Ares Capital (ARCC) Q2 FY26 earnings call: the analyst Q&A

Earnings call· Jun 2026 (Q2 FY26)· Financials· Jul 29, 2026

Source: earnings call transcript

Executive summary

Ares Capital Corporation Q2 FY26 — Solid Results and Strategic Balance Sheet Enhancements

Ares Capital delivered solid Q2 FY26 results, maintaining core earnings and healthy portfolio performance despite a subdued transaction environment. The company strategically enhanced its balance sheet by launching a commercial paper program and optimizing credit facilities, reinforcing its strong liquidity and financial flexibility. Management emphasized its selective investment approach, leveraging scale and relationships to capitalize on attractive upper middle market opportunities, while navigating increasing dispersion in credit quality across the industry.

Highlights

Core earnings of $0.47 per share, consistent with the prior quarter, representing an annualized return on equity of 9.7%.
Organic weighted average LTM EBITDA growth of portfolio companies was approximately 8%, consistent with ARCC's 10-year average.
Nonaccruing loans at cost remained historically low at 2.4%, well below the approximate 3% historical average since the global financial crisis.
Launched the first commercial paper program in the BDC sector, a $1 billion program with potential to reduce funding costs by 50 to 100 basis points.
Expanded the SDLP's borrower diversification from 28 to 72 companies in the last quarter due to co-investment relief.

Concerns

Total portfolio at fair value decreased slightly from $29.5 billion to $29.3 billion, primarily reflecting mark-to-market valuation adjustments and healthy net repayment activity.
Net asset value (NAV) ended the quarter at $19.35 per share, representing a decrease of $0.24 per share from a quarter ago.
The second quarter closing ratio was moderately below the historical average of approximately 5%, underscoring discipline amid lower quality deal flow.

ARCC operating KPIs by quarter

ARCC operating KPIs stated on its earnings calls, by fiscal quarter
KPI	Mar 2026 Q1 FY26	This call Jun 2026 Q2 FY26	Change vs prior quarter
Portfolio companies	607 With investments across 607 companies at an average position size of less than 20 basis points. Source: earnings call transcript	619 With 619 portfolio companies, we believe our incumbent relationships will continue to be a meaningful driver of origination activity and long-term value creation for our shareholders. Source: earnings call transcript	+2%

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Deals & partnerships

Ares funds Co-investment relief for Senior Direct Lending Program (SDLP)

Ares Capital received co-investment relief that allows its Senior Direct Lending Program (SDLP) to invest alongside other Ares funds, which was not historically possible. This expanded the SDLP's opportunity set and fairway.

Risks & headwinds

Subdued transaction environment and lack of sponsor-backed M&A activity Q2 FY26

fewer deals closed across the market in the second quarter

Mitigation:Leveraging scale and stable capital to gain market share, particularly in the upper middle market; selective investment approach.

Increased pressure on some lenders to deploy capital, leading to compromise on quality Q2 FY26

ARCC's Q2 closing ratio was moderately below our historical average of approximately 5%

Mitigation:Maintaining disciplined investment approach and selectivity, waiting for quality deal flow to improve.

Potential impact of AI on software investments Ongoing

Less than 50 basis points of ARCC's total portfolio at fair value attributable to higher AI risk software investments; less than 4% attributable to medium or higher AI risk software investments.

Mitigation:Independent assessment of software portfolio; focus on foundational infrastructure for complex businesses with high switching costs; ongoing portfolio monitoring and thoughtful capital allocation.

Credit quality and nonaccruals across the industry trending towards historical norms Ongoing normalization period

Nonaccruals at cost ended Q2 at 2.4%, still below historical average of 3% (since GFC) and BDC historical average of 4%.

Mitigation:Platform scale, disciplined underwriting, active portfolio management, and experienced portfolio management team.

Volatility of interest rates hampering transaction volume Past and potentially future periods

Discussed as a general market dynamic impacting transaction flow.

Mitigation:Current rate picture feels more stable, allowing for more certainty in modeling for buyers and sellers.

What to watch in Q3 FY26

Deal flow and quality

Next quarter (Q3 FY26)

Current Q2 saw fewer deals and lower quality, but June showed a significant ramp-up in reviewed transactions.

Target Continued increase in deal flow and improved quality of opportunities.

Why it matters

Indicates market health and ARCC's ability to deploy capital into attractive risk-adjusted opportunities.

We reviewed over 20% more transactions than in the prior quarter, and June marked one of our strongest months for new transactions reviewed in the past 2 years.

Find out whether ARCC delivers this. Inve re-checks your case every morning.

Q&A highlights

Given ARCC's strong debt ratings and peers' valuations/asset quality issues, is ARCC considering strategic acquisitions, and are there motivated sellers?

Management acknowledged that the likelihood of such transactions is higher due to performance dispersion and weakness among some managers. They highlighted ARCC's relative outperformance in credit quality compared to competitors.

“given the dispersion in performance that we're seeing across managers in the space, and some of the weakness that is coming out to the floor, the likelihood of a transaction like that occurring is probably higher than it's been in the past.”

asked by Rick Shane · answered by Kort Schnabel

2 min read 6 chapters

Detailed narrative

Market Environment and Competitive Positioning

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.

Portfolio Performance and Diversification

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.

AI Risk Assessment in Software Portfolio

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.

Balance Sheet Strength and Funding Initiatives

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.

Investment Approach and Credit Discipline

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.

SDLP Diversification

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.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.