Ares Capital Corp (ARCC) 2021 Q3 法說會逐字稿

Good afternoon. Welcome to the Ares Capital Corporation's Third Quarter Ended September 30, 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Tuesday, October 26, 2021. I will now turn the conference over to Mr. John Stilmar, Managing Director of Ares Investor Relations.

Thank you. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss certain non-GAAP financial 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 stockholders' equity resulting from 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 relating to portfolio companies, was 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 third quarter ended September 30, 2021, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2021 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and 10-Q are also available on the company's website.

I'll now turn the call over to Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks a lot, 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'll begin by providing some third quarter highlights and then discuss the current market and the company's positioning.

This morning, we reported third quarter core earnings of $0.47 per share, up from $0.39 per share a year ago and well ahead of our $0.41 per share dividend. Our third quarter GAAP earnings per share of $0.73 included $150 million of net realized and unrealized gains, which drove our net asset value to a new record of $18.52 per share. Our NAV is now about $1.20 per share higher than the NAV pre-pandemic.

With this rising NAV, we've generated $110 million of realized gains in excess of losses since the onset of the pandemic, which I believe is a real achievement for a debt-oriented portfolio and is worth calling out. This continued increase in NAV demonstrates not only the quality of our underwriting and the benefits of our approach to portfolio construction, but also the strength of our risk management efforts and our portfolio management team.

These gains add to our industry-leading track record. The company has now generated over $1 billion in net realized gains since our IPO in 2004. We believe we are one of the few business development companies that has demonstrated an ability to pay a stable dividend while growing our NAV over an extended period of time and through multiple credit cycles.

In terms of the current market, we believe we're benefiting from an expanding opportunity set, and we believe we've increased our market share in this large and growing industry. The U.S. economy is experiencing well above average economic growth, and this remains a positive driver of transaction activity.

Companies and sponsors are increasingly seeking growth capital to support the execution of organic and M&A-driven business plans. Additionally, private capital solutions are now increasingly accepted by larger companies who see value in our flexible capital, partnership approach and our ability to provide certainty of close. As these market trends accelerate, we've seen the size of our portfolio companies grow.

And today, the weighted average EBITDA of our portfolio companies has increased to $157 million compared to $67 million just 5 years ago. We believe our company is now operating with a wider fairway for deal opportunities in an expanding market for direct lenders in the U.S. The company's exceptional team, scale and market tenure, coupled with the many platform advantages we can harness at Ares, have all permitted us to expand our share in what we believe to be a $1.5 trillion addressable market.

As evidence of this trend, our pipeline of reviewed transactions has increased almost 4x faster than Refinitiv's view of the reported middle market since 2019. In order to achieve this market share growth, we continue to build upon our relationships with sponsors and middle market companies. We believe our track record of working with private equity sponsors during our 17 years as a public company is unmatched, and we continue to benefit from the continued growth in private equity.

We've closed transactions with more than 400 sponsors, but we're continuing to expand our leading roster of private equity relationships, with over 15% of the deals completed this quarter being with new sponsors.

Beyond our sponsor relationships, we continue to develop our coverage of non-sponsored transactions. Over the past 5 years, we've focused more intently on expanding these capabilities and now have dedicated specialized teams in software, health care services, financial services and sports media and entertainment, all aimed at going direct to companies seeking financing.

We are seeing these focused industry groups contribute meaningfully to the growth of our nonsponsored business. And over the past 4 quarters, our nonsponsored total commitments grew over 30% when compared to the full year 2019. In addition to these sourcing advantages, our team continues to focus on the existing portfolio and robust risk management.

Our portfolio companies are generally demonstrating strong underlying financial performance. And in the third quarter, the weighted average annual EBITDA growth rate of our portfolio companies increased 13%, more than double The Conference Board's expected GDP growth for 2021. This strong growth in profitability of portfolio companies reflects our long-standing focus on selecting high free cash flow companies in defensive industries with relatively inelastic demand for their products and services.

For example, our 3 largest industries, software and services, health care services and commercial and professional services, which represent about 40% of the portfolio today, are demonstrating 30% faster EBITDA growth on average in the overall portfolio as a whole. We believe this orientation to defensive industries and downside protection has positioned our portfolio away from segments of the economy that are likely to be negatively impacted by commodity inflation and the current supply chain disruptions that we are witnessing generally.

With strong overall portfolio credit metrics, it's also worth noting that our nonaccrual rates at cost declined this quarter and are now below our historical average. With that, let me turn the call over to Penni to provide more details on our third quarter results and some updates on the balance sheet.

Thanks, Kipp. Good afternoon, everyone. Our core earnings per share of $0.47 for the third quarter of 2021 were primarily driven from higher recurring interest and dividend income due to our net portfolio growth in the past quarter as well as capital structuring service fees from a continued strong level of origination.

Our GAAP earnings per share was $0.73 for the third quarter of 2021, including net realized and unrealized gains of $0.33 per share. The net unrealized gains on investments for the quarter primarily reflect performance improvement in the companies in our portfolio, continued tightening of credit spreads on our loan book and improved valuations of our equity investments relative to the end of the previous quarter.

At September 30, 2021, our stockholders' equity grew to $8.5 billion, resulting in a record net asset value per share of $18.52, an increase of 2% from a quarter ago and over 12% since the third quarter of 2020. Our total portfolio at fair value at the end of the quarter was $17.7 billion, and we had total assets of $19.2 billion.

As of September 30, 2021, the weighted average yield on our debt and other income-producing securities at amortized cost was 8.6% and the weighted average yield on total investments at amortized cost was 7.7% as compared to 8.8% and 7.7%, respectively, at June 30, 2021.

At September 30, 2021, 80% of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates, 91% of the remaining floating rate investments had an average LIBOR floor of approximately 1%, which is well above today's current 1- and 3-month LIBOR rates.

Shifting to our capitalization and liquidity. We had another active quarter focused on raising additional capital to help fund the continued growth of our business. During the quarter, we took advantage of a drop in treasury rates along with improved spreads and reopened our existing 2.875% June 2028 notes. We issued an additional $400 million at a premium, resulting in an effective yield to maturity on the incremental borrowings of 2.44%, which was 43.5 basis points tighter than the existing coupon.

We have been active issuers in the investment-grade term debt market during this period of historically low treasury rates. This environment, along with improving spreads and the ability to repay higher rate debt, has allowed us to reduce the weighted average stated interest rate on our outstanding unsecured term debt by 68 basis points since December 31, 2019.

It is also worth noting that we believe our approximately $1 billion of unsecured term debt maturities in early 2022 with a weighted average coupon of 3.7% represents an opportunity to further reduce our aggregate weighted average cost of borrowing. During the third quarter, we also accretively issued a modest amount of equity capital through the combination of the secondary offering as well as issuances from our ATM program to support the investing opportunities that Kipp mentioned in his opening remarks.

Considering these capital raises, we ended the third quarter with over $6 billion of total available liquidity. Our debt-to-equity ratio net of available cash of over $1 billion was 1.04x at September 30, 2021, down from 1.12x at the end of the second quarter. While our leverage ratio over time will vary depending on activity levels, we remain committed to operating within our stated target leverage range of 0.9x to 1.25x.

Overall, we continue to believe our strong balance sheet and financial position remains one of our most significant competitive advantages and enables us to actively invest in all market environments.

Before I conclude, I wanted to mention that we have completed our prior year tax return and can now report a final undistributed taxable income spillover from 2020 of $1.06 per share. We continue to believe that having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions and sets us apart from many other BDCs.

With respect to the fourth quarter 2021 dividend of $0.41 per share, it is payable on December 30, 2021, to stockholders of record on December 15, 2021. I will now turn the call over to Mitch to walk through our investment and realization activities for the quarter.

Thanks, Penni. As Michael Smith and I do every quarter, I will focus on providing more details on our investment activity and portfolio performance for the third quarter, including some thoughts on drivers of our net realized gain performance. I will then conclude with an update on our post-quarter-end activity, backlog and pipeline.

Starting with our investing activity. We had a very active quarter with $3.1 billion of new commitments, 70% higher than our pre-COVID 2019 quarterly average and resulting in $9.7 billion of total commitments year-to-date through September.

During the third quarter, we invested in 47 companies across 19 distinct industries with a weighted average EBITDA of approximately $100 million. Although the weighted average EBITDA of our portfolio has grown over the past couple of years, it should be noted the EBITDA of the companies we financed this quarter range from less than $15 million to more than $500 million.

This range should provide some insight into the breadth of our sourcing capabilities. We continue to see compelling value in our historic core middle markets and are finding interesting businesses with strong growth prospects that we believe will have additional financing needs as they grow.

One of our distinct advantages in today's active deal environment is our position of incumbency with more than 370 different portfolio companies. Incumbency enables us to support the growth of businesses that we know well and in turn provides distinct informational and investing advantages.

In highly competitive markets, you will often see us focus to a greater extent on financing incumbent borrowers. Similar to last quarter, where the majority of our investments were to existing borrowers, 60% of our third quarter transactions were with incumbent borrowers, as many of our portfolio companies were involved in strategic M&A to support their growth prospects.

We believe our portfolio remains attractively positioned. It's highly diversified across industries, sponsors and asset classes with an average position size of only 0.3%. Our portfolio also continues to skew towards senior positions as 86% of the loans we committed to year-to-date were senior secured.

By investing in senior positions and maintaining a focus on resilient industries and market-leading companies, we have been able to construct a portfolio with significant downside protection. For example, our debt portfolio's weighted average loan to value was approximately 43% at the end of the third quarter, well below the mid-50s levels seen in prior to the pandemic.

Another measure of the strong overall health of our portfolio is our nonaccrual rate at cost, which declined 120 basis points since last quarter to 1.7% and is now below pre-pandemic levels. This quarter, 4 companies were removed from nonaccrual, and there were no new additions. In short, we feel really good about the overall health and credit quality of our portfolio.

I would now like to discuss some of the drivers of our long-term strong credit performance. Over the years, we've often talked about the power of the Ares platform in driving results for ARCC. These advantages include our strong research teams across our credit platform with over 70 professionals covering more than 60 industries, our access to robust deal flow or our ability to gain insight from a broad set of C-suite executives.

Importantly, we believe that each of our investment groups at Ares joins ARCC and benefiting from being part of the broader platform. Today, I'd like to quickly highlight another one of those platform advantages, our portfolio management team.

Kipp alluded to this earlier, but it is a team of 28 seasoned individuals which we believe is larger than the entire teams of some of our competitors, and is responsible for monitoring our credits, providing portfolio company valuation analysis each quarter and helping companies that may experience difficulties.

This quarter, our portfolio management team, leveraging the broader Ares platform, helped build upon ARCC's long track record of net realized gains, which in turn contributed to our continued growth in NAV. Specifically, ARCC generated a realized gain of over $100 million on an investment where we needed to take an active role in managing the business and supporting the strategic direction of the company over the past several years.

As Kipp mentioned, this type of outcome is not unique as we have generated over $380 million of restructuring gains since our IPO. Strong NAV performance was also helped by working with our portfolio companies and capitalizing on the strength of the economy and the financing markets.

In multiple instances this quarter, debt positions that were held at discounts to par just last quarter, along with some that had been on nonaccrual in the past, were repaid at par.

Now we will finish with a brief update on our post-quarter-end investment activity and pipeline. From October 1 through October 20, 2021, we made new investment commitments totaling $1.5 billion, of which $1.3 billion were funded. We exited or were repaid on $415 million of investment commitments, generating approximately $5 million of net realized gains on exits.

As of October 20, our backlog and pipeline stood at roughly $1.9 billion and $149 million, respectively. 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 Kipp for some closing remarks.

Thanks, Mitch. I'll close by saying we believe the company is in an excellent position today. The advantages provided by our scale, our platform, the strong balance sheet and our highly experienced team continue to enable us to drive attractive financial results for our investors.

With our leading market presence in a growing market opportunity, we're excited about our future growth prospects. Our industry continues to grow, and our leadership position in it is getting more embedded. We deeply appreciate the continued support for our company.

And with that, operator, we'd be happy to open the line for questions.

(Operator Instructions) Our first question today is from Ryan Lynch with KBW.

First question I had, if I look at your overall origination commitment volumes so far year-to-date, including the October data that you provide, you guys are well over $10 billion of overall commitments, which is significantly above the 2018 and 2019 levels. And so my question is, is how much of this is a function of visually strong volumes or a function of pent-up demand and activity from kind of the light levels and the slowdown we had in 2020?

Or how much is it -- of this is really from kind of the changing landscape that we're seeing in the direct lending market and really the proliferation of these large mega tranche deals that you guys seem to be taking a lot of share in? And how really sustainable is $10-plus billion of commitment volumes at ARCC going forward?

Yes, Ryan, it's Kipp. Thanks for the question. It's a good one. It's obviously one that we're asking ourselves about and, without the crystal ball, don't know. I mean I think it's both for the time being, right? We definitely think that there's a fair amount of pent-up demand coming out of COVID. Low rates persist and the economy remains strong. So this will be a record originations year.

Our view is the fourth quarter is looking very busy. The first half of 2022, I think, will continue to be busy, too. Beyond that, it's really difficult to forecast. But we do see this underlying trend that you're referencing, which is we believe increased acceptance of direct lenders and private capital versus the public markets, frankly, excitement about, not even acceptance of.

And we see the industry taking some share, and we think that we're taking some share within the industry as the largest player. So it's going to be difficult to see, but that will be the question, I think, for '22 and beyond, right?

Okay. Yes. That's helpful color. Penni, maybe just one for you as my follow-up. You mentioned some of the primary drivers of the gains that caused your portfolio to be written up this quarter, performance improvements, tighter spreads and improvement in valuations for some of your equity investments. Could you maybe just give a ballpark estimate of the overall net gains that you guys had in your portfolio? How much of that was driven by write-ups in fair value of your equity portfolio?

Sure. Yes. If you just look at this quarter, what drove the fair value improvement, the majority of it came from the equity portfolio, given these higher market multiples. So if you look at the kind of per share impact of, I think, $0.33 of net gains for the quarter, it's about $0.19 coming from equity.

The next question comes from Finian O'Shea with Wells Fargo Securities.

Just a follow-up on Ryan's topic there on sort of the expanded market opportunity and some of these larger names. How are you thinking of growing the SDLP, given it was designed for that kind of opportunity and you still have pretty ample runway in the non-qualifying bucket?

Yes. I think we've got a whole handful of options there, Fin, I appreciate the question. Obviously, SDLP is a lever that we can pull additional growth at Ivy Hill is something that we can pursue as well as, obviously, those are the 2 big kind of components of our 30% allowance today. But it's not going to be -- I'd just say, doing these larger deals is not reliant -- we're not reliant on SDLP, right?

I mean we're able to do a lot of these larger unit tranches and participate in substantial transactions with the capital base, right? So all we try to refer back to is the fact that we think that this market has grown a lot in the last 7 or 8 years. Our company in terms of assets has been reasonably stable.

So folks said, why raise equity in the past? The reason that we raised the equity is we thought it was good to help grow the company's earnings and obviously that it was good for existing shareholders and new shareholders alike. But I don't think of, to your question, as SDLP being tremendously impactful about -- in regards to our ability to keep growing the company.

Sure. And just a follow-up, I guess, a market question with your comments on the larger addressable market. Is there -- does that include these very large privates, say, the Galway Insurance type? Or what's the balance between that, if any? And just an expanded core middle market with all the new private equity money that would be more likely to provide you more BDC investment-type yields? Just color on how -- with the market growth, how much of it is providing the right yield for the BDC industry?

Yes. I mean, look, we've said we don't feel that we're sacrificing any return doing these larger transactions, right? We've actually said we think that there's a little bit of better risk-reward, frankly, in these larger deals than what we've seen in historically the smaller middle market businesses that we've financed over the years. And I think to answer your question, just because of the law of large numbers, I think a lot of the market growth has occurred because some of these larger transactions are now of interest to larger private equity funds.

And they're going direct to private capital sources instead of doing syndicated deals, often willing to pay a higher price in the private markets than they are in what would potentially be a public market alternative just to derisk and to know who their capital partner is and have support for ongoing growth in the future. So I think it's mostly, to try to answer your question, I think it's a little bit of everything, but I think it's mostly these larger transactions that are driving the market growth.

The next question comes from Devin Ryan with JMP Securities.

This is Kevin Fultz on for Devin. First question, competitive environment and its impact on deal pricing has been a prominent conversation over the last few quarters. Are you still seeing continued downward pressure? Or has that begun to normalize a bit?

Yes. I mean, you'll see the yield on our investments have come down over the last few quarters. I think that's typical, frankly, with a better economic backdrop. The competition really isn't any different. I think the competition is just alive again, as COVID at least slowed down and become less of a risk and a lot of the economies reopened. So with that, you'd expect with such good positive backdrop on the economic front.

And obviously, we talked about how good our portfolio looks in terms of the growth and also the decline in nonaccruals, I think you're seeing folks that are willing to take slightly lower yields. Interestingly, though, that's coming with substantially higher purchase prices in most of the private equity transactions that we're seeing. So we don't feel that we have a less attractive proposition with a slightly lower yield in the portfolio. I think it's just natural as we come through the cycle here.

Okay. I appreciate the color there, Kipp. And then second question, just looking at PIK interest income, it increased this quarter to 14.5% of total interest income. I would assume that's driven by recent investments that were structured with the PIK component rather than the result of temporary concessions with borrowers. Just curious if that's correct.

That is generally correct. I mean most of -- it's a little bit influenced by, obviously, the significant repayment that we had in a company called OTG, right, that was a portion of it marked below par. There were some PIK concessions there, and we got repaid on all of our debt investments at par, which was a great outcome for us, and we have the remaining equity piece outstanding.

So there's a little bit of funniness in the numbers this quarter. But yes, most of the PIK is coming through some of the larger junior capital investments that we've made and that whole concept of providing concessions, i.e., pay-in-PIK instead of cash for the time being, is largely behind us as COVID luckily has kind of come through the portfolio for the most part.

The next question comes from John Hecht, Jefferies.

Just because interest rates are so topical, I'm wondering -- and inflation as well. I'm wondering, do you guys -- can you remind us how kind of interest rate sensitive you are? And second, do you have any thoughts about potential inflationary pressures and how it affects the portfolio that you guys have?

Sure. I'm happy to answer that. So generally, to go back up to 50,000 feet, we do try to remind folks, obviously, and most of our shareholders that own lots of different financial stocks, we're probably one of the least interest rate-sensitive stocks around because we obviously run with materially lower leverage than most financial institutions, right? So as we mentioned, our leverage tends to run somewhere between where we are today, 1, 1/4.

And on the asset side, all of our assets, most of our assets, I should say, are floating rate. So we're positively inclined toward rates going up. We lose a little bit on the financing side. But again, it's immaterial. So for us, rates isn't a huge consideration.

Just as a reminder, too, we publish in our filings just disclosure around what modest increases or decreases in LIBOR would do to the balance sheet. And you'll see that anything de minimis for the time being, either up and down, has very little impact on our earnings. So that's sort of where we cover off on the first point.

Look, in terms of inflation and everything that we're reading in the newspapers about supply disruptions, we think they're real, for sure. And we've gone in and spent a lot of time scrubbing the existing portfolio in places where they would be most impactful. The good news is we're underweight a lot of these sectors, and companies that I think would be most touched by that, right?

If you look at our largest industries, it tends to be things like software and services and health care services and all of that, things that really have not been impacted in any way, shape or form. But we're definitely doing a fair amount of work because we're seeing supply disruptions in companies that are obviously trying to get parts over. We're trying to get goods over. And that has, for sure, an inflationary effect. For the most part, our companies are underwritten to really try to waive those and that have good pricing power.

We have very little exposure to industries and to companies where there's no pricing power. But I think, look, as you read the headlines, right, John, lots and lots of CEOs out there saying, yes, we're raising prices, right? We're seeing supply disruptions. We're seeing input cost inflation. And our turn is to obviously turn around and pass that on to the consumer, whatever those goods or services are. So I think it's real, and I think it's going to last a while. But I do think that we're underexposed and not as impacted as a whole host of others.

Okay. I appreciate the color and the thoughts. You also mentioned a greater percentage of nonsponsored activity. I'm wondering, is there generally a different characteristic of a nonsponsored transaction from a sponsored transaction?

Yes, I would say, look, the convention is to keep it really simple because in these nonsponsored deals, you're going in as really the only institutional capital in a company where there's no private equity. So it can be a combination of debt and equity that we're investing in these businesses. They tend to be owned by founders, families, entrepreneurs that aren't in the, I want to sell to private equity or I want to sell to my competitor and exit. But they're looking for some sort of transformational capital.

So typically, they command much, much lower leverage ratios, and they typically come with higher returns, both in terms of yield and often equity participation. But we think that's warranted. I mean we've been doing nonsponsored deals for a long time, and they inherently tend to be a little bit riskier at [their corner]. But if you're selective and you're good at sourcing and obviously, underwriting and managing those companies and those relationships, they can be very high reward too.

So the business 15 years ago was so private equity oriented, and that's not to say that we didn't do sponsored -- nonsponsored transactions. But I think, for us, just to continue looking at growth opportunities for the company, our ability to bring on more industry expertise and more sourcing to go direct was something that was important. And we finally said, we're going to do that with stand-alone teams probably 4, 5 years ago.

We just haven't spent a whole lot of time talking about it. But it's something that we are more active doing today than I think we were 5 years ago. About 15% of the portfolio today, John, is nonsponsored for you and for others out there. So...

(Operator Instructions) The next question comes from Robert Dodd with Raymond James.

Congratulations on the quarter and the balance sheet. Actually to follow up on John's question as he jumped on it. On the nonsponsored, I mean, to your point, it's not something you've talked about a lot. 15% of the portfolio is material, right? So on -- when -- you talked about it was 30% increase in deal volume kind of last 4 quarters versus 2019. Obviously, your overall increase in deal volume over that period is roughly double that, right? I mean, obviously, market activity is really high.

So I mean, should we expect nonsponsored to actually grow? Or is it just a niche? 15% of the portfolio is not small. But is it just a niche area for you? Or do you expect to actually grow that maybe if the overall just large end of the market?

Yes, I mean, I would guess because of the resources that we've invested, obviously, that it would grow. We'd like it to grow, whatever it be, 50% of our deal flow, 50% of the portfolio, I don't think so, right? Good growth for us, just as I approximate it, could be, I don't know, up to 20%, 25% of the portfolio. But really all we're trying to do is expand the origination and obviously expand the opportunity set.

Got it. I mean -- and then just following up on that. That's my follow-up question. I mean you mentioned the higher returns, which makes sense, higher risk, but higher return. What would you -- how would you characterize the opportunity in the nonsponsored segment with -- how does that work with incumbents?

Because you also talk about incumbency advantages, et cetera, which obviously, when there's a sponsor process and those things, obviously change hands somewhat regularly if it's a sponsor-backed business? On the non-sponsored size, do they -- does incumbency come into play and that's one of the tools that has been an advantage in other areas that you've grown into? How do those 2 things kind of...

Yes, I actually think, to your point, about private equity having the need to sell something after 3 to 5 years, right? That inevitably creates the opportunity for somebody new, a new owner to own a business. But to answer your question quickly and succinctly, I think the incumbency advantage in these nonsponsored transactions is much, much higher, right? So we're selling ourselves as a capital provider and as a partner to these families, operators, entrepreneurs, et cetera.

And once they choose us and they see the flexibility of our capital and the ability for us to scale with them, they tend to like us as partners and see us as being able to add quite a lot of value to their businesses. So I could rattle through a handful of different nonsponsored deals that we've been in for 10-plus years, right?

And it's just a different -- it's a different relationship because, again, at the end of the day, your counterparty is somebody who really doesn't want to do a change of control transaction, right? They just want to continue maybe doing acquisitions, building plants, building out services capabilities, et cetera, so they tend to be longer.

The next question comes from Melissa Wedel with JPMorgan.

Wanted to follow up on the questions around moving up market. Wondering if the portfolios were still in the 100 bps range? And generally, as you do these larger deals, are you seeing any pressure on those floor rates?

I'm sorry, Melissa. Are we seeing pressure on what?

On the floor rates, particularly for the larger company deals that you're doing.

No. I mean not really. No. Some of the deals, they've drifted from a point to 75 basis points, but we're not really seeing any pressure beyond that.

Okay. So as we think -- I take your point about the -- actually appreciating the better risk-adjusted returns that you're seeing with some of those larger deals. Just in terms of sort of portfolio yield and compression, is that something that we should expect to persist, particularly as the market sort of expands into and private capital becomes more accepted with these larger companies?

I think that's the $64,000 question that everybody is asking, right? So our team has been doing this for a really long time, as you know, both at banks and then obviously at Ares for the last 17 years. And I would tell you that over those 17 years, the market has institutionalized and returns have generally come down as a whole. They obviously spiked back up when capital is less available and when competition is less frequent and all of that.

But the one thing that puts a little bit of a floor on yield is the fact that most of the folks running direct lending money and private capital these days don't use a lot of leverage, right? So the syndicated market, for instance, in loans is supported by highly levered CLO buyers that are very dependent on their cost of capital and the amount of leverage they can get, i.e., what's AAA pricing, is their CLO levered 8x or 14x, right? That dynamic doesn't exist so much in direct lending.

So we do think there's a bit of a floor, and I'm hopeful that we're kind of scratching that floor right now. Base pricing for unit tranches these days is kind of LIBOR 550, LIBOR 600 for really good companies, and we haven't seen it drift much lower than that. But hopefully, no one breaks the buck, you know what I mean.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.

No. I don't have any other than to just say thanks for all the great questions, and we'll follow up with you all after the call and into next quarter. Appreciate the time.

Ladies and gentlemen, this concludes our conference call for today. If you've missed any part of today's call, an archived replay of the call will be available approximately 1 after (sic) [hour] after the end of this call through November 9, 2021, at 5:00 p.m. Easter time to domestic callers by dialing (877) 344-7529 and to international callers by dialing (412) 317-0088. For all replays, please reference conference number, 10159851.

An archived replay will also be available on a webcast link located on the home page of the Investor Relations section of Ares Capital website. Thank you for attending today's presentation. You may now disconnect.