ARES CAPITAL Q2 FY26 earnings call ARCC

The market experienced fewer deals in Q2, particularly in sponsor-backed M&A, but activity increased towards quarter-end. Ares Capital reviewed over 20% more transactions than in Q1, with June marking one of the strongest months for new transaction reviews in two years. The company benefits from its scale and stable capital, especially as some retail-indexed managers become less active. This differentiation allows ARCC to capitalize on opportunities, particularly in the upper middle market, where it finds enhanced economics and stronger terms.

ARCC's diverse portfolio, with $29.7 billion at cost, continues to perform well, with no single investment exceeding 1.3% (excluding Ivy Hill and SDLP). Borrowers generated organic weighted average LTM EBITDA growth of approximately 8%, consistent with ARCC's 10-year average and exceeding the broader syndicated loan benchmark. Interest coverage and leverage levels remain in line with historical averages, and portfolio companies maintain equity cushions of over 50% beneath investments, providing downside protection.

The company completed an independent assessment of its software-oriented portfolio, concluding that AI risk remains limited. Less than 50 basis points of ARCC's total portfolio at fair value is attributable to higher AI risk software investments, and less than 4% to medium or higher AI risk software investments. Medium-risk companies are currently performing well, with credit statistics comparable to the overall portfolio, though they will need continued investment in AI.

ARCC ended the quarter with modest leverage of 1.12x debt-to-equity (net of available cash) and approximately $6 billion of available liquidity. The company issued $800 million of unsecured notes and secured $370 million in additional commitments on revolving credit facilities. Notably, ARCC launched the first commercial paper program in the BDC sector, a $1 billion program expected to reduce funding costs by 50-100 basis points, backed by its $5.5 billion revolving credit facility.

ARCC maintains a highly selective and disciplined investment approach, with its Q2 closing ratio moderately below its historical average of approximately 5%. The company's institutionalized credit process and experienced leadership team (average 18 years at Ares for investment committee members) contribute to its long-term investment performance, including over $1 billion cumulative net realized gains from equity co-investments since inception, with an average gross IRR of over 20% for the last decade's vintages.

The SDLP (Senior Direct Lending Program) has significantly expanded its diversification, increasing the number of borrowers from 28 to 72 in the last quarter. This was enabled by recent co-investment relief, allowing SDLP to invest alongside other Ares funds, thereby broadening its opportunity set and enhancing its utilization.