Ares Capital Corporation

Operator: Good afternoon, everyone. Welcome to the Ares Capital Corporation's First Quarter Ended March 31, 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, April 28, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir. John Stilmar: Thank you, and good morning, 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 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, 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's one method the company uses to measure its financial condition and results of operation. 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, the 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 credit ratings and information related to portfolio companies was derived from or obtained by third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's first quarter ended March 31, 2026 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the First Quarter 2026 Earnings Presentation link on the homepage 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 Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort? Kort Schnabel: Thanks, John, and hello, everyone, and thank you 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. Let me start by providing a few thoughts on ARCC's performance, current market conditions and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represents an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets. We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions. And we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment. Let's now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes, but also diminished competition and improved lending conditions as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite. As a result, we are seeing a reset underway with wider spreads, lower leverage levels and more attractive overall deal terms across the market. New transactions today are being discussed at 50 to 75 basis points of enhanced levels of fees and spread alongside a half to full turn of lower leverage and tighter documentation versus the second half of last year. As risk premiums widened during the first quarter, overall market activity slowed as the market searched for clearing prices during this period. However, over the past 3 to 4 weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital. Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. direct lending platform and its significant dry powder from institutional sources positions us well to capitalize on these market conditions. Our diverse high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies at an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's 10-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark. Portfolio fundamentals also remained solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards and revolving credit facility utilization in line with historical norms. Our nonaccruals also remained well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption. And in fact, many are embracing AI and seeing enhanced growth. We believe the most important question is not how much software exposure we have, but what types of companies we have invested in and what staying power, risks and opportunities our companies have through this latest technological cycle. Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers' core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs and benefit from proprietary data. Importantly, our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million, strong cash flow and meaningful equity cushions even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves. To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in the fourth quarter of 2025 to challenge our AI risk assessment across our software-oriented portfolio companies. Prior to engaging this firm, we conducted extensive diligence in the middle of 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials and if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution or whether it poses a direct risk to the core business, absent significant strategy change. The consultant study found the largest differences between higher and lower risk companies to be system of record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats and control of data. The firm also assessed human dependency, data availability, risk of error and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. Their report indicated that about 85% of our software portfolio at fair value represented low risk with only a small subset of companies categorized as higher risk. These higher-risk companies represented only 1% of reviewed names by fair value and 2% by count or only about 0.3% of ARCC's total investment portfolio at fair value. An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC's total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment in product evolution with many of these companies well positioned to adapt within the time necessary. Of the 85% of names categorized as low risk, these companies are well positioned to adapt and in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors. While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector. As we seek to take advantages of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile with minimal near-term maturities offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends. Importantly, core EPS taken together with $0.15 per share of net realized gains was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions. That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and turns improving and given our strong competitive position, we continue to believe that ARCC's current dividend approximates the long-run underlying earnings power of our business. And our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for 16 consecutive years. With that, I will turn the call over to Scott to take us through more details on our financial results and balance sheet. Scott Lem: Thanks, Kort. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity and conclude with details of our dividend and the taxable spillover referenced earlier by Kort. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation. Core earnings per share was $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical with the first quarter in addition to softness from the broader credit market volatility that Kort mentioned earlier. Now turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago. Our net asset value ended the quarter at $14.1 billion or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past 5 years and more than 30% since inception. Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure. Reflecting our long-standing strategy of being a consistent issuer in the investment-grade notes market, we kicked off the year by issuing $750 million of long 5-year unsecured notes at an industry-leading spread of 180 basis points over treasuries, which we swapped to SOFR plus 172 basis points. During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a 5 basis point reduction in the spread. On the topics of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector. At ARCC across our 4 credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been long-standing supporters of ours. The weighted average length of these relationships exceeds 13 years with several dating back more than 20 years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships with most of these banks and lenders working with us not only at ARCC, but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities and performance provide us with unique and consistent access to capital across multiple markets and especially with our banking and lending partners. Additionally, drawing on our experience successfully navigating the global financial crisis, we view the structure, duration and diversification of our funding facilities as essential factors in ensuring balance sheet stability. As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involve margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods. Our experience through the global financial crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest rated BDC across all 3 major rating agencies with the longest ratings history, 19 years with 2 agencies and 16 years with the third and more than 15 years of experience issuing investment-grade and convertible notes. The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners. More recently, in 2024, we further enhanced the diversity of our funding sources and broaden our lender base through the securitization market. By generally issuing only through the AA tranche, we are able to achieve similar advance rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares' strong reputation with investors. Looking forward, while market participants may anticipate tighter credit conditions and reduced access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities and deep and enduring relationships such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders, including investors, banks and other lending institutions. Overall, our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the first quarter with debt-to-equity ratio net of available cash of 1.1x versus 1.08x last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Finally, our first quarter 2026 dividend of $0.48 per share is payable on June 30 to stockholders of record on June 15. ARCC has been paying stable or increasing regular quarterly dividends for 67 consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026. I will now turn the call over to Jim to walk through our investment activities. James Miller: Thank you, Scott. I'll start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance and overall positioning. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases, lending terms may improve and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers. Beyond the decades-long positioning of our platform around these principles, there's compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today's broader market narrative. Our own Ares quantitative research team recently examined 25 years of aggregated private credit data to evaluate the association between managers' ability to invest during periods of market-wide volatility and the subsequent levels of returns. In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated on average more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions. While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments with 70% of transactions coming from existing borrowers. As transaction volumes slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies. These opportunities focused on achieving attractive risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 subindustries. As Kort noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations as spreads on first lien originations in the first quarter increased by approximately 20 basis points quarter-over-quarter, while leverage levels declined by nearly 0.5 turn of EBITDA. We ended the quarter with a portfolio of $29.5 billion at fair value, which was stable quarter-over-quarter as new fundings were offset by fair value changes and repayments. Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today's market. As part of this repayment activity, we exited 4 equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter. As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last 21 years. These latest 4 exits generated a mid-teens weighted average realized IRR. Importantly, over the last 10 years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of S&P 500 Index. As we've discussed previously, these minority equity investments are made selectively generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections represented approximately 7% of total interest and dividend income, which is below our historical 5-year average. As we've discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows. From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger well-performing companies, not reactive amendments. As with all investments, PIK investments are underwritten with the same discipline as cash pay loans with a strong focus on structure, leverage and exit protections. Importantly, over our 21-year history and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x. This MOIC is a modest premium to the 1.3x MOIC on all of our exited investments since our inception in 2004. We believe that this demonstrates that the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlates to future losses. On the contrary, it has supported our strong returns over the past 21 years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time. We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit. Specifically, when comparing realized investments exited over the past 2 years to their respective fair values 1 year prior to exit, we found that 99% of fully paid off U.S. debt investments were realized at valuations in line with or better than their valuations 1 year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health. The financial position of our portfolio companies remains solid with interest coverage stable sequentially and improving year-over-year and leverage levels broadly stable. Our investments remain well protected by substantial equity cushion beneath us with an aggregate loan-to-value ratio in the portfolio in the mid-40s percent range. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our nonaccruals at cost ended the quarter at 2.1%, a 30 basis point increase from prior quarter, but still well below our approximately 3% historical average since the global financial crisis and the BDC historical average of approximately 4% over the same time frame. Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter-over-quarter and well below our historical levels. Our overall risk ratings remain stable and the share of our portfolio companies in our higher risk categories, Grades 1 and 2 remain below our 5-year average and notably lower than our portfolio companies in Grade 4, which are outperforming companies. With this backdrop of our portfolio continuing to perform well, we would note that as we have said several times in the past, we would not be surprised to see credit quality and nonaccruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue. Shifting to the second quarter. As Kort noted earlier, market activity has remained slow as participants continue to work through price discovery. Through April 23, 2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels as measured by discussions have increased in recent weeks. Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter first lien loans. 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. While we are beginning to see deal flow pick up, we expect the slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline and portfolio management. Supported by a well-performing, diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. With that, operator, please open the line for questions. Operator: [Operator Instructions] We'll go first to Rick Shane with JPMorgan. Richard Shane: Look, it's obviously an interesting time. You've talked about the widening of spreads, and you've talked about better origination fees. I am curious when we look at some of the other elements of transaction structure, particularly things like covenants and control provisions if the market is readjusting as well. I think that when we sort of hear what's happened over the last couple of years, that's been one area of concern. And I'm curious if that's normalizing also. Kort Schnabel: Yes. Thanks for the question, Rick. This is Kort. I can jump in on that one and see if anyone else on the team wants to chime in. But I would say, yes, those other noneconomic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. So whether it's getting a financial covenant on companies that might have been previously on the margin of getting one, I would say that's tipping in our direction. I don't want to overstate it. Obviously, large-cap borrowers of high quality are still able to access deals from the private credit market cov-lite. But at the margin, it's moving in our direction as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. So yes, it feels like certainly a better time. Obviously, our market moves a little bit more slowly. So we'll continue to watch and see how things change from here. Richard Shane: Great. Kort, if I can just ask one quick follow-up to that. So I think what I'm hearing from you is in terms of all of deal structure mean reversion. It's not like we've swung from a wildly bullish market to a wildly bearish market in terms of wider spreads, et cetera. And given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves? Kort Schnabel: I think it's probably that -- I think it's probably a little bit of 2 things. I think it's one, supply of capital and the changes that we're seeing in the flows in the retail and wealth channel. But I think it's probably also just part of what Jim said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now with some of the geopolitical developments and slowing economic growth. And that probably is also influencing people's behavior when it comes to pricing new deals. So I think it's a little bit of both of those things. But in terms of your comments around reverting to the mean, I think that's correct. I don't think we're saying we're in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year, and it's good to see them widening. But like we said, 50 to 75 basis points of kind of total yield improvement between spread and fees doesn't indicate a blowing out of spreads. Operator: We go next now to Finian O'Shea with Wells Fargo Securities. Finian O'Shea: Just following up on that topic. And Jim, you talked about the benefits of investing in volatility. It does -- this sort of activity on the runway does sound like the higher quality kind of deal that would reprice down when the retail vehicles, say, eventually recover and that could pressure NOI more. So as you approach book and can raise capital, how aggressive do you want to be in terms of growing into this environment? James Miller: Yes. I'll start by saying -- thanks, Fin. But I'll start by saying that I don't think we're in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best to -- when we look -- when we're in a market like this to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly, there's some period of time that will pass and you will end up in scenarios where repricing will come back to the market. I think we're seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions, things like that. And we're doing a lot of that right now. So that is sort of how the market works. It's not as rapid as a public market. So you'll see insulation from those repricings to a certain extent, more in the private markets than in the public markets. So it's not as rapid. You don't -- because it's not as active, the volatility is not as high. You just see a little bit more stability in the bands on either side are tighter. And then as it relates to raising capital, I mean, we'll just evaluate that quarter-to-quarter, month-to-month as we see what's in the pipeline, the nature of the market at that point in time and where the stock price is. Finian O'Shea: It's helpful. A follow-up, Scott, I appreciate your comment on the bank side of the funding arena. I think it's fair to say you're a desirable counterparty, but you've also done your job in fighting those borrowing spreads down for yourselves, and we have seen banks sort of push back. I think there were a bunch of repricings upward in, say, '22, '23. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up? Scott Lem: Yes. Thanks, Fin. Yes, I do think that there's potential for that. We're not seeing it at the moment. As you saw during the quarter, we actually repriced one of our facilities down a little bit. So these things will ebb and flow. I think for us, if it does move that it's not going to be just for us, it will be for the whole sector. So if that's happening, that should mean that we should be able to put pressure on the asset side, too. So our ability to take increases on our liabilities should be commensurate with increases on the asset side, but it's too early to tell right now. Operator: We'll go next now to Arren Cyganovich at Truist Securities. Arren Cyganovich: The April to date trends were quite low. You highlighted that as borrowers are trying to adjust to the new spread and document environment. What -- you mentioned that things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Or do you think that this could actually potentially pick up as you have had these conversations in recent weeks? Kort Schnabel: Yes. Why don't I try to answer that one. It's obviously really hard to predict. And I probably don't want to venture a guess as to how we're going to see transaction activity evolve from here because it just has been very up and down. Obviously, you mentioned last year, kind of similar, things really slowed down with the tariff noise and then the second half was extremely busy, and we posted record volumes. It was really hard to see that coming when we were sitting here in April, May last year. I guess what I would say about the backlog or the -- I guess, the activity in the last few weeks since the end of the quarter, obviously, there's a little bit of a lag effect. So the stuff that we're committing to in the first few weeks of April has been sort of teed up and discussed through investment committee for weeks, if not months prior to that leading up to it. So a little bit of a lag effect. We're starting to see the comments we had in the prepared remarks referred to the fact that we're starting to see a pickup just in terms of our cadence of deals that we're seeing come through investment committee, I would say, in the last 3 to 4 weeks. So we're at the front end of seeing that pickup, and we did want to go out and make sure that people are aware we're seeing that. But whether it's sustained or not, I think, depends on a lot of different variables out there, maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully, but that's something that's just really hard to predict. So hopefully, that helps a little bit. Arren Cyganovich: Yes. No, absolutely. It's obviously something that's evolving rapidly. So I appreciate those comments. The other question I had was around the consultant that you hired, and I appreciate all the numbers and kind of fits with what you've been saying to us publicly in terms of the higher quality type of well-protected enterprise type of companies, some small risk from AI, some, I guess, medium risk as you kind of pushed -- pointed to that. I think the biggest question that people have, and this is going to take quite a while to unfold is these companies are doing well now. They're going to probably continue to do well in the near term. But at some point, they have to be refinanced and the equity markets have repriced software down, I don't know, 40% or so. What are some of the options if you have a private equity firm that maybe bought a company at 21x EBITDA and now they're trading at 13 and maybe not want to exit those and you probably don't want to hold on to those loans through the next cycle. So maybe you could just talk about the refinancing risk and some of the options that you'll have to use whenever you get to that kind of point of refinance whenever that occurs. Kort Schnabel: Yes, sure. So obviously, a fair amount to unpack on the software topic. I guess, just specifically to the refinancing risk, number one, there already is a market that exists currently despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or 2, where the market has been able to finance these transactions. They're -- for higher-quality borrowers without AI risk, they're coming in at obviously a little bit wider spreads, but they're getting done. We actually had one company in our portfolio that we didn't think was particularly risky, but sort of almost straddle the low to medium risk category, and we decided to not extend maturity and the lender group took us out of that name. So just as one case study of our ability to exit when there's a maturity if we're not willing to provide an extension. I guess, again, there's so many names in the book. It's hard to go kind of granular on a call like this. But I would just remind everyone that our loan to values on our software book as a whole still are very healthy and low relative to the broader book. So we took a lot of markdowns on the equity values on our software names in our portfolios and the LTV in our debt software book still stands in the low 40s, below the LTV of the total book. The growth rate, the EBITDA growth rate of our software companies remain consistent with the growth rate of the rest of the book at 9% year-over-year. And I guess I would also say we can spend more time if people want to on the consultant study and the different categories and risk ratings. We obviously have a lot of detail there, but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower risk category versus the higher and medium risk category. And the maturity profile actually for the higher and medium risk names is materially shorter. It's 2.4 years versus 3.9 on the total book. So the low-risk names are about 4.2 years. So when it comes to trying to mitigate technology risk, obviously, shorter maturities is better. And when -- I guess, to the final specific point of your question, when we get to the point of the maturity and if we're not willing to give an extension, then we're going to have a conversation with the owner of that business. If it's a financial sponsor, then we're going to, in most cases, probably request that a capital injection is made in order to pay down our debt and derisk us to get a maturity extension. Obviously, it's a case-by-case basis. It's hard to generalize, but we are not unfamiliar with having some difficult conversations with sponsors about needing to exit names. We've done it over a long period of time, and we feel confident we'll be able to do that again now. Operator: We'll go next now to John Hecht with Jefferies. John Hecht: Maybe a little bit of a tack on to the prior question. I really appreciate all the context you gave us around your software portfolio and understand you had a highly regarded third-party management consulting firm evaluate your exposures. I'm wondering, are you able to give us any, call it, sensitivity analysis around like impacts or disruptions to revenue as revenue models shift within the portfolio? And what that did to, call it, leverage calculations during that exercise? Kort Schnabel: I'm sorry. So just -- you're asking about how are the revenue trends changing within the different categories? John Hecht: When you analyzed sensitivity or exposure to AI disruption, did that include like an assessment of potential revenue model shifts for the software companies? And if so, can you give us any, call it, materiality of the revenue shift as the industry changes? Kort Schnabel: Sure. Yes, I think I get it. Why don't I just give a little bit of color around kind of the definitions of these 3 categories, and I was anticipating we might -- people might want to go into this because I think it will help with your question. The first thing I would say is we're not seeing any significant deterioration in the performance of these companies regardless of whether they're in the low or the medium risk. I should say in the high-risk category, again, it's only 0.3% of the entire portfolio at fair value. And it actually is only 3 names in that high-risk category. One of them is Pluralsight, which people know is not performing well. So within that high-risk category, there is performance issues. But in the medium risk and low-risk category, this portfolio as a whole continues to perform very, very strongly. So to the prior question, nothing is happening yet in the numbers. It's all about the look forward into the future that everybody is -- wants to talk about and is focused on. So maybe just on the definitions of these categories, the low-risk names are companies that were identified by the consultant and us, by the way, they validated the work that we've been doing ourselves rating these names for the past 6 months. But companies that have lots of layers of mitigants to AI risk. And we've talked about this before, whether it's system of record positioning, proprietary data, regulated end markets, network business models, all these things that insulate a company from being disrupted. That low-risk category, these companies have lots and lots of those mitigants. And what I would just kind of say is they don't have to do a lot to prevent disruption. And they actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book, much more poised to benefit from AI than to be disrupted. The medium risk category, which is 14% of the software portfolio or 3% of the total portfolio, what I would say about this category is there are still mitigants that exist, some of those mitigants in the low-risk category, and these companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive. So to your point, I don't know if -- it's not a revenue model change, but it's just making sure that they're evolving their product suite to incorporate AI so that they could stay competitive and ahead of the curve. And that is how I categorize those names. And really importantly, in this medium-risk category, we're not saying nor is the consultant saying there's going to be disruption. And actually, the study specifically states that many of these companies are well positioned to adapt within the time necessary to adapt. But it's just that there are less mitigants than the companies in the low-risk category. And in the high-risk category, the definition there is these companies really need to transform their business model in order to get -- in order to sort of survive the disruption risk. So I don't know if that helps with your question, John, or not. But hopefully, that color helps provide some more insight into the study that we can do. John Hecht: That helps a lot. I really appreciate that. Second question is, and you talked about the deal environment, how it was -- it's temporarily been impacted by all the global stuff. But that maybe you're seeing some early indications of a renormalization. We've been waiting for a long time for this wave of, call it, private equity, call it, portfolio maturities and how there's a lot of pressure to liquidate and return capital to LPs. I'm wondering what are the -- assuming this geopolitical stuff stabilizes, is there anything obstructing that, call it, wave of potential activity beyond this? And do you guys have an opinion about when and if that wave might occur? Kort Schnabel: It feels like all the ingredients are still in place if you take out the volatility that's going on in the world in the market right now. So that -- the pressure on the private equity firms to return capital is only increasing. The hold periods are lengthening. Again, the -- even though economic growth overall is slowing a little bit in the sectors that we invest in, growth is still really strong. So I really don't see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously, all the noise around software is likely to hamstring volume within that sector specifically. But other than that, I don't really see any other barriers. James Miller: Yes. And maybe I'll add, Kort. There is a fair amount of healthy discussion dialogue in the sectors and areas that are unaffected, either with geopolitical or software. There's -- so I think there's an optimism around deal flow. It's not optimal for a private equity firm to go bring their company to market in the midst of the most intense moments. But there's a lot of interest in migrating towards companies and having -- getting invested in companies that are sheltered from some of those issues. And I think there's a lot of optimism there. So I think those will lead the way probably. And then you'll see a more active broader market. If history repeats itself, that's what we should expect to see over the next few quarters. Operator: We'll go next now to Paul Johnson with KBW. Paul Johnson: Credit is still relatively strong today, but I was wondering, in relation to just the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus kind of credit-specific write-downs? James Miller: Yes, happy to take that. More than 2/3 of the marks we've had around 70% are mark-to-market related rather than credit related. So the significant majority of it is from mark-to-market. Paul Johnson: Got it. Appreciate that. And then you guys have done -- I mean, you've clearly done some extensive analysis on the book. You've provided a lot of transparency on top of that. But I was wondering if I could just ask kind of higher level on marks, more specifically on software investments. How do the discount rates, I guess, move quarter-to-quarter? And is the assumption that the fundamentals of these companies because it sounds like a lot of them still have very strong performance, is the fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lagged effect that we might expect to see throughout the year if spreads continue to widen out? James Miller: Yes. Look, I think it's -- I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It's probably a good moment in time just to express, and I said some of it in our prepared remarks, but we have an extraordinarily extensive valuation process that's worked for a really long period of time, and it's proven out to be quite effective. It's really a bottoms-up company-by-company analysis, right? And every company is distinctly different to answer that question. You have to go look at that company. You have to look at the comparables that are very specific to that company. And that's even within software. There are so many categories that exist within software. So broadly speaking, you want to draw a parallel to the broadly syndicated market or to sort of mark-to-market issues there, but it's not something that we should do. We should just look at them one-off. So there isn't a simple answer to that question. What I will say is there's clearly an impact on EV, and it was more pronounced in software, right, for the quarter. So the assumption is fair, but that EV doesn't just flow directly into mark-to-market on the loan, right? So -- and once again, the private market -- Kort said it, the private market is active and still active in software. And so there is some movement, but what we are looking at a lot in the analysis, which is bottoms up again, is what is the private market doing for these companies and where indications there. And so that is a better source of one of the more important variables, I should say, that go into the equation. Kort Schnabel: Yes. Maybe I'll just add one more bit of color to just further illustrate what Jim was talking about that it's not so simple. Obviously, spreads widen, that affects the value of the loans and marks should go down. But it's not that simple on a portfolio-wide basis because on each individual name, that might not occur. For instance, if we have a software company that has performed extremely well and delevered such that the pricing and the spread on that loan is actually somewhat wide relative to the risk, we don't mark that loan above par. We mark it at par. And so when spreads then widen, that loan can stay at par because the performance indicates that the risk is still -- that the pricing is still appropriate for the risk. So that loan might not get a markdown even in a spread widening environment, whereas another software name that is more levered would get a markdown in a spread widening environment. So just one example of like [ 50 ] of why it's -- you have to do it name by name. You can't do it on a portfolio-wide basis. But obviously, we're paying very close attention to each one of these names. We've got third parties in here validating all of our marks. And as Jim said, 70% or so of the write-downs were mark related. Paul Johnson: Got it. Appreciate that. Very good answer, very helpful answer. My last question here was just in terms of Cornerstone software that was marked lower this quarter. Medallia, which you are not an investor, not a lender to, but Medallia getting restructured this quarter. Pluralsight, which you have a very small investment, also that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies, what exactly do you think it is that those companies are lacking in terms of the challenges that they're going through today? I mean was it lack of a critical system of record, that sort of thing for these companies to be running into trouble today? Kort Schnabel: Yes, I appreciate the question. I really just think we always hesitate to dive into any individual name discussion and really start getting into trends or performance results on individual names. So I just don't think I'm going to necessarily go there and get into that level of detail. On any portfolio, when you have 600 and some names and 100 whatever, 130 software names, you're going to have some names that are going to underperform. We thankfully only have a few of them. Pluralsight has been underperforming for a while. People understand what's going on there. Some of the other names you mentioned, performance is actually fine, more of just mark-to-market issue based on what we're seeing in the market, how the market is viewing those kinds of credits. So not everything is what it seems. A lot of it isn't really performance related. But really, other than that, I just think it's not appropriate to dive into individual name discussions. Operator: We'll go next now to Brian McKenna with Citizens. Brian Mckenna: Great. So one more follow-up on your software exposure. How much of the $1 billion roughly of the more at-risk software investments are sponsor-backed? And then you also have the largest portfolio management platform in the industry. So I'm curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you can ultimately -- and that team ultimately drives better outcomes within this part of the portfolio. Kort Schnabel: Sure. so again, in that high-risk category, I think all of the names response are backed actually. There's only 3 names. We'll go back and check, but I believe they're all 3-year are sponsor backed. In terms of our portfolio management and our playbook, I'm glad you raised it, something that we're -- we think is differentiating for our platform. It's something we try to highlight a lot. We have over 50-person portfolio management and restructuring team. We've operated over 21 years here through lots of different cycles, including the [ GFCE ]. We are not afraid to have tough conversations with the owners of businesses as I already mentioned, I think once on this call before. Look, the first thing we look for is if there's a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. And if the other of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. Never what we want to do. It's never the plan, but we have the expertise and the team in place to own these companies, to be patient with them to provide additional capital to come out the other side and over our history, we've generated an enormous amount of gains by doing that. Just this year, we posted a big gain on portfolio company that was a mezzanine investment that we restructured and owned for 10 years and posted a big gain on it. So there's lots of examples like that over the course of time. so it might be hard to work if I take more involvement, but we absolutely have the expertise in place to do that. Brian Mckenna: Okay. Great. That's helpful. And then if you were to mark-to-market the portfolio today to reflect quarter-to-date trends, how much of the first quarter markdowns would be reversed? Unknown Executive: I'm not sure we're in a position to answer that one at this point in time. I think that requires a whole -- our valuation market process is extremely extensive, as you can imagine. So that would be a difficult one to address as a one-off. Kort Schnabel: Yes. And our market doesn't move as fast as the liquid market does either. So really tricky to say. Operator: We'll go next now to Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just another one 1 on the software loan side. It sounds like the private markets are still originating software loans. But for Ares in particular, Wonder if you could talk a little bit more about some of the more recently originated software loans? What sorts of economics and terms are you seeing and also roughly what's sort of like the average LTVs that you're underwriting at? Kort Schnabel: Yes, sure. I appreciate the question. There really have not been a lot there. They're just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are sort of larger kind of bellwether type software names where we can really point to and say this is where the market is. Smaller deals get price sometimes a little bit more indiscriminately if we have another lender who might just really want to own that name and can clear the deal. So I think it's really a hard question to answer. I guess I would probably say on the deals that we have seen clear the spread and fee increase on those transactions is a little bit wider than the 50 to 75 basis point average that we put out in our prepared remarks. And these are higher quality companies. It's not like -- if a software company has some kind of material question around the AI risk. That type of company is not really outraising capital right now. So these are the higher quality companies and it's a little bit wider than the average is probably what I would say. Kenneth Lee: Got you. Very helpful there. And then one follow-up, if I may, once again, just on the software side. Broadly across the portfolio there, how do you think about potential downside protection for software investments there, especially production that could potentially put a floor on recoveries. I'm thinking about, for example, intangible assets, any sorts of IP, I wonder if you could just give a little bit more color around that. Kort Schnabel: Yes. Look, again, so first of all, we are cash flow lenders in our core and always have been. And our underwriting thesis are always -- not always, but most of the time underpinned by very high degree of recurring revenues and predictability of cash flow conversion through lots of different cycles, as it pertains to software, technological cycles. And as we think about downside protection here, I think we'll just keep coming back to the fact that these companies have again, the vast majority. As we've been saying is now third parties have validated, vast majority of our companies have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues on these companies continues to be very, very high. The cash flow conversion is strong. The EBITDA growth is strong and the loan to value, again on our software book through for our debt investments is 41%. So even today after the markdowns we took on the equity values. So I think we rely on the significant amount of enterprise value cushion and the strategic value of these companies. to lots of different acquirers, either strategic acquirers or private equity acquirers for values that are well in excess of our debt if we needed to sell these companies to recover our principal. I don't know... Scott Lem: Maybe just one additional point. I don't know if this is what you're referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protected as part of our documentation. And I think we do a better job in private markets than the public markets do in that point. Operator: We'll go next now to Sean Paul Adams with B. Riley Securities. Sean-Paul Adams: While non-accruals are still relatively within low levels. It seems like there was a couple outsized markdowns, totaling almost $100 million for the quarter, and that was across just 2 names that aren't captured within the nonaccrual figure. I understand not wanting to delve into portfolio specific names. However, if your headline nonaccrual exposure metrics are capturing AI-based positions marked below $0.75 on the dollar, how are you trying to really express true exposure for mark-to-market risk in the next couple of quarters. Kort Schnabel: I was following you until the very end when the question -- the actual question came out there. So not sure exactly the point of the question. I get the -- one thing I'll say, and then maybe I'll have you rephrase it is, obviously, in volatile markets like we're in today, we see more dispersion of valuations and marks. And we see what the broadly syndicated market is doing to a bunch of names in the software space. And so that is going to be reflected in our remarks. We have to mark our portfolio based on where the comps and the market is saying, these debt positions are -- should be valued. That is -- that mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible. And so there certainly could be in a more volatile market, loan valuations that trend lower but where we still feel that the principal and interest is collectible because we're covered by enterprise value. And my guess is that, that would apply to the names that you're fighting, again, without getting into individual name discussions. So I don't know if that was specifically what you were asking, but I want to make sure that point does come across clearly. Sean-Paul Adams: Right. Right. So to refine the question, if you're having a position with an exposure of $350 million at cost, right, and you're having a $50 million difference quarter-over-quarter. 25% of the marks at debt, you're -- like it's not calling out the full risk to that name. Kort Schnabel: It's price -- it's valuing the loan at the level that the market today is pricing that loan at. So that's a fair value market. It is reflected in our NAV, which these markdowns, we saw NAV decline this quarter for the first time i-- in a pretty long time here at it's capital. So it's reflected in the NAV. It's reflected in the marks. It is not -- if we still deem that were covered by enterprise value, it is not reflected in the nonaccruals. Because I think the point that you're making and that is accurate. We reflected in the nonaccruals when we believe there is risk of impairment and that the full interest and principal is not collectible. Operator: We'll go next now to Peter Troisi with Barclays. Peter Troisi: I appreciate all the comments on the -- on funding on the call so far. I'm just wondering if you could talk a little bit more about the mix of funding. Just looking at the ratio of unsecured debt to total debt has been gradually declining. Over the past few quarters and ended March at about 59%. And obviously secured funding is always going to be cheaper for you, especially now given where BDC unsecured spreads are generally. But wondering if you had a target for the ratio of unsecured debt to total debt or maybe even to total assets and where we could expect that ratio to go over the next few quarters? Kort Schnabel: Sure. Peter, thanks for the question. I think we certainly have run at fairly high levels of funded unsecured debt in the past. I think even at the current level, you cite, it's still pretty healthy and relative to the rest of the sector. Certainly, early part of this year, post our deal, the spreads gapped out quite a bit in the unsecured market and we're fairly unattractive. Let's say, the past 2 weeks have been very productive. So certainly makes it a little better. But I think the point is we have a fair amount of liquidity on hand, and we like doing that on purpose to make sure we can be very opportunistic about our issuances. So yes, I think the way we look at it is that we've got to still do no issuance for the rest of the year and we know you have a maturity coming up, still puts us at majority funded and unsecured. So I'd say, probably our target is to make sure that a majority of our funded debt is unsecured. So it does -- I think some room to go there. But certainly, it's a more productive market than it has been. Operator: We'll go next now to Casey Alexander with Compass Point. Casey Alexander: I want to badge of honor for being the last question on the longest quarterly conference call in Ares Capital history. And I do have 2. First one is, in the last 6 years, we've heard multiple periods where all of a sudden spreads widen out, and it looked like it was going to be durable in better terms and better documentation. And then just immediately -- almost immediately competition came in and slammed the right back to where they were. So why should we believe that this cycle is different and that wider spreads and better terms can be a little bit more durable? Kort Schnabel: Jim and I can maybe tag team on that answer, Casey. I don't know that we're actually sitting here saying, pounding our chest saying that anybody should expect it to be more durable than in past cycles. I think we're just saying, we're seeing it widen. We are watching the factors as to what's creating the widening, which we talked about before. I think both flows within private credit and maybe risk premiums in the market. I think the other thing I should say is banks, bank behavior is also driving the widening, and we're seeing banks be less risk on in terms of new commitments. We've seen the broadly syndicated market widen out as well in terms of their implied spreads and the pricing in that market. So there's lots of different things they're creating it. Every period is different. I mean we did see wider spreads be pretty darn sustained when they started to wind down in mid-2022. And that lasted for 18 to 24 months. We saw spreads peak out at [ 650 to 700 ] and fees were 2 to 2.5 points, and that was pretty well sustained. If you're referring to. Yes, look, last year, the tariff taxing period, obviously, we garnered some premium economics through that. Right through the teeth of that period when everything was extremely uncertain and then things changed immediately when our government decided to do their announcement and things were right back on track. So really hard to predict, and I don't think we are actually predicting whether it's going to be sustained or not, I think time will tell. Casey Alexander: Okay. And my follow-on is Pluralsight, which you were involved in Medallia, which are not involved 2 of the highest profile sponsors within the space, and 2 very large deals. And I'm just curious, internally, how has that impacted your thinking in terms of sponsor selection and also sizing of investments going forward. Kort Schnabel: I think we have good relationships with both of those sponsors. I would say on Pluralsight, the way that, that deal resulted itself with the sponsor worked consensually with us to effectuate a restructuring and hand over the keys to the lender group. We were not the lead in that lender group. We didn't need those negotiations. We were a smaller holder but they certainly behaved ultimately in the way that, obviously, we would have liked to see them support the company with capital. But they did work consensually with us. And I don't think it's materially changing our view of whether we want to work with those sponsors or not. Not every deal is going to go on to plan. And we didn't really -- again, we didn't see any sort of nefarious behavior on the part of those sponsors. Operator: [Operator Instructions] we'll go next now to Robert Dodd with Raymond James. Robert Dodd: SOrry, Casey, but I guess, I'm after you. A question on the management consultant hiring them, and I apologize for [indiscernible], less about the output and more about the why. I mean to your point, A year ago, there was the tariff tantrum, et cetera, and you didn't hire a consultant at that point to evaluate embedded tariff risk in the portfolio or anything like that. You did it in-house with your in-house expertise, et cetera. So my question is, is it feels different this time, right? You've hired a consultant who might be agreeing with what you said, but was there a level of complexity increase and uncertainty about the capabilities of the in-house expertise or what motivated the decision to bring in that third party when that's not typically been the patent in the past when there's been some theme, be it tariffs or something else? Kort Schnabel: Yes, I love the question. So with tariffs, it's a math-based equation pretty much, and we were able to pretty quickly speak to all of our portfolio companies, asked them to break down their cost of goods sold from -- not all of our portfolio companies, but the ones that actually import products and break down the cost of goods sold and do a quick analysis as to the impact based on various tariff rates and come up with an exposure. And we put that number out with a clear explanation of how we did it. And people seem satisfied and agreed with the analysis. And by the way, then the tariff thing went away, like we said in the prior question. This is a much more complicated situation. It's becoming apparent to us. And it's not exactly numbers based, is what I would say. Because the numbers continue to be very, very strong in the software portfolio and yet the concern really from the outside world, not from the inside world, continues to be present. Even as we continue to talk about why we feel good about the software portfolio and the underwriting we've done. And I guess I'll just remind people a couple of things. So first, 2 years ago, right around now, we had a public Investor Day in New York and [indiscernible] anybody who wanted to show up and we had a whole slide we had on AI risk and how it might impact the software business and how we felt good about our underwriting and how we've always underwritten again, mitigating against technology risk. That was 2 years ago. And that wasn't even the beginning of when we started thinking about that topic. And as we said in the prepared remarks, it was middle of last year that we started to think about bringing in a consultant because we just felt like as we kept talking about the underwriting we've done in the mitigants, the fact that it wasn't a map-based equation and the fact that everybody was looking forward and not backward meant that we should probably bring in a third party to help us validate our opinions. And obviously, we feel good about our opinions, but like any, I think, prudent investment manager, you want to test your own thesis. And you want to figure out, do we have some bias potentially because we are the ones that have been underwriting this portfolio, and we wanted to bring in a third party not only just to help satisfy the external world, but also to test around thesis. And we started viewing those parties and decided on the consultant at the end of last year. We actually had in our prepared remarks in the October earnings call, a lot of comments about AI. Again, that didn't seem to satisfy people because in February, it seemed like the world woke up and everybody thought all of a sudden, there was going to be massive explosions in software, in private credit portfolio. So I think just the continued concern by the external world, the lack of math-based formulas and the desire to test our own thesis were the reasons why we went and did it this time. And hopefully, it's helping give people a little more color around the situation. Scott Lem: And maybe to clarify -- if you don't mind, I'm just going to clarify a little -- maybe just the response a little bit. We often engage third parties to help us evaluate transactions, right, and sectors and white paper, new spaces, and we utilize third-party work from consultants like this as part of our diligence, as part of our ongoing review of portfolio companies, too. So that's not -- that part of it is not new. I think what -- the scale of this and maybe the disclosure or the outbound to the community is what's new here. But I do think we -- this is a part of our work in a regular way, too. So it's a combination of the circumstances correlate out. And just this is a good practice for us and we do it often. Robert Dodd: Got it. Yes. I can understand it's part of the processes. It's not normally a footnote in the presentation. On the -- kind of a follow-up sort of related. I mean, you said the medium risk assets have about 2.4, I think 2.5-year maturity left. I mean from the review, did they -- you get a takeaway on like what's the time line for these AI risks if they happen, right? If a medium business does get impacted and it's in the next 9 months than the maturity being a year plus, a lot further out is 1 thing. If it's 5-year horizons, then most of these assets are going to be matured and possibly gone before it ever becomes an issue. So can you give us any color on like what the outputs were on like where the maturities are versus what time horizon the risks actually really exist on. Kort Schnabel: Yes. It's a good question, Robert. I guess the more detail -- the more facts we disclosed, the more questions that come up when you talk about the 2.4-year maturity. Let me tell you, there was not really a strong part of the study or conclusion that delved into the amount of time that it would take it, I'm sure, obviously, that's very company-specific and not something that can necessarily be calculated. Again, this is a very complex topic. And I think it's a great question, but not something that I'm really in a position to answer other than to say that the consultants did report, I already said it once, but I'll say it again, the medium risk company, they felt the medium-risk companies in our portfolio do have ample time to execute on their own AI strategy in order to avoid being disrupted. So that was the specific commentary, but I didn't really talk about the actual specific length of time. Operator: And ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kort Schnabel for any closing remarks. Kort Schnabel: Great. No closing remarks. Thanks, everybody, for joining today and for your support and engagement, and we look forward to connecting with you on our next quarterly call. Operator: Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, a replay of the call will be available approximately 1 hour after the end of today's call through May 28, 2026 at 5 p.m. Eastern Time. You can access the replay for domestic callers by dialing 1 (800) 727-6189 and international callers 1 (402) 220-2671. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital website. Again, thanks for joining us, everyone, and we wish you all a great day.