Ares Capital Corp Q2 FY2025 Earnings Call

Good afternoon. Welcome to Ares Capital Corporation's Second Quarter Ended June 30, 2025 Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, July 29, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team.

Great. Thank you very much, and good afternoon, everybody. 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 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, which include factors such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding the financial performance because it's one method that the company uses to measure its financial condition and the results of its operations. A reconciliation of GAAP net income per share, the most directly comparable GAAP 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 on Form 8-K with the SEC. Certain information discussed in this conference call and the accompanying slide presentation, including information related to portfolio companies, which arrived from third-party sources, has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's second quarter ended June 30, 2025, earnings presentation can be found on the company's website by clicking on the Second Quarter 2025 Earnings Presentation link on the Home page of the Investor Resources section. Ares 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. Kort Schnabel, Ares Capital Corporation's Chief Executive Officer.

Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President, Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. Before we begin today's call, I want to take a moment to acknowledge the tragedy that occurred at 345 Park Avenue, just a few blocks from our New York office. This senseless act of violence has deeply affected our community, and our hearts go out to everyone impacted. We extend our deepest condolences to the families and loved ones of the victims and to our friends and colleagues at Blackstone, KPMG, NFL, Rudin, and others who work at 345 Park Avenue, as well as the brave NYPD officer, who lost his life protecting the building. In times like these, we are reminded of the importance of standing together as a community with compassion, resilience, and support for one another. We are keeping all who have been affected in our thoughts. Let me now turn to our second quarter results. I will begin with a few quarterly highlights and will follow that with some thoughts on current market conditions. This morning, we reported solid second quarter results, delivering stable core earnings of $0.50 per share, representing an annualized return on equity of 10% consistent with the prior quarter. Additionally, our net asset value per share increased both sequentially and year-over-year. The growth in our net asset value per share was supported by earnings in excess of our dividend and robust net investment gains, including strong net realized gains from our equity co-investment portfolio. These results support our position as one of the few BDCs to experience per share growth since our IPO. We are pleased with our profitability and the continued strength of our portfolio, particularly in light of the tariff-related volatility that led to economic uncertainty and reduced investment activity during the second quarter. Let me now discuss what we are seeing in our markets and our positioning. The second quarter began with policy-driven volatility, which temporarily slowed transaction activity, particularly in the liquid loan markets. During the early part of the quarter, we remained active while traditional market participants retrenched and were not underwriting many new transactions, if any at all. We believe our ability to transact in varying market conditions and provide certainty in uncertain times yet again reinforced our value proposition and allowed us to garner enhanced terms and premium economics. As volatility subsided later in the quarter, the liquid credit markets reopened. Overall financing activity began to rebuild and has returned to a more normalized pace. As we have discussed many times in the past, we benefit from periods of volatility as our broad portfolio of 566 borrowers, extensive market relationships, and strong balance sheet position us as a valuable partner to many market participants despite reductions in overall M&A volume. We saw this dynamic play out in the second quarter as nearly 3/4 of our gross commitments were from incumbent relationships. We continued to serve as a stabilizing force for our existing portfolio companies who are increasing their borrowings with us and enabling us to take share from other established lenders. For example, across our 10 largest transactions with incumbent borrowers in the second quarter, we more than doubled our previous lending commitments and in doing so, increased our wallet share with these borrowers, which we view as some of our highest quality opportunities. As our track record illustrates, we believe we can generate attractive, risk-adjusted returns and enhance our overall credit quality by supporting the capital needs of our existing portfolio companies. Beyond expanding our commitments with our existing borrowers, we remain proactive with our extensive sponsor relationships and continue to grow our presence among nonsponsored borrowers in our targeted industries. Despite overall declines in reported middle market M&A and transaction activity, we are continuing to review a growing number of opportunities with the number of transactions we reviewed increasing 20% quarter-over-quarter. This growing level of opportunities reviewed should support greater investing volumes in the future, and it is particularly notable that June accounted for nearly half of the quarter's transaction activity. This momentum gives us visibility into a potentially more active second half of the year. As we have discussed in the past, we believe we are one of the only direct lenders with a meaningful presence across each of the lower, core, and upper middle markets. More recently, we have been particularly active in the upper end of the market, providing certainty of capital to potential borrowers in the face of market uncertainty. For example, as you have probably seen in media reports, we will serve as the lead-left arranger for the largest private credit LBO on record with the take-private of Dun & Bradstreet, which is expected to close in the third quarter. Dun & Bradstreet is a long-standing, high-quality company with strong recurring cash flows, and this transaction clearly demonstrates our scale and leadership position in the market. We believe our ability to be a meaningful capital provider to larger borrowers, alongside those in the core and lower middle market, remains a notable differentiator for our platform. Importantly, we believe that the breadth of our origination capabilities is one of the key contributors to our long-term credit performance as it enabled us to see a broader view of the market opportunity and then be highly selective in choosing where we invest. Shifting now to our existing portfolio. We are continuing to see healthy overall performance as our borrower's weighted average organic EBITDA growth rates accelerated further into the double digits over the last 12 months. Supported by this underlying growth, borrower leverage levels are below our 5-year average and the portfolio average loan to value remains in the low 40% range. We also take comfort in the fact that our portfolio is focused on domestic, service-oriented businesses that, in our view, carry lower policy risk from tariffs and other recently proposed and implemented government policies. While we ended the second quarter with a modest uptick in non-accrual, these levels still remain well below our historical average and that of the broader BDC peer group. We remain highly confident in our ability to manage these idiosyncratic situations as we have an experienced veteran portfolio management and evaluation team of approximately 50 dedicated professionals. We believe the deep credit experience on our team and our differentiated strategy of investing across the capital structure is a cornerstone of our track record and supports our generating realized gains well in excess of realized losses on our investments since inception. Specifically, in the second quarter, we continued to build on this track record of gains in excess of losses as we exited several of our equity co-investments, realizing 3 times multiple of our initial invested capital and generating a gross realized internal rate of return in the mid-20% range. In summary, we demonstrated stability amid significant market uncertainty in the second quarter. As we've seen in past periods of volatility, we believe these environments continue to reinforce our resilient business model and strong competitive positioning. We believe our consistent execution, disciplined approach, and differentiated platform leave us well positioned to navigate evolving market conditions and to capitalize on emerging opportunities. With that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet.

Thanks, Kort. This morning, we reported GAAP net income per share of $0.52 for the second quarter of 2025 compared to $0.36 in the prior quarter and $0.52 in the second quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.61 for the same period a year ago. The stable core earnings are consistent with the general stability we have seen in yields, which for our portfolio essentially remained flat with the prior quarter. Going a bit more into the net realized gains that Kort highlighted earlier, we generated $117 million of net realized gains on investments during the second quarter, bringing our cumulative net realized gains on investments since inception to nearly $900 million. Related to certain of these gains, we incurred $44 million of capital gains taxes. As you may have noticed, we now break out these amounts separately on our income statement to make it easier to identify. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our realized equity gains have delivered attractive returns for our investors. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $27.9 billion, which was up from $27.1 billion at the end of the first quarter and up from $25 billion a year ago. Shifting to our funding capital position. We have remained active in adding capacity, extending our debt maturities, and reducing our costs. In June, following a recovery in the capital markets from earlier volatility, we issued $750 million of long 5-year unsecured notes, at a new issues spread to Treasuries of 175 basis points, marking the tightest 5-year new issue spread achieved by a BDC since the beginning of the second quarter. We also continue to benefit from the deep and strong relationship we have with our banking partners. During the second quarter, we upsized our largest revolving credit facility by $880 million, bringing the total facility size to $5.4 billion. We extended the end of the revolving period and the maturity date to April 2029 and April 2030, respectively, and reduced the drawn spread on the facility by more than 20 basis points. Subsequent to quarter end, we added a new banking partner contributing an additional $100 million to this facility. With this latest increase, we've expanded our revolving credit facility by nearly $1 billion since the first quarter of 2025. This momentum is carried through to our other credit facilities. So far, in the third quarter, we extended and upsized two of our other credit facilities by a combined $400 million and reduced the draw on spreads on each by 20 basis points. Overall, pro forma for this post-quarter activity as well as the repayment of our July 2025 notes two weeks ago, our liquidity remains very strong, totaling nearly $6.5 billion, including available cash. We believe we are well positioned, particularly since we have no debt maturing for the remainder of this year. In terms of our leverage, we ended the quarter with a debt-to-equity ratio, net of available cash of 0.98x, consistent with the quarter ago. We believe our significant amount of dry powder positions us well to continue supporting our existing portfolio company commitments, which remain a significant source of deal flow as well as investment opportunities in new portfolio companies. Finally, our third quarter 2025 dividend of $0.48 per share is payable on September 30 to stockholders of record on September 15. ARCC has been paying stable or increasing regular quarterly dividends for 64 consecutive quarters. In terms of our taxable income and spillover, we currently estimate we will have $878 million, or $1.29 per share, available for distribution to stockholders in 2025. In addition to our core earnings, continuing to be in excess of our current dividend, as seen by the net realized gains this past quarter and the potential for further net realized gains, we remain optimistic we will further enhance our taxable income of spillover. We believe our meaningful taxable income and spillover provides further long-term stability for our dividends and is a significant differentiator for us. I will now turn the call over to Jim to walk through our investment activities.

Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance, and our positioning. In the second quarter, our team originated over $2.5 billion of new investment commitments as our long-standing relationships with existing portfolio companies enabled us to remain active during the second quarter, with incumbent borrowers accounting for 74% of our commitments. As Kort also mentioned, we believe we are the only direct lender that focuses on the upper, core, and lower middle markets, which, in our view, drives differentiated deal flow. By making new commitments to borrowers, ranging from under $10 million to over $500 million in EBITDA, we are able to select what we believe are the most compelling credits across a multitrillion-dollar total addressable market in the U.S. The scale and broad market coverage of our investment team, which includes more than 200 investment professionals, supports our ability to invest in attractive, risk-adjusted return opportunities across varying market environments. While our gross commitments were lower than the prior quarter, reflecting the reduced market activity through much of the quarter, the decrease was less pronounced than in the liquid loan market. And our net fundings of $644 million were more than double the prior quarter's level. These results contributed to a 3% quarter-over-quarter increase in the overall size of the portfolio at fair value. Our $27.9 billion portfolio at fair value continues to be highly diversified across 566 companies in 25 different industries. This means that any single investment accounts for just 0.2% of the portfolio on average. And our largest investment in any single company, excluding our investments in SDLP and Ivy Hill, is less than 2% of the portfolio. Our emphasis on portfolio diversification mitigates the impact of negative credit events in any one company or industry. On that point, our portfolio management team is monitoring our portfolio on an ongoing basis for potential impacts from changing domestic and foreign policies and geopolitical shifts among a multitude of other potential risks. With respect to tariffs, as we learn more about our portfolio company's exposures and available mitigants, we feel incrementally better about the risks posed by potentially higher tariffs and our portfolio company's strategies to address them. The health of our portfolio is reflected in the 13% weighted average LTM EBITDA growth of our portfolio companies, up modestly from 12% last quarter and broad-based across industries and company sizes. This strength is further supported by the low leverage and strong and stable interest coverage of our portfolio companies. Notably, we see consistently strong performance across company sizes. Companies with EBITDA of less than $100 million and those with greater than $100 million of EBITDA all exhibited double-digit organic EBITDA growth over the last 12 months. Our non-accrual rates continue to be well below historical levels but did tick up modestly at cost from 1.5% to 2%, and on a fair value basis from 0.9% to 1.2% since last quarter. On a cost basis, these metrics remain below our 5-year average and our historical average since the Great Financial Crisis. Relative to other BDCs, our non-accruals at cost are 180 basis points below the BDC average over the same time frame. Looking ahead, we remain confident in the caliber of our team, health of our portfolio and strength of our positioning. In the third quarter, we are seeing transaction activity recovering to pre-tariff levels. As a result, our backlog remains healthy. Our total commitments for the third quarter to date through July 24, 2025, were $1.1 billion, and our backlog as of July 24, 2025, stood at $2.6 billion. As a reminder, 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. In closing, we're encouraged by the normalization of transaction activity so far, as well as the consistency of our core earnings in the second quarter, which continues to exceed our $0.48 per share dividend. Our declared third quarter dividend of $0.48 per share marks our 16th consecutive year of stable or increasing regular dividends. We're proud of this track record and remain confident in our ability to sustain a steady dividend, supported by our earnings power and significant undistributed spillover income. As always, we appreciate you joining us today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions.

We'll take our first question from Finian O'Shea with Wells Fargo Securities.

First question on the activity picking up. Can you talk about any improvement in terms spreads and upfront fees and how might that drive an NOI improvement on the go forward?

Yes, sure, Fin. Thanks for the question. Yes, look, I'd say although there was some volatility intra-quarter on terms, and we saw things improve a bit in the beginning of the quarter, towards the back half of the quarter, spreads kind of tightened back to where they previously were back in the first quarter. So I would just reiterate the theme of stability in overall spreads and terms and total yields, in the new investment environment. Obviously, who knows what the future holds, we're certainly in a little bit more of a volatile time as we tried to highlight in the prepared remarks, volatility can be good for us. So we see that in the future, then there will be an opportunity for potentially improved terms. But so far, I would just say we're seeing stability, which I would say, over the last several quarters now, we do seem to have kind of found that point of stability in terms of spreads now for 3 or 4 quarters in a row. And then yes, the volume really does seem to be picking up. Again, the story on volume was a little bit mixed throughout the quarter, first half, a little bit of an air pocket as people are digesting some of the tariff-related news. But as we mentioned in June, really saw a lot of momentum and our commitments post quarter end were very strong.

Very good. And for a follow-up on the off-balance sheet vehicles, the SDLP and Ivy Hill, those are a little smaller as a percent given the growth of ARCC, but seeing if you can hit on the ability or likelihood to expand those back to historical averages or peaks or wherever you might see fit?

Yes. Yes. Both of those vehicles are strategically important vehicles for us. And I guess I would say I wouldn't be surprised if they grow more from here.

We'll go next to Doug Harter with UBS.

As you think about taking advantage of the growing pipeline that you talked about or deal activity you talked about, how are you weighing the balance between maybe taking leverage up versus continue going to issue new equity off of the ATM?

Yes, I think it's a balance, and it's something that we're obviously always monitoring quarter-to-quarter. We do think that it is strategic for us to raise capital via the ATM program when it's available. And obviously, this quarter, we moderated it a bit relative to prior quarters, given the transaction volume was a little bit lower. So approximately $300 million this quarter via the ATM versus $400 million to $500 million in the prior few quarters. Again, you never know where the markets are going to go, and it's crucial for us in our competitive advantage and value proposition to have capital for our existing borrowers and for potential new borrowers in all market environments. And as a reminder, also, when we're raising equity via the ATM program, we're doing that at a premium to book, which is accretive to NAV and we think good for our shareholders. Obviously, with the volume being a little bit lighter than we had hoped in this past quarter, we weren't able to get more into leverage. But again, core earnings of $0.50 a share still feels very good and stable and well covering the dividend. And so it doesn't really bother us that we are operating around 1x leverage. In fact, it probably just gives us a lot of financial flexibility going forward to take advantage of whatever kind of market environment we encounter. So long answer, but I guess it comes back to what I said in the beginning, which is it's a balance.

We'll go next to Robert Dodd with Raymond James.

On the credit side, you added a couple of names to non-accrual, but some of those were new, correct? PRG and KBS had defaulted and been restructured before, and now they're back. Is it getting harder to restructure a club asset effectively the first time, especially considering your strong track record? Is there anything systematic in this situation, given that it is relatively unusual for you to have an asset that gets restructured and then becomes a problem again? Any insight on this?

Yes, I appreciate the question, Robert. And you're absolutely right. Interestingly, a couple of those names we added, by the way, a handful of names, a little less than a handful of names to the non-accruals. And yes, a couple of those names had been restructured. So a little bit unusual. But I would say, I don't think there's anything to read into there. It's not really about the club nature of those transactions. It's really about the underlying companies. And I guess what I would say about the increase in non-accruals is it's obviously something we're paying close attention to, but I would say that there are really not any underlying within these handful of names that we added, that we can really discern that would tell us there’s any pockets of the economy that are showing certain weakness relative to other pockets. Obviously, we're always looking for those kinds of trends in our portfolio, and when we see a little bit of tick up like this, it gets our attention, but there's really just idiosyncratic factors that are affecting each. So I don't know that I'd read too much into it. The non-accrual number can bounce around a bit quarter-to-quarter and as if you look back over the last many quarters. And on an absolute basis, it's still at a pretty low level and below our historical averages and the industry averages. So it's not really something that's giving us a lot of concern at this point, but certainly, we're paying close attention to it.

Got it. Got it. And then 1 more, if I can. Follow-up, On Ivy Hill, you injected some more capital into Ivy Hill this quarter. Is that part of just kind of the long-term growth plan? Or was that opportunistic given the volatility in the liquid loan markets that obviously we saw in Q2?

Yes. Good question. It is just part of the long-term growth plan, normal course. We did take a little bit of a pause on selling assets for a few quarters prior to this one. But for that reason, we felt like it was the right time to sell some more assets. Again, part of our policy, normal course. IHAM is a strategic vehicle and they have demand for assets, and it felt like a good time to sell some assets down. So really nothing specifically opportunistic about the fact that we did it this quarter versus prior quarters.

We'll go next to Arren Cyganovich with Truist.

You mentioned that in the activity that you're seeing recently has been a little bit more skewed to the upper middle market, which makes sense given the volatility. But as you talk about the activity in the pipeline looking pretty strong for the second half, are you seeing broader out into the core and lower middle market as well?

Sorry about that. Yes, we are seeing it broaden out for sure across all different types and sizes of companies. Again, one of our I think big advantages is the broad origination and you'll see us move around a bit based on the opportunities that we're finding in the market. And it's interesting in 2022 and 2023, we moved up market significantly when there is dislocation, then we kind of broadened back out and you look at the average EBITDA of our new borrowers that will bring into the portfolio that's kind of come down through 2024, we moved a little bit more down market this quarter. The average EBITDA ticked back up again a little bit. But if you look at the pipeline and the post-quarter end commitments, it is more broad-based, which again is another sign to us that suggests there should be some nice momentum going into the second half of the year.

Got it. And I just want to follow-up on the leverage question. I certainly understand and appreciate balancing the equity issuance, et cetera. The leverage, it's not at extremely low level, but it is lower than what typical peers would have. Is there a specific reason that you're at that level, just the broader volatility in the global economy? Just curious as to what would give you a little bit more confidence to raise that up a little bit. And I'm not saying a lot, just something like that.

No, I understand. Yes, we have a stated range of 0.9% to 1.25%, and we are closer to the lower end of that range. We feel confident about covering the dividend with stable results while maintaining our leverage towards the low end. This positioning gives us flexibility to capitalize on any increase in transaction activity or volatility that could offer better market terms. I appreciate having this flexibility, as it serves as an additional tool to support earnings if necessary. However, we do not currently need it, and this situation puts us in a favorable position. Transaction volume has been somewhat slow, but we are not managing the business based on this leverage level; it just happens to be where we are ending up, and we are pleased with it.

We'll go next to Casey Alexander with Compass Point.

I appreciate your commentary about spreads. I'm wondering, you're getting a little bit better pipeline filled. Is it your view that a real and dynamic increase in deal activity would help push spreads out to a little bit more attractive levels? Or is there just so much capacity out there that it's really hard for spreads to make much of a move?

Yes, the laws of supply and demand suggest that increased deal flow in the market could lead to a modest widening of spreads. I don’t think we’re dissatisfied with the current spreads. When considering total yields, particularly with base rates where they are now, along with upfront fees and spreads, we are achieving high single-digit returns on lower-leveraged first lien senior assets, unitranche deals, and low double-digit returns on lower to mid-double-digit junior debt assets. Historically, those represent good total absolute returns. It has been common for spreads to fluctuate; if base rates decline, spreads widen, and when base rates rise, spreads tend to tighten, resulting in an imbalance. We believe this is a favorable investing environment. Furthermore, leverage levels within our existing portfolio and the new assets we are investing in have remained stable over the past few quarters and are not close to the high end of our historical leverage range. On a risk-adjusted return basis, we feel optimistic. However, we hope that increased transaction activity could lead to some widening of spreads, although it's difficult to predict.

Just a maintenance question, and I'm sorry if I missed this, a couple of distractions. But a pretty good jump in dividend income quarter-over-quarter. Was there any one-time in that? Or was that just based upon growth of the vehicles?

Yes. Thanks for the question. It's a mix. I mean, we definitely had a little bit of increases from the recurring portion of the portfolio, but there are also as nonrecurring portion as well, which does tend to happen on occasion. So that's what drove that.

Do you have any information about how much was that nonrecurring?

About $10 million of it.

We'll go next to Kenneth Lee with RBC Capital Markets.

As you look across your pipeline of potential originations there, and it sounds like you've been seeing a lot more of the upper end of the segments more recently, how did the relative pricing and returns for the smaller scale or more core middle market segment compare to the upper? Are you seeing more attractive returns in any particular segment? I just want to get a little bit more color around that.

Yes, it's not only about spread and yield, but also about leverage levels. Generally, as we look at smaller companies, leverage levels tend to be lower and spreads are typically wider. I don't want to provide specific figures since it varies, but generally, you could expect an incremental yield of around 50 basis points or more for smaller companies compared to larger ones. However, the leverage levels can be several turns lower in terms of EBITDA compared to comparable large-cap companies. That summarizes my thoughts on the matter.

Okay. Very helpful there. And just one quick follow-up, if I may. In terms of the equity co-investments, the exit side, I presume they were not driven by Ares Capital. They were not discretionary. Just want to double check that. And to the extent that they have any visibility, is there any potential outlook for further equity realizations? Or is it primarily driven by the sponsors?

Definitely primarily driven by the sponsors, not a lot of control that we have. We're not obviously in the control equity business. So they are a little bit sporadic. But if you look over a long period of time, obviously, that's been a huge differentiator for us and our strategy of building that diversified portfolio so that we can offset our losses with gains. And in terms of looking forward, probably can't comment or get really too much forward-looking guidance around what to expect going forward? Sorry for that.

We'll go next to Melissa Wedel with JPMorgan.

Just to follow up on a couple of things. I wanted to go back to the comments made about the impact of tariffs on portfolio companies. Are you still estimating a roughly mid-single-digit exposure across the portfolio to companies that could be impacted by tariffs sort of before any mitigating factors?

Yes, I'm glad you asked, Melissa. We actually feel better this quarter than we did last quarter. We spent a lot of time talking to our affected portfolio companies, understanding how they can handle the tariffs through pricing adjustments, shifting manufacturing, or other measures. Our portfolio companies are optimistic about their ability to pass on pricing. People are starting to explore moving manufacturing, although that hasn't made a significant impact yet as they wait to see the final tariff rates. The companies have a good sense of the actions they can take to mitigate these effects. I should also note that new tariffs have emerged, and there is still a lot of ongoing change. However, in sectors like steel, our portfolios don't have much exposure as we primarily invest in service-oriented businesses. We're pleased to report that the high-risk names in our portfolio are now only a low single-digit percentage, down from the mid-single digit percentage we mentioned last quarter.

Okay. And then just to clarify, it sounds like some of the price increases are happening already.

Starting to a little bit. Obviously, the tariffs, there was a pause on a lot of the tariffs and the effects of them are just starting to flow through now. But I think what we found is that our companies have reached out to their customers. It had discussions about pending price increases and are feeling relatively good about the responses they're getting. So I don't know if it's actually like broad-based actions that have been pushed through yet. But kind of just starting now.

Got it. My last question is about the capital injection or additional investment into IHAM this past quarter. I also noticed a comment in the presentation about exited investments after the quarter ended that included a significant amount in the subordinated loan to IHAM. I'm curious how we can reconcile these two situations – the inflows into Ivy Hill this quarter and the apparent outflows from the sub-loan in Q3.

Yes. We have a subordinated loan with Ivy Hill that is sometimes used as a working capital line. We provide capital to them, and they are able to return some of the proceeds to us after the end of the quarter.

Is that clear? I mean it's similar to equity; it's just more recycled. It allows us to recycle.

We'll go next to Sean-Paul Adams with B. Riley Securities.

Touching back on Ivy Hill, it seemed there was a slight shift in the gross commitment portion for first lien senior loans, which I'm guessing is largely a reflection of Ivy Hill repayments. So it was just an allocation rebalancing. But when you are looking at the balance of Ivy Hill, will there be more of a long-term shift in the target asset classes to balance the growth targets? Or a change in the target for first lien?

No. Ivy Hill has a first lien investment strategy and that will continue to be the primary thrust of their strategy, we really don't anticipate any strategic changes.

This concludes our question-and-answer session. I'd like to turn the conference back over to Kort Schnabel for any closing remarks.

No closing remarks. Thanks, everybody, for joining, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes our conference call for today. If you missed part of today's call, an archived replay of the call will be available approximately 1 hour after the end of the call through August 29, at 5:00 p.m. Eastern Time to domestic callers by dialing 1(800) 695-1624 and to international callers by dialing +1 (402) 530-9026. 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.