Ares Capital 2Q16 Earnings Call Notes

Ares Capital’s (ARCC) CEO Kipp deVeer on Q2 2016 Results

Leverage lending market rebounded

“But first I’ll provide a few thoughts in the market environment. The leverage lending market rebounded in the second quarter after a rocky finish to 2015 and start to the year. We continue to see elevating interest in direct lending from our global investor base, however, most of our focused on private investments and private funds. From advantage point, we are having trouble reconciling this strong global demand for direct lending assets and the attractive returns they provide versus the tapping demand for investing for investing in high quality BDC’s holding similar assets.”

Seeing a lot of investors move a portion of the portfolio to something illiquid to generate higher yields

” I’d say on one side of the discussion, we are seeing the frustrated fixed income investor reposition their portfolios into direct lending because of obviously the interest rate environment and sort of what their alternative are in core fixed income and that’s everything from, how high grades to mortgages, anything else that they potentially buy including liquid loans and high yield and all of that and folks have decided that taking a portion of their fixed income portfolios into something that is illiquid to achieve better yields and better risk adjusted returns or something if they are willing to do. So we’re seeing lot of repositioning on that front form kind of core fixed income.”

Venture is in a transition period

” I think the venture business is transitioning a bit and then obviously valuations as everybody read around in paper had gotten to be pretty robust. So we have seen it’s more challenging to bring you know round C or the round D into a venture back company today. And that’s actually created couple of issues at a couple of our smaller names. So we’re cautious around venture right now but we’ve got a pretty experience team there managing the asset. So they are certainly doing new deals but I think along with ARCC, they are being pretty selective on new deals there. So I think the venture base is definitely in a transition period.”

The election is holding back activity in PE a bit

” going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world, private equity multiples have gotten very elevated, that’s actually – a lot of our sponsor friends have said, I’d rather hold some of my existing names longer for fears that I can’t redeploy capital well in my funds. So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year, I think it will kind of continue with the current activity levels, maybe a little bit better, but I do look at the election as something that’s holding activity back quite a bit.”