Ares Capital Corporation

Good morning. Welcome to Aries Capital Corporation's second quarter, June 30th, 2024 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Tuesday, July 30th, 2024. I will now turn the call over to Mr. John Stillmer, partner of Aries' Public Markets Investor Relations. Please go ahead.

Thank you very much, and 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 comments' actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filing. ARIES 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 FCC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information for investors regarding the 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 8K. Certain information discussed in this conference call and the accompanying slide presentation, including information relating to portfolio companies, is derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranty with respect to this information. The company's second quarter June 30, 2024 earnings presentation can be found on the company's website at www.AriesCapitalCorp.com by clicking on the second quarter 2024 earnings presentation link on the homepage of the investor resources section of the website. Aries 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. Kip DeVere, Aries Capital Corporation's Chief Executive Officer.

Kip? Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm here with our co-presidents, Mitch Goldstein and Cord Schnabel, our chief operating officer, Jana Markowitz, our chief financial officer, Scott Lim, and other members of the management team. I'd like to start the call by highlighting our second quarter results, and we'll follow that with some thoughts on the economic environment and the current market. This morning, we reported another quarter of strong core earnings of 61 cents per share. Our core earnings per share increased 3% from the prior quarter and 5% from the prior year. These results were driven by a continued attractive investment environment, healthy credit performance, and an acceleration of investing activity in a more active transaction environment. We believe we continue to see the benefits of our well-established platform and significant scale in direct lending. We reported record NAV per share of $19.61 this quarter, which is up 6% year over year, and we provided a healthy quarterly dividend. Over the past year, Aries Capital has generated among the best growth in NAV amongst its peer group of externally managed BDCs with over $1 billion of market capitalization. Throughout the second quarter of 2024, we saw a healthy and improving market environment for companies seeking our flexible capital solutions. And we observed a particularly clear acceleration in private equity sponsor activity as most sponsors are seeking capital to support the growth of their portfolio companies and exit investments as they work to increase distributions from aging fund vintages. Against this backdrop, direct lenders have continued to represent a meaningful part of leveraged buyout transactions during the quarter, underscoring the importance of direct lending solutions in the current market. In conjunction with this more active market, we saw meaningful growth in deal flow during the second quarter. Specifically, we reviewed 40% more new transactions compared to the prior quarter, resulting in an estimated $185 billion in total quarterly deal volume reviewed. For some context, this amount exceeded the completed transaction volume reported in the broader institutional loan market for the second quarter. Many of you know our philosophy has always been to out-originate the competition, which we believe is a key contributor to driving deal selection and strong long-term credit performance. And although we increased our $3.9 billion in originations threefold from the same quarter a year ago, our overall selectivity rate remained consistent in the mid-single digits. We believe that our deep origination and longstanding relationships put us in a better position to say no if we need to and move on to the next transaction when terms are not favorable. Despite operating in a more competitive market, our originated investments for the quarter have characteristics that we believe are highly attractive. Specifically, our second quarter originations had a weighted average loan-to-value of below 40 percent, all in yields of approximately 11 percent, and leverage levels nearly a half-turn below our weighted average over the past three years. Furthermore, the originated yield per unit of leverage which we view as one measure of the risk-adjusted return in the current rate environment, was 10% higher than the recent three-year average. Moving on, our portfolio also continues to perform well, and companies have adjusted well to the higher base rate environment. Our non-accrual rates declined quarter over quarter and remain at levels well below industry averages. In addition, the fair value of our risk-rated one and two loans, which are typically our underperformers and watch list names, also declined from the first quarter. The LTM EBITDA growth of our portfolio companies continued to accelerate now for the third consecutive quarter. The organic weighted average LTM EBITDA growth of our portfolio companies reached 12% in the quarter, which is roughly double the rate from a year ago. We see the positive impact of this portfolio company performance driving stable to slightly improving portfolio company interest coverage ratios and declining overall portfolio leverage levels, now reaching the lowest level we've seen in four years. The current pickup in the liquid capital markets environment has also allowed us to enhance our capital base by accessing attractive forms of financing and extending the duration of our committed debt facilities. As Scott will discuss further during the quarter, we access both secured and unsecured funding markets at levels that we believe are amongst the best in our industry. With that, let me turn the call over to Scott to provide some more details on our financial results and some further thoughts on the balance sheet.

Thanks, Kip. Let me walk through our income statement before discussing our balance sheet and the actions we took during the quarter to enhance our capital position. This morning, we reported gap net income per share of $0.52 for the second quarter of 2024 compared to $0.76 in the prior quarter and $0.61 in the second quarter of 2023. We also reported core earnings per share of $0.61 for the second quarter of 2024 compared to $0.59 in the prior quarter and $0.58 in the second quarter of 2023. Our investment income in the quarter was primarily driven by increased investment activity, resulting in higher structuring fees and interest income. The structuring fees more than doubled from the first quarter of 2024, reaching their highest level since the fourth quarter of 2022. Interest income also increased by over 5% since the first quarter due to the net portfolio growth. In terms of our expenses, the increase in our interest and credit facility fees was consistent with our higher leverage during the quarter to fund a portion of our portfolio growth. Lastly, you may have seen a notable uptick in our tax expense during the quarter. This was largely driven by capital gains taxes associated with a sizable realized gain from the exit of our investment in Heelstone. Even after netting out these capital gains taxes, we still generated a very nice overall return on our investment with a net realized gain of over $115 million. Our total portfolio fair value at the end of the quarter was $25 billion, up from $23 billion at the end of the first quarter. The weighted average yield on our debt and other income-producing securities at amortized costs was 12.2% at June 30th. which was down slightly from 12.4% at March 31st and equal to the 12.2% from the same period a year ago. Our total weighted average yield on total investments at amortized costs remained steady at 11.1%, up slightly from 11% a year ago. Our stockholders' equity ended the quarter at $12.4 billion, or $19.61 per share. another record high for us, as Kip stated. In terms of our capitalization and liquidity, we remain busy making sure we can continue supporting our investment opportunities. Since our last earnings call, we took advantage of very favorable market conditions and issued $850 million of long five-year unsecured notes at a stated coupon of 5.95%. Similar to our other most recent issuances during this higher rate environment, we swapped this issuance to floating rate and timed it such that we achieved highly favorable terms, resulting in a floating rate spread to one month SOFR of 164 basis points. These transactions build upon the amendment and extension of our $4.5 billion revolving credit facility and our first on-balance sheet securitization in 18 years, both of which took place earlier in the second quarter. Post-quarter end, we amended and extended our BMP funding facility by increasing the facility size by $400 million, extending the end of the enrollment period and the maturity date to a full three and five years, respectively, and reducing the draw and spread in the facility from 250 basis points to 210 basis points. In total, including the benefits we achieved with the timing of the swap, On the recent notes issuance, we have been able to reduce the overall weighted average spread for our floating rate debt obligations and continue to drive what we believe are industry-leading borrowing terms. Our overall liquidity position remains strong, with nearly $5.5 billion of total available liquidity, including available cash, and pro forma for the post-quarter activity discussed earlier. We also ended the second quarter with a debt to equity ratio net available cash of 1.01 times. We believe our significant amount of dry powder positions us well to continue supporting our portfolio company commitments and remain active in the current investing environment. Moving on to the dividend, we declared a third quarter 2024 dividend of 48 cents per share. This marks ARCC's 15th consecutive year of stable or increasing regular quarterly dividends. This dividend is payable on September 30th, 2024 to stockholders of record on September 13th and is consistent with our second quarter 2024 dividend. In terms of our taxable income spillover, We currently estimate that we ended 2023 with approximately $635 million, or $1.05 per share, for distribution to stockholders in 2024. This estimated spillover level is more than two times our current regular quarterly dividend, which we believe helps provide further visibility and stability to our dividend. I will now turn the call over to Court to walk through our investment activities.

Thanks, Scott. I'm now going to spend a few minutes providing more details on our investment activity, our portfolio performance, and our positioning for the second quarter. I will then conclude with an update on our post-quarter end activity, backlog, and pipeline. In the second quarter, our team originated approximately $3.9 billion of new investment commitments, meaningfully expanding our deployment from last quarter and from the same period last year. Importantly, our $2.5 billion of net commitments set a new quarterly record as our existing borrowers are consolidating their financing relationships with us and new borrowers are increasingly selecting Aries as their lender. We continue to believe our growing portfolio of 525 companies, an 11% increase over last year, provides a large installed base of differentiated lending opportunities for our company. By further investing in our incumbent borrowers, where we have an existing relationship and significant knowledge of the company, we believe we can reduce underwriting risk and drive better credit performance. We continue to lean into these advantages as over 60% of our total commitments in the quarter were to existing portfolio companies. We believe that the scale and flexibility we provide to our existing borrowers are driving market share gains for us, as borrowers consolidate their lending relationships in favor of those who can support the long-term growth of their business plans. As one example of this trend, across our top 10 investments to existing portfolio companies in the quarter, we doubled our share of the overall financings compared to our previous share provided to those same companies. During the second quarter, we also continued to add new borrower relationships. Our investments into new portfolio companies increased 35% quarter over quarter, driven by our focus on covering the broader middle market, as well as the growing buyout activity among these borrowers. The median EBITDA of new portfolio companies in the quarter was $61 million, slightly below the $81 million median EBITDA of our total portfolio. reflecting the rebound in activity across smaller and mid-sized borrowers and our ability to originate across all different asset classes. Reflecting on our very active quarter, we ended the second quarter with an approximately $25 billion portfolio at fair value, which grew 8% from the prior quarter and 16% from the prior year. Let me now update you on the state of our overall portfolio. With respect to our credit performance, our weighted average portfolio grade of 3.1 remained unchanged from the prior quarter's level. Our non-accruals at cost ended the quarter at 1.5%, 20 basis points lower than the prior quarter. Our current non-accrual level at cost remains well below our 2.9% historical average since the great financial crisis and the BDC average of 3.8% over the same time period. Our non-accrual rate at fair value remained consistent with last quarter at 0.7%, which continues to be well below historical levels for our company. Further underpinning the strength of our portfolio, at the end of the second quarter, the weighted average loan-to-value in the portfolio was 43%, which we believe provides us with strong downside protection for our loans. In addition, we remain highly selective when extending credit to companies based on annual recurring revenue, as our total exposure to these loans is currently less than 3% of the portfolio at fair value. An additional point of differentiation in our portfolio is that company size has not been a driver of performance. Companies in our portfolio with 25 to 50 million of EBITDA had similar or even higher growth rates as compared to companies with over 100 million of EBITDA. Our underwriting and portfolio management process and our ability to select what we believe are the best companies in attractive industries helps drive our results. We also remain highly focused on the benefits that diversification adds to the credit strength of our portfolio. Our average hold size is only 0.2% as fair value Excluding our investments in Ivy Hill and the SDLP, which we believe are well diversified on their own, no single investment accounts for more than 2% of the portfolio at fair value, and our top 10 largest investments total just 12% of the portfolio at fair value. This level of diversification meaningfully reduces the impact to the overall portfolio from any single negative credit event at an individual company. We believe this is a critical risk management tool that differentiates us in the market. Finally, we've had an active start to the third quarter. From July 1st to July 24th, 2024, we made new investment commitments totaling $682 million, of which $532 million were funded. We exited or were repaid on $493 million of investment commitments, which resulted in us earning $2 million of net realized gains. As of July 24th, our backlog and pipeline stood at roughly $3 billion. 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. I will now turn the call back over to Kip for some closing remarks.

Thanks a lot, Court. In closing, our strong earnings this quarter are underpinned by the many durable advantages that we believe continue to drive differentiated results for our investors. In today's more competitive investing environment, we are squarely 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. With our historically low leverage, a proven ability to invest across the capital structure, and a healthy underlying portfolio of growing companies, we believe we are well-positioned to deliver attractive financial results through varying market and interest rate conditions throughout the year. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, operator, we can open the line for questions.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad now. If you would like to withdraw your question, please press star 2. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow-up. If you have additional questions, you may re-enter the queue. The Investor Relations team will be available to address any further questions at the conclusion of today's call. And we do have our first question from Melissa Weddle with JP Morgan.

Thanks for taking my questions today. You anticipated a few of them already. Look, I think there's a lot here that was really strong in the quarter. One of the things that has come up from our clients during the quarter was a pretty public situation with Pluralsight. We certainly saw the markdown during the quarter, and it looked like you added it to non-accrual. I'm wondering if there's anything that you can share with us in terms of sort of the ongoing situation there, how you think about that mark and how you think about resolving it.

Sure. Thanks, Melissa. I'm surprised people actually were going to ask a question about Pluralsight. I'm kidding. So, look, what I'd say is, Most of what's been reported in the press is not accurate, so I think that's important just to put out there. The last article that I did see was reasonably indicative of what's happening there, which is, unfortunately, For Vista Equity Partners, who's the sponsor, you know, it's not going to be a situation that works out very well for them. So they're handing the company over to a significant group of lenders. You know, we're not the agent on the facility. Owl Rock is. So we're sort of working with the group to, you know, put a restructuring in place there where lenders will obviously reduce debt and take control of the company. Not the first time that's happened in our history, but for some reason it's taken on a lot of press. But that's what's going on. It's pretty simple.

Okay. No, I think you're right. We definitely got more than a few questions about it during the quarter, and I appreciate your willingness to share whatever you can there. I think it's helpful. It's okay.

I mean, I think, frankly, it incited a lot of conversation based on a lot of speculation in the situation that, frankly, wasn't very accurate.

All right. Well, I appreciate the clarifications. If I could follow up on one of the comments you made about the real strong pickup in investment activity during the quarter, it sounded like a lot of the sponsor-driven activity that you were seeing and certainly seem to be carried forward in the backlog, which I don't think we've seen something as strong in the last few years, It sounded like it's driven by M&A. Is that a fair characterization? Are you also seeing a decent amount of refi activity as well? Thank you.

Yeah, we're not seeing a tremendous amount of refi activity, so you're right. I think there's better M&A activity. The direction that we're seeing is actually sponsors in particular, as you probably read in press, it's actually reasonably accurate or under a lot of pressure to return capital of LPs. So there's a substantial amount of unrealized NAB that's just in the ground. It's had a hard time getting to realizations during this increase in rates and then presumed decrease in valuations. Interestingly, most of the M&A that we've seen has actually been for what I characterize as the best companies in sponsors' portfolios. And multiples on those M&A transactions are actually holding up to be reasonably high, at least in my estimation, based on a reset that I think we all expected would occur with materially higher rates. We'd expected lower valuations on new transactions. But the ones that we're seeing get done are actually some of the best companies that we know that are out there, and they're getting done at reasonable multiples. And obviously, they're deals that we view as attractive that we want to participate in.

I'll just add, this is Court, one more thing that I think we mentioned in the prepared remarks as well is that we've seen, you know, a real pickup in M&A across all different size companies. Obviously, we're benefiting from some large transactions for the last 18 or 24 months during the dislocation period. But, you know, we really see an activity now across the middle market, the smaller end of the middle market, as well as all the large deals as well. And, Now, we always talk about our broad origination, but I think it's showing up now as we see the environment really start to rebound across all these different asset classes.

Thanks, Court.

Thanks, Melissa. And we have our next question from Finian O'Shea with Wells Fargo Securities.

Hey, everyone. Good morning. So I think, Court and Mitch, how are you? Of course, comments at the end, I think new investments, which were up, are in the $60 million range. Can you add some color to that? How big of a drop is that from what you've been doing in recent years? Is that a function of less attractive terms in the large market? And is that also something going into the core middle market? Is that something that your large cap peers are doing as well?

Thanks, Finn. Great question. More along the same lines of what I was just talking about, which is just sort of the rebound across all these different sized companies. And I don't think it's anything out of the ordinary for us to be originating from the middle market and the smaller end of the market. There's lots of great companies of all different sizes and stripes. And it's highly strategic for us to get invested in companies when they're small so that we can gain incumbency and then grow with them and and support their business plans. So I don't think it's anything unusual. I think it's just a change from this environment we've been operating in for the last 18 or 24 months. As to the last part of your question, I think we see a different set of competitors in the more medium and smaller size companies than we see in the large size companies. There aren't many competitors, if any, that compete across all different size ranges, and I think that is one of our core differentiating advantages. So it's a different set of competitors in those markets, and those markets come with different competitive dynamics as well. So we're fortunate to be able to pivot up and down based on what the market is giving us and where we see attractive risk-adjusted return.

Okay. A small follow-up on the post-quarter commitment yields down a touch to 10.6%. Is that more of a function of sample size, or is that sort of where we are now on new deployments?

I think there's been modest spread compression. The reality is that didn't surprise us much, right? Spreads were wide. They've tightened a little bit, I think, in response to what people see as better than expected economic performance and lower than, you know, median average defaults, right? So in what's, I think, viewed as a pretty strong recovery here in the U.S., yes, spreads will come in. What's great, though, is that the all-in total return in the asset class is still, in our opinion, pretty extraordinary with base rates as high as they are.

Great. Thanks so much. Thanks for the questions.

And we have our next question from Paul Johnson with ABW.

Yeah, good morning. Thanks for taking my question. Just, you know, generally, you know, just with what took place with the Plurals site, I was wondering if, you know, did that raise any issues or questions just, you know, in general around kind of sponsor concentration within, you know, your network and just kind of in general within, you know, investments funded and the portfolio, you know, kind of currently or going forward in terms of, you know, doing the you know, large, you know, group deals, kind of, you know, club participation like investments and even working with potentially other specific, you know, kind of direct funders.

If I heard the question correctly, and you can let me know if I didn't, but We don't have a lot of concentration in our portfolio, either with sponsors or sponsored versus non-sponsored, obviously with 500-plus investments. So when we really drill through and look at who are the biggest sponsors in the portfolio, they're obviously sponsors that we do a tremendous amount of business with that we have a lot of confidence in. You know, Vista is one of them. You know, Pluralsight didn't work out so well for them, unfortunately. But as I mentioned earlier, this won't be the first situation where we have to step in and own a company with either the management team as a sole lender or with a group of other lenders. So I think, again, as I said, a lot of the facts reported were really incorrect. It's an unfortunate situation. But like the other ones, we'll go in and fix it and move on.

Thanks, Kip. Appreciate that. Last question for me, just on the higher tax expense in the quarter. It looked like, if I have the numbers correct, approximately $9 million or so was from the excise tax and $32 million or so was from income-related tax. Should we look at that portion of it, that $32 million or so, as kind of basically non-recurring at one time in nature?

Yeah, about $30 million of that was related to the Hillstone exit, so kind of a one-time tax because we held the investment in a blocker corporation. So we unfortunately had to pay corporate-level taxes for that, but still we're net ahead on a net basis of $115 million gain.

Guys, congratulations. Yeah, that was a good game for you guys. That's all for me. Thanks. Thank you.

And we have our next question from Kenneth Lee with RBC Capital Markets.

Hey, good morning. Thanks for taking my question. In terms of the quarter's originations, what's sort of like the mix between incumbents versus new borrowers that you saw? Thanks.

We're looking around, and I think we're saying it's about two-thirds

Yeah, I think it's around 60% incumbent borrowers, 40% new borrowers. So a little higher on the new borrower mix than it was, again, during the dislocation period as the M&A environment picks up.

Gotcha. Very helpful there. And then in terms of junior debt opportunities, what's sort of like the latest outlook there in the current environment? Thanks.

I'm sorry, we missed that. In terms of senior debt opportunities? Junior debt opportunities. Okay. Thanks. Yeah, it's just a little hard to hear there. I would say, you know, they're probably fewer and far between these days in healthy performing kind of new buyouts and in refinancings. The unit tranche has really kind of taken over in driving most of the new deal flow. So a little bit – less relevant to places that we're actually seeing junior capital be the most impactful is where companies are finding themselves with, you know, I think good performance, but maybe lower interest coverage, right? And they need some relief from the higher base rate. We're actually seeing some interesting opportunities where you can bring in deleveraging capital, probably can't pay cash interest, to be honest, because that's the constraint. but then can, you know, make a situation with lenders, you know, improved extend duration for the equity, and we think we can achieve some pretty interesting returns on that junior capital. But it's very light is the general answer to your question.

Yeah, I would just add the one place we are seeing second lien opportunities is in, you know, very large cap borrowers where we're actually seeing an interesting dynamic where crossover high yield buyers are stepping in and pricing those second lien securities fairly pretty darn tight from a spread perspective, even, you know, almost right on top of unit tranche spread. So we're being just highly selective. We are seeing those opportunities, but we're just being extremely selective around where we're playing those.

Gotcha. Very helpful there. Thanks again.

And we have our next question from Robert Dodd with Raymond James.

Hi, guys. Good morning. On Pluralsight, well, not really Pluralsight, but what proportion of your portfolio, I mean, you gave us the AAR at 3%, but can you give us any comment on how common is the type of structure you saw in Pluralsight in terms of the covenant package, et cetera, et cetera? How common is that within the portfolio more broadly? And is it an artifact confined to Curling at 21 originations, or is that structure still prevalent today? Obviously, Pluralfight itself is only 20 basis points of your portfolio fair value. Now, that doesn't matter that much anymore. The question is, is it elsewhere in the portfolio as well?

Yeah, I think that's actually the important question, so I'll just say it explicitly, which is we spend, I think, a tremendous amount of time just because of the experience we have in the market thinking about, frankly, documentations and the way that we come into transactions. As most of you on the phone know, we like to lead our own deals. We like to write documents. We like to structure covenants, et cetera, because we've been doing this a long time and we think that we actually – allow for things that give us better downside protection and can mitigate risk. So I'd actually say, Robert, we don't view sort of liability management transactions, which are obviously increasing in the broadly syndicated world, as something that's really present in our portfolio. We don't view them as generally a risk to our middle market borrowers. And I'd actually tell you, and I think Cora would probably agree, over the last 12 to 18 months, we probably passed on deals more often on a document than any other reason for passing on a deal. You know, there's a lot of debate about what do covenants look like? Do you need covenants? Do you not need covenants? We can all have those debates Can you make loans to companies where you have no liquidity, where companies can actually strip assets and move them into unrestricted subsidiaries that aren't parts of your collateral package with no ability to exit? I would argue no. So we try very, very hard to not put ourselves in that situation. I don't, again, think that what was reported on Pluralsight was accurate, but I know for certain that it's not indicative of other things in the portfolio. or what was reported inaccurately is not indicative of what else is in the portfolio. So I don't view that as a huge risk.

And back to Finn's earlier question around origination across all different size ranges, because we are able to do that, it gives us the luxury of saying no to Kip's point when we need to say no because of a documentation issue in a larger CAT deal. And I think, again, back to Pluralsight, A lot of what was reported was inaccurate, and the document protections actually worked pretty darn well in that transaction as well. Got it. Thank you.

Just following up on that kind of the size issue, not related to the poor sector, the size of the quality, I mean, you said a lot of the deals that are getting done right now are the really high-quality companies. Well, that does mean there's still a lot left that may be, lower quality companies that need to be refied at some point over the next couple of years. I mean, what's your approach going to be to the market if all the good ones have been done and you're left with, you know, B-grade or C-grade companies out in the market transacting? Do you think you're going to be, you know, sitting on the sidelines for some prolonged periods of time next year or any thoughts on that front?

I mean, I can jump in on that. I think the ingredients are in place for a pretty broad pickup in volume, and that would get us back to a more normalized environment where there's going to be, sure, some worse quality credits, but still some good quality credits. And I think you'll just see, like we always do, we'll just be very selective in choosing the best quality companies. Obviously, if there's only weaker companies, then we will be less active. But I'm not sure that that's how we foresee the transaction environment being. I think there's going to be a nice, healthy mix going forward.

Yeah, that's right. I think our incumbency advantage as well will help us, right? I mean, having this many companies. But look, the reality is, Robert, we're in a situation where people's numbers are a little bit different. I'll give you just rough numbers that we think are reasonably accurate. There's about $3 trillion of unrealized NAV. in private equity that's in the ground unreturned to LP capital versus about a trillion dollars of private equity dry powder to do new transactions. So until you unlock that unrealized NAV through selling, it's difficult to actually create new capital for transactions. So what I would think would happen is the $3 trillion will start looking for an exit, and it's all going to be about at what price. My guess is that unrealized NAB gets sold at lower multiples with lower leverage levels that can obviously support a capital structure taking into account a 5% base rate because that capital can't stay locked in the ground forever.

Understood. I appreciate the comment. Thank you. Thanks for the questions.

And our next question comes from Mitchell Penn with Oppenheimer.

It's just a couple of quick questions. On the perpetual prefers in the portfolio, how do they ultimately get collected?

Typically, most of our pick gets collected upon exit or repayment, i.e., a company gets sold or gets refinanced. It doesn't matter if it's perpetual or not.

Do you have, like, a 10-year – option to cause a conversion or typically you don't get that?

Sometimes yes and sometimes no.

Got it. And in terms of synthetic pick, do you guys do the synthetic picks?

Somebody mentioned this to me yesterday. I actually don't know what that is. I don't know what that means. But if you want to describe it to me, I don't think so because I don't know what that means.

So essentially, you issue a line to your borrower, and they access the line to pay interest each interest period. So they're essentially drawing the line down to pay the interest each quarter.

Yeah, I don't think we really do that expressly. I mean, the way that I guess I'd think about that is companies typically Obviously, they can use those to make interest payments and do a lot of other things, you know, from drawing that capital. That sounds a bit sort of like an interest reserve, I guess. We've done that in a couple of transactions over 20 years where you set a company up with effectively a cash balance or an interest reserve to get them through a period of time, whether it's a turnaround or a company that's not generating cash flow out of the gate, but it's very rare.

I think it's probably more common in some of the recurring revenue loans, the ARR loans. And as we already talked about, that's a very small percentage of our portfolio. And even within that percentage in our portfolio, I think, you know, very limited amount, if any, of the type of transactions you're talking about.

Got it. And last question, the unrealized loss, was that driven by Pluralsight this quarter?

Yeah, and partially. I mean, obviously it has a handful of different components, but, yeah, Pluralsight for sure is in there. Got it.

That's all for me. Thanks, guys. No problem.

And just a reminder, if you'd like to ask a question, that is star and 1 on your telephone keypad. And our next question comes from Casey Alexander with Compass Point.

Hi. Good morning, and thanks for taking my questions. My first question is, we saw the weighted average yield on interest-earning investments decline about 20 basis points. The yield on the overall portfolio was stable, I think, because you were able to because 12% of your exits were non-interest earning assets. So that was able to balance it out. But looking at sort of your new issue yield, should we be thinking about some continuing yield compression over the next few quarters? Does that make sense?

Turn it to Court. But, I mean, I think generally we've seen spreads come in, as I mentioned earlier, and one of the responses a little bit, but I think Court and I were talking about it yesterday. You can chime in. We kind of feel like they've plateaued again, and, you know, we don't see a lot of, compression in the last 60, 90 days?

Yeah. And so there obviously might be a little bit of a lag effect of what we're seeing currently and then what shows up in the quarterly results as we report them. But anecdotally, I think seeing, you know, hopefully a little bit of stabilization more recently, you know, maybe goes without saying, but obviously there's lots of benefits of spread compression as well in terms of increased M&A activity, higher capital structuring fees. As you saw this quarter, you know, that jumped meaningfully. So there's offsets that we're able to take advantage of when we see that, and it's not really anything that we're particularly concerned about. You know, as Kip already talked about, higher overall yields and lower leverage levels relative to historical averages set us up really well to be investing in today's environments.

All right, great. Thank you. My follow-up is a couple quarters, Kip maybe expressed a little bit of frustration that the stock valuation wasn't a little bit better. Now that the environment is picking up, it seems like you sold a lot of shares, 21 million shares in the quarter. sort of relative to the activity, the leverage ratio came up a little bit, but there's so much room to bring the leverage ratio up more. Are the stock sales indicative of also what you think your origination environment might be in this next quarter, or how should we think about your balancing the stock sales relative to the origination and deal calendar?

Yeah, I mean, I think the simple answer to your question is yes, right? So it got much busier, we felt, despite, as one of my partners has said to me, every CEO thinks that their company stock price is too low. So throw me into the mix. But despite that, look, we're still issuing through the ATM program very cost-effectively, accretively to the company. And to your question, specifically supporting what we think is strong backlog and pipeline that we're excited about.

All right, great. Thank you very much.

Thank you, Casey.

And once more, if you would like to ask a question, that is star and 1. And our next question comes from Doug Harder with UBS. And Doug, if you could make sure your mic is off of mute when you pose your question. And just a reminder, that is star and one for any questions and or comments now. And this does conclude our question and answer session. I'd like to now turn the conference back over to Mr. Kip DeVere for any closing remarks.

No, thanks. I guess they let us off the hook early. Appreciate everyone's support in joining the call. I hope you enjoy the rest of the summer, and we will get to you between – between the end of this quarter here and into the next. Thanks again.

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 30th at 5 p.m. Eastern Time to domestic callers by dialing 1-800-839-2398 and to international callers by dialing