re bringing in smaller players perhaps for small holds and in the deals that we’re leading. So I think this periods another one, where the large direct lenders with strong teams, strong originations and good track records are attracting investor capital, and they’re becoming you know, increasingly preferred partners for private equity and for companies generally.

[John Hecht, Jefferies]

Okay, great. Appreciate the color. Thanks, guys.

[Operator]

Next question will come from Devin Ryan with JMP Securities. Please go ahead.

[Devin Ryan, JMP Securities]

Great. Good afternoon, everyone. Great to see the momentum here. I guess first question, just want to touch on the mix unitranche. And obviously, that’s grown pretty meaningfully over the past few years. Currently, I think 22% of the investment portfolio. And so it feels like that’s been an attractive opportunity, but love to maybe drill down around how you guys are thinking about the longer term mix of unitranche, whether you’re targeting a certain level or how much you’d be comfortable with. And just in terms of that growth, how much has been a function of just, I guess, what you’re seeing in the broader market and maybe with larger borrowers, or is it just simply, that’s where there’s been more attractive risk rewards more recently.

[Kipp DeVeer, Chief Executive Officer]

Thanks, Devin. Yes, that’s a good question. I think some of it plays off the comments that I gave to John’s question, which is, you know, the large unitranche I think it’s an incredibly attractive product, right for borrowers, and that it’s easy to use and can be done with one or two or three people depending on how large it is. And it’s definitely kind of seen an increase in uptake. I think partially because of COVID to the comments I made earlier, but I think that there’s a lasting trend here where large direct lenders have the ability to do larger and larger unit tranches either on their own or together. You know, to be honest, as a percentage of the mix, I don’t think we’ve really talked about that much. As a team, I mean, we’ve used them generally as being some of the best risk reward assets at the company and frankly, in the market. So we’re going to continue to be happy seeing that as substantial source of kind of new originations. But no big thoughts other than that, but I think it’s something it’s increasingly taken market share to your question and to John’s question.

[Devin Ryan, JMP Securities]

Yes. Okay. That’s helpful, Kipp. And then a follow up. I guess, you John touched on in his question as well. But thinking about the capital structuring fees in the fourth quarter of last year, I think $3.8 billion of gross commitments, and you had $93 million of capital structure and fees. And then this past quarter, if $4.8 billion and incremental billion dollars of commitments still $93 million to the same level of capital structure fee. So you’re trying to think about like, is there a fee compression occurring there, or just more broadly, how we should think about kind of that relationship moving forward, if at all, but just trying to figure out from a modeling perspective, that extent, we see strong activity.

[Kipp DeVeer, Chief Executive Officer]

Yes. I mean – so, as I mean, the quick answer is the percentage of kind of pure structuring and capital markets fees, i.e. not commitment were higher in the fourth quarter of last year, right, we’re engaged in a couple and this is not dollars. But in terms of mix, we’re engaged in a couple transactions there relative to the overall origination size, where we simply didn’t end up with a final hold in the name. That was a little bit, you know, less true this quarter, i.e., the originations, that we’re holding are higher, right? The transactions were acting in a more capital markets-oriented way were lesser, because we’re finding some pretty nice companies to invest in. So I mean, I think generally, when you guys are modeling, if you look historically 2% of originations, I think is always a pretty good place to anchor your numbers, but it’s just going to move around depending on that on that mix. If you think about Q4 versus Q4 of last year versus this quarter, it’s just a slightly different mix.

[Devin Ryan, JMP Securities]

Got it. Okay, that makes sense. I’ll leave it there. Thank you very much.

[Operator]

Next question will come from Terry Ma with Barclays. Please go ahead.

[Terry Ma, Barclays]

Hey, good afternoon. Can you maybe just talk about the SDLP and this strategy for that vehicle going forward? The size has been more or less the same over the last year? So is that about as big as it’s going to get? Or is there a longer-term strategy there?

[Kipp DeVeer, Chief Executive Officer]

No, I think we’re, you know, Terry, thanks for the question. I think we’re very open to continuing to grow. Remember, we can’t tell our companies kind of how to do things and obviously doing a deal with SDLP, which obviously is a joint venture requires a borrower wanting to do something not just with Ares Capital, but with obviously some other counterparties that are involved in that joint venture. I wouldn’t really take anything away from it. Sometimes it has more uptake in a quarter than at other times, but you know, we still have a lot of confidence in the program. We like it as an investment and still we are partners there is as valuable. So no change in our thoughts or outlook around SDLP.

[Terry Ma, Barclays]

But is there, I guess, is it being done in a way? Or is there anything different compared to the legacy program, the SDLP? Or the SSLP I’m sorry?

[Kipp DeVeer, Chief Executive Officer]

Is there anything happening with legacy SSLP, no.

[Terry Ma, Barclays]

Is there anything about the SDLP that’s being done differently than the legacy program before?

[Kipp DeVeer, Chief Executive Officer]

Yes, I mean, there are a few nuanced differences, obviously in that. We have more than one capital partner, right. So there are a couple of different folks involved in that joint venture. You know, AIG and Verizon being one, another insurance company who we’ve heated their desire to not be public. And yes, there’s a different I don’t know, maybe mechanics of the vehicle that we’ve structured slightly differently, if you remember from SSLP way back when it’s wind down didn’t go exactly how we might have hoped. And, you know, our negotiation with GE back then probably wasn’t as pleasant as we might have hoped it would be. So I think that we’ve structured the program in a way that we’ve taken some of those learnings from the past and made sure that we don’t end up with sort of any of those issues to the extent we ever chose to wind it down. But you know, that’s something that’s frankly, not even a discussion on the table today. But yes, I mean, sure, certainly, there’s some nuances and some learnings from what we did with GE versus what we have in place today that we’ve put into place.

[Terry Ma, Barclays]

That’s helpful. Thank you.

[Operator]

Next question will come from Melissa Wedel with JP Morgan. Please go ahead.

[Melissa Wedel, JPMorgan Chase & Company]

Good afternoon. As we see the portfolio yield sort of ticking a little bit lower each quarter. I’m attributing part of that to the competitive environment that I think you touched on earlier. But then also, should we think about that as being a function of sort of the larger companies that you’re increasingly allocating capital to? And if that’s the case, should we also think about that being sort of related to any increased comfort level running towards the higher end of your target leverage range? Thanks.

[Kipp DeVeer, Chief Executive Officer]

Yes, I mean, I think, you know, some of it looking backwards is just LIBOR resetting, but luckily, and thankfully, that’s pretty much behind us. But yes, it’s all of those things, you know, I mean, it’s a more competitive environment now than it certainly has been over the course of the last, let’s say, at least four quarters ago, for sure. So it’s partially that, and I think larger companies obviously can command a lower cost of financing. So I think the combination of those two things are the two best conclusions, I agree with them.

[Melissa Wedel, JPMorgan Chase & Company]

Okay. And then, just thinking about the sort of aftermarket program that you guys have, is that something that you’d expect to sort of tap more regularly going forward? Should we be expecting that?

[Kipp DeVeer, Chief Executive Officer]

Well, I mean, I think, we’re happy that the stock prices is finally sort of trading to levels that at least makes sense to us. Showing a material premium to book and with that the ATM is a nice tool to issue some creative equity, I mentioned that I really do think coming out of COVID in into this recovery that we gained market share. And we think that there’s no reason for us to grow the company based on the investment environment being attractive. And as Mike said, on the call, or on the prepared remarks him more than investable, I mean, pretty attractive. But the ATM is a nice tool to have. So is not to come surprise the market with an overnight equity deal. You know, as we’ve done in the past, so we view it as a useful tool, but it’s but it’s at the margin, right. The amount of stock that we’re actually able to issue in the ATM is quite limited. But you know, the good news is we’re doing it on a creative basis. That’s low cost that allows us to continue to grow the business.

[Melissa Wedel, JPMorgan Chase & Company]

Okay, thanks.

[Operator]

The next question will come from Casey Alexander with Compass Point. Please go ahead.

[Casey Alexander, Compass Point]

That’s okay. My questions were asked and answered. Thank you.

[Operator]

Our next question will come from Robert Dodd with Raymond James. Please go ahead.

[Robert Dodd, Raymond James & Associates, Inc.]

Just touching on the equity and it was touched on in prepared remarks. I mean, that seemed to generate a lot of the appreciation. I mean, my math says about two thirds of the appreciation and unrealized appreciation this quarter came from the equity books, diversified across a lot of assets not concentrated. Can you give us any color? I mean, you mentioned it company performance and market environment? I mean, is it 50% multiple, 50% performance? I mean, any color you can give us on exactly the relative weighting to the market, driving that valuation versus the performance of the underlying businesses.

[Kipp DeVeer, Chief Executive Officer]

Thanks, Robert. Yes, I mean, your mats, pretty much spot on in terms of the mix. Right, I mean, the most significant driver of the fair value improvement was the equity portfolio. You know, look, we’ve seen good profit growth, obviously, as we mentioned about 12% EBITDA growth in the portfolio, which we talked about in the prepared remarks. So some of it is improvements in profits and companies and that’s in companies that certainly have some recovery from COVID. I mean, you know, it’s, if you did your industry cuts, it’s healthcare and consumer, I mean, there’s certainly some fair value improvement, the energy portfolio, you know, which has been more difficult over the last 12 months. But then, for sure, you have to acknowledge to that valuation broadly for most assets, but certainly private equity and private companies has increased substantially, and you’re seeing much, much higher purchase prices, in new transactions. And obviously, you’ve seen pretty robust equity markets, which is how, you know, we think about valuing our equity portfolio. So I think it’s all of that.

[Robert Dodd, Raymond James & Associates, Inc.]

Okay, I appreciate that. Thank you. Just a related follow up, probably for Penny, because it’s a tax question. If these equity positions or broadly markups in the portfolio were realized how much of those gains would be shield double. I mean, if we go back to alchemy, obviously, you could shield a lot of that, because of going all the way back to allied and an attack shield that you still retain and obviously a bit shield of all its permanent NAV growth, if and when those realizations happen. I mean, my method or looking at the [indiscernible]. Looks like there’s about 800 million in available tax shields still left? Is that the right kind of number where that level of realized gains which could flow to permanent NAV growth versus flowing to spill over?

[Penelope Roll, Chief Financial Officer]

Yes, I think you’re looking at the footnote we have in the SOI. There are capital loss carry forwards. As even like I mentioned earlier, there are book tax timing differences, you referenced the allied acquisition. So there are things that are there that we have to go through the tax process to determine what’s utilizable against the gains along with those differences. I think if you go back to our 10k, where we typically give an annual update on cap loss carry forwards, we had a few $100 million of even loss carry forwards, we could use. So somewhere between the carry forwards and maybe built-in losses, which is the way I think about what you’re referencing, there are opportunities to shelter a future capital gains and therefore not have a tax distribution requirement for the gains that we realize. But there are a lot of things to figure out in the context of timing differences and other differences that exist, but directionally, that’s a good way to look at it.

[Robert Dodd, Raymond James & Associates, Inc.]

Understood. Yes, nobody wants to do their tax return early. I appreciate that thank you.

[Operator]

This will conclude our question-and-answer session, I’d like to turn the conference back over to Mr. Kipp DeVeer, for any closing remarks.

[Kipp DeVeer, Chief Executive Officer]

Sure. Now, just thanks to everybody for joining the call and hope you enjoy a bit of rest and relaxation here towards the end of the summer after what’s continued to be a crazy year. But thanks for the support the company and we will be in touch. Thanks.

[Operator]

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 one hour after the end of the call through August 11, 2021, at 5:00 p.m. Eastern Time to domestic callers by dialing 877 344-7529 and to international callers by dialing 1-412 317-0088. For all replays, please reference conference number 10156455. 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. You may now disconnect your lines.