Ares Capital 3Q16 Earnings Call Notes

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Kipp DeVeer

I think there is caution here

So I think that there is caution here having spent a lot of time, getting ready for today with the team. I think, the way couple of us were describing it in a lot of different markets or the fundamental and this surrounding economic and political environment feel mediocre and uncertain. And up until maybe a week or two ago, the stock market seem to go up every day, and spreads in virtually every fixed income asset team to tighten leverage multiples in our market were going up, pricing was flat at best if not coming in a bit. And we’re seeing just weaker documents in a more heavily adjusted EBITDA numbers being leveraged and just things that you typically see when number one the market spend and number two is more competitive. I think, you’ve seen new capital come online in the space and I think that capital has to change the marginal deal, have to chase rather the marginal deal.

Don’t see any acceleration of decline

” I think, generally we see companies that are up year over year but maybe a bit behind budget, but it’s probably reasonably on either side of 50% of beating budget or missing budgets. When I think that’s in line with lot of the credit portfolios that we’re seeing across areas and also I think what the public equity markets are seeing. So we don’t view it as getting worse quicker. I don’t know if things slowdown again, just because folks are nervous around next week’s election. I continue to believe that they are. So we’ll see if any of those trends reverse after that’s resulted into a new year. But now, we don’t see any accelerating of the decline”

New entrants tend to be small and have adverse selection

“there is definitely been capital flowing into the space. The way that I think about new entrants is they tend to be small and they tend to be adversely selected on new deal flow. So they just don’t have the skill of platform in terms of origination breadth and reach. We have people on seven offices, we got almost a 100 people dedicated to the business, it’s a pretty different than what you would see from some of the new guys, and when you’re a new guy you have to justify your platform and explain who you are and explain your philosophy or no, even if you have relationships from past firms it’s never the same. You have no evidence to show your counterparties how you’re going to act in situations that don’t work out as expected. So the new entrants frankly tend to focus on the smaller companies and then we don’t see them much.”

I think consensus is that the consumer is slowing down

” I think some of the industries that we do participate in where I think folks would generally say there’s weakness, definitely retail. And retail is tough these days, brick and mortar retail, in particular with just changes in the way consumers and buying patterns are working in terms of online retail. Restaurants inevitably I think see the weak consumer, if the consumer is slowing down, which I think consensus is they are. You’re seeing a little bit of weakness there.”

We’re seeing valuation in venture come down

“We’re seeing valuations in venture come down. We’re seeing that the next round of equity capital, which is typically our take-out, take longer. So I think that business is a little bit choppier. We’ve added a non-accrual or two over the course of the year. And I think that’s representative. But again it’s a pretty small portfolio for us. It’s about $270 million. And even if you have a couple that it blips along the way it’s just not something that’s all that material for us. We like the business. It’s a nice part of the strategy. And I think venture is going through a time where you need to be more cautious and be paying attention to the fact that evaluations are coming down and capital isn’t flowing quite the way it was maybe 12 months ago. But nothing of great concern there to you.”