Good afternoon and welcome to Ares Capital Corporation’s Third Quarter Ended September 30, 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday, November 2, 2017. I will now turn the conference call over to Mr. John Stilmar of Investor Relations. Mr. Stilmar, the floor is yours, sir.

Great. Thank you, Mike and good afternoon everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. 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 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 core earnings per share or core EPS, which is a non-GAAP financial measure as defined by the SEC Regulation G. Core EPS is the net per share increase or decrease in stockholders’ equity resulting from operations, less professional fees and other costs related to the acquisition of American Capital, realized and unrealized gains and losses, any capital gains, incentive fees attributable to such realized and unrealized gains and losses and any income taxes related to such realized gains and losses. A reconciliation of core EPS to the net per share increase or decrease in stockholders’ equity resulting from operations to the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call by going to the company’s website. The company believes that core EPS provides useful information to investors regarding financial performance, because it is one method the company uses to measure its financial condition and results of operations. Certain information discussed in this presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified and accordingly, the company makes no representations or warranties with respect of this information. As a reminder, the company’s third quarter ended September 30, 2017 earnings presentation is available on the company’s website at www.arescapitalcorp.com by clicking on the Q3 ‘17 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation’s earnings release and 10-Q are also available on the company’s website. I will now turn the call over to Mr. Kipp deVeer, Ares Capital Corporation’s Chief Executive Officer.

Thanks a lot, John. Good afternoon and thanks to everyone for being with us today. I am joined by most of our management team including our President, Michael Smith; our CFO, Penni Roll and other members of the finance, investment and Investor Relations teams. You will hear from both Penni and Michael later in the call. Let me start by reviewing our third quarter results in investment activity, including an update on our continued progress with the American Capital portfolio. This morning, we reported third quarter core earnings of $0.36 per share, a $0.02 improvement from the $0.34 per share we reported in the second quarter. The improved earnings were driven by higher yields on our investment portfolio due to the resolution of the SSLP and the early returns from our ongoing portfolio rotation effort. In addition to these core earnings, we generated another quarter of net realized gains, which totaled an additional $0.08 per share. When taken together, our core earnings plus our net realized gains were $0.44 per share, which is a measure that we believe, is the best proxy to evaluate our dividend. They are again well in excess of our historical regularly quarterly dividend of $0.38 per share. The ability to generate earnings from a variety of sources highlights the diversity of our business and our ability to deliver earnings even in aggressive market conditions and in times of increased competition and lower yields, we believe our strategy enables us to take advantage of a strong liquid market environment by monetizing investments at gains. Consistent with prior quarter levels, we announced our fourth quarter dividend of $0.38 per share. Now, turning to some commentary on the markets. Our feeling is that pricing on new deals is generally stabilized, but underwriting terms are fairly aggressive driven by…

Thanks, Kipp. As Kipp stated, our basic and diluted core earnings per share were $0.36 for the third quarter of 2017 as compared to $0.34 for the second quarter of 2017 and $0.43 for the third quarter of 2016. Our basic and diluted GAAP earnings per share for the third quarter of 2017 were $0.33, including net losses for the quarter of $0.03 per share and a reduction for American Capital related expenses of $0.01 per share. This compared to GAAP net income of $0.42 per share for the second quarter of 2017, which was reduced by American Capital related expenses of $0.03 per share and GAAP net income of $0.35 per share for the third quarter of 2016, which was reduced by American Capital related expenses of $0.01 per share. As of September 30, 2017, our investment portfolio totaled $11.5 billion of fair value and we had total assets of $12 billion. Also, at the end of the third quarter, the weighted average yield on our debt and other income producing securities at amortized cost increased to 9.6% and the weighted average yield on total investments at amortized cost increased to 8.5% as compared to 9.4% and 8.2% respectively at June 30, 2017. The total portfolio yield increased since the end of the second quarter primarily due to the rotation out of lower and non-yielding investments, including the SSLP and certain American Capital equity investments into higher yielding investments as Kipp previously mentioned. We generated $35 million in net realized gains during the third quarter representing the 13th straight quarter we have reported net realized gains on investments. In total, we have reported net realized and unrealized losses on investments in foreign currency transactions for the third quarter of $14 million. Our current dividend remains well supported by our…

Thanks, Penni. I will spend a few minutes reviewing our third quarter investment activity and portfolio performance and then provide a quick update on post quarter end activity and backlog and pipeline. During the third quarter, we used our scale, market coverage, and extensive relationships to originate a strong level of new investments, mostly in senior first lien loans. Excluding the loans, assets we purchased from SSLP, we need 40 new commitments totaling $1.5 billion and had gross fundings of $1.4 billion. As Kipp mentioned earlier, approximately half of the new commitments were to existing borrowers of ARCC and its affiliates. Taking a closer look at our activity, you will see that we funded companies that we feel are operating in less cyclical sectors such as business services, food and beverage, and healthcare services. To give you an idea of the breadth of our transactions, we committed to companies with EBITDA ranging from $14 million on the low end to $170 million on the high end with an weighted average EBITDA of $55 million. ARCC has 325 portfolio companies with an average investment size of $35 million per portfolio company providing us with significant room for growth within our existing borrowers. Providing capital to incumbent borrowers allows us to selectively deploy capital to our best companies and we believe this has been an important contributor to our long-term track record and credit outperformance. For example, in the third quarter, we were the lead administrative agent and lead arranger and book runner for a $429 million first lien term loan and administrative agent and investor and approximately $95 million of junior capital to support Genstar’s growth strategy for accruing. The company is a leading provider of real estate and facility management software serving customers across several industry verticals, including retail, telecom,…

Thanks a lot, Michael. So, we feel we had a productive third quarter with improving core earnings, increase portfolio yields, strong net realized gains and significant positive initiatives executed with respect to our balance sheet and our funding costs. We are making excellent progress against our goals of enhancing earnings through portfolio optimization with the resolution of the SSLP and the strong execution to-date on the American Capital portfolio. Going forward, we are confident in our ability to reinvest lower yielding assets into new investments that are higher yielding and we believe we can enhance earnings further with additional utilization of our 30% non-qualifying basket. To highlight this point, following the resolution of the SSLP, we now have very significant unused capacity in our 30% basket that provides us with meaningful operating flexibility which we have not had in quite a while. Our plan is to continue to use this capacity wisely by investing in higher returning investments that we feel are appropriate for ARCC and aligned with the core competencies that we have developed in our credit group here at Ares. To-date, both SDLP and Ivy Hill have been strong contributors and we feel both can continue to grow. However, we also continue to evaluate new investments and new credit strategies, where we can generate higher long-term risk adjusted returns. Many of these opportunities we believe already resident at Ares and we are working on ways to leverage the high-caliber credit platform of our external manager. We believe Ares Capital is well-positioned today and we remain focused on delivering strong returns for our shareholders over the long-term without taking what we feel is undue risk. We believe we are well capitalized and we have multiple opportunities to grow our core earnings using our existing capital base. That concludes our prepared remarks. Mike, would you open the line please for questions?

Yes, sir. [Operator Instructions] The first question we have will come from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Thank you so much for taking my questions. I will just ask two. First, Kipp, you were kind enough to mention that utilization of your 30% basket served as an opportunity to drive greater portfolio yield or likely income over time. Give us an example of what you believe might be an adequate or worthwhile use of that available capacity understanding that given your size an SSLP arrangement, the SDLP etcetera is already set and that you have additional capacity to grow that? Are there others outside of the SDLP that you find worthwhile in the current environment?

Yes, thanks for your question, Jonathan. Look, we have got a lot of things in the lab. I think what you will hear from us is in regards to the future is we have heard in the past, we want to make sure the things that we are doing in our non-qualifying asset basket where we do have more flexibility kind of stay on the fairways how we think about it. So, we would like to bring some of the things that we are particularly good out here at Ares that may not have made their way into the BDC perhaps into the BDC. So, couple of examples of that, things that we think that we do well here that could be suitable for the company, our investments into an asset-based lending franchise. We have a very high-quality one here that we have developed privately and we are hopeful that we may find an ability to access that opportunity. Another interesting business that we have been building here at Ares is around the private ABS and securitization market, where quite a lot of capital is left banks and bank trading desks and are coming to alternative credit firms like Ares. Much like our core sponsor and non-sponsored lending businesses, it’s relying on origination, it’s relying on finding new deal flow, but it’s a bit of a twist on what we have done historically, but again we want to pursue higher return opportunities only where we are really investing in things that we know that we understand that we have our arms around and feel manageable, but exciting for the company.

Got it. That’s very helpful. Thank you. And then just a common theme that I think every institutional investors likely sits in the back of their mind, gets to – we see math today and understand that there are some drivers right, NAV can fall to the extent that credits a problem, which clearly is not and I think actually rise that you have gains that you have had. But also fall, yes, the dividend is higher than what we will consider to be just true EPS. And I noticed a small decline in the comment of you actually protecting NAV by not doing stupid investments is well-suited. But one question folks want to better understand is in the event the current environment persists they see effectively a couple – you choose to protect NAV, does the dividend level at all in anyway, shape or form concern you given that earnings are slightly below the dividend today? And more importantly, do you believe that there are other ways aside from a dividend reduction or perhaps significant capital being deployed, are there other ways to ensure that, that dividend in and of itself can and always will be stable at the current adjacent level?

Yes. I mean, I think we have tried to express them a high level of conviction and confidence in the current dividend level which we absolutely would reaffirm sitting here today on the call. We again spent most of our prepared remarks trying to communicate the path that we laid out for folks in January as to how we intended to spend 2017, which was again rotating a portfolio of roughly $3 billion of assets into higher yielding new deals. We are doing that. We are on the path. We are very confident in the plan. We are quite certain. And once it’s resolved, our core earnings will again exceed our dividend, but for the time being we just have to recall what we set ourselves up for in 2017 which was buying a portfolio effectively of low yielding investments and equity positions, which we thought we could monetize and generate gains. And just to reiterate it, we continue to generate gains when we take our core earnings and the earnings that we have generated from those gains both in this quarter and in past quarters, we have more than sufficient earnings to pay our dividend, which is why we have high confidence in the dividend.

The track record speaks for itself, folks understand it and clearly that there is at a point I believe we don’t expect some level of spread widening based on the abilities of some others to actually underwrite properly, so bit more normalcy return to the market at some point. So thank you for taking my questions.

Yes, of course perhaps Jon, one of these days I hope you are right, but thanks for the questions.

Thank you.

The next question we have will come from John Hecht of Jefferies.

Thanks guys very much. Good morning.

Good morning, John.

Or I guess good afternoon. The one question just clarification for some of the prepared remarks, what’s the remaining – you guys said the figure, but I didn’t catch it the remaining value of the ACAS assets that you want to reposition. And then if you handy what’s the – like the value, current fair value that was relative to the cost?

Yes, I am just going back here – and this is the number from right, we laid out in the prepared remarks $875 million in non-core former American capital assets that yields 7.6% and I have to go back and look actually John at kind of cost versus fair value, I don’t have that in front of me.

Okay. And then if you get that we can talk offline and get that, I would make sure it’s positive number for book value potential, but nothing meaningful, but the second question I have is the – and we talked about this on the last quarter call the opportunity to take some of the SSLP assets and reposition them into the SDLP. Any update on that, do those have to be refinanced in order to move into the SDLP or how do we think about the opportunity to ramp up the SDLP?

Yes. Look I mean there are definitely opportunities for SDLP, they do need to refinanced strength, so typically a company has to have some reason to do a “new deal” right which often incurs new fees to the company. So, that’s the barrier maybe to just moving those over so to speak. But look they are like any other portfolio company of our 300 plus ongoing discussions with them about their future and all of that and SDLP is a solution that we certainly pitch a lot of our existing companies as well as many of the new borrowers we are talking to, but really not a big update there.

Okay. And final question I know this is more topical than any specific in detail we have, but I just figured since this has been evolving and you probably had some internal discussions. Do you guys have any opinions and how the type of tax reform we are starting to see laid out would impact you? Have you talked to your other general constituents and your borrowers to determine what type of intermediate and long-term impacts we should see?

No, I mean not really, it’s obviously all new and just I think people are watching on TV at least I was before you joined the earnings call. I mean look my understanding is that corporate tax rates are going to go down I hear is good for business. My guess is good for our portfolio companies as well. There is an exemption is my understanding in there that allows small businesses to completely benefit from tax deduction at a greater level with the idea that it helps main street or smaller businesses, but beyond that, we have not had deep ongoing conversations with folks in the portfolio or the CEOs of portfolio companies to get a feel, but I have to imagine it’s a long-term positive.

Understood. Thanks very much, guys. Take care.

Yes. Thanks a lot, John.

Next we have Rick Shane of JPMorgan.

Hey, guys. Thanks for taking my question. I know you don’t love to go into pipeline stuff in too much detail, but given that this is so much about reinvestment at the moment. I’d love to go through some numbers and get a little bit of an outlook. Commitments quarter-to-date are up substantially year-over-year, the pipeline which we see is sort of likely to close is up 50% year-over-year, but the backlog is down 60% year-over-year that would suggest that you guys are positioned to have a big origination quarter in the fourth quarter, but a lot more uncertainty as we head into 2018. Is that the right way to be looking at this?

Yes, it’s hard to be scientific right. I mean, we try to make that determination of what’s backlog and what’s pipeline, right. I mean, backlog really is generally signed up and more or less ready to go subject to either final due diligence or documentation or whatever it maybe pipeline or the things that we think are higher probability opportunities, but again I think if we went through our existing pipeline of things that are in due diligence, it would literally be 50 or 60 different things that we are working on here, right, and we have 100 people. So, we are constantly shifting that backlog and pipeline. I put them together. I have a very difficult time comparing and contrasting the two just because they – pipeline can accelerate, backlog can fall away for an issue. I just look at the end of Q3 where we sit now, our backlog and pipeline was about $1.4 billion I think is what we said compared to a year ago Q3 ‘16 it’s down a little bit from $1.7 billion, I think that’s us being probably a bit more selective on kind of what we are working on, but it is up from the end of Q2. So, we feel fine about the amount of things that we are seeing in the level of deal flow. And again, the key is that we are able to onboard new deals at yields, but also with ROE that we think is commensurate with what we have got in the portfolio today certainly and in the past and look, the weighted average yield on that backlog and pipeline is around 9% and that’s not taking into account fees and the potential for prepayments upon resolution or equity gains or other things. So, we are happy with where the backlog and pipeline sits today. Look, we are not worried about what’s ahead of us. We have been able to execute in what’s been the challenging market all year and I think we will look forward feeling just as optimistic.

Got it. I have to admit, I had to go back and look at the footnotes to differentiate backlog and pipeline myself. The other question and Jonathan touched upon this and I think it’s I will try to hit it maybe in a more direct way. You are in a unique situation which is that you are likely to have increased liquidity over the next year as you – continue to rotate out of the ACAS portfolio, you have identified that at least for now unless there is a dislocation in the market, the incremental returns, the spreads are not necessarily what you would think is the best risk adjusted pricing. Given the stocks trading near book, it’s actually slightly below book at this point. Does it make sense to add as a tool to the toolbox, a buyback just so that you are not in a situation where you are overcapitalized, because the history is sound capital management here?

Yes. Look to your first point, we actually are finding enough to do from a risk reward perspective. I mean, I do think the market is challenging, but I tried to reinforce in some of the prepared comments that despite that we are finding enough to do here from the existing portfolio and from some of the new things that we are seeing. But to answer your question at the end, we have an existing buyback program in place and we have had one for years and our intention is as we have said in the past to put it in place to use it if we think it’s a valuable tool. I did notice the stock traded off a bit more today. It’s traded off for 5 or 6 days now in a row confusing us again, but that being said, it can be a pretty effective tool we think to generate value for shareholders.

Yes, Kipp, I guess the observation I would make is that I know at this point necessarily see buyback is a way to reward shareholders in terms of stock performance, but I actually see it potentially more as a capital management tool given the dynamics that you are facing in the industry?

Yes, I couldn’t agree more.

Thanks guys.

Yes, thanks a lot, Rick.

Next we have Ryan Lynch of KBW.

Good afternoon. I wanted to touch on your capital structuring fees, I would think in today’s environment being very competitive that certainty of close which you guys can provide, would it be as important when guys can maybe tap the broadly syndicated loan market, but you guys have been able to generate very good capital structure and fees. I mean, the first quarter was kind of dipped down in the $12 million, but the last two quarters, you guys have been able to generate about $30 million of capital structuring fees the last couple of quarters. So, I just wanted to kind of get your outlook on you guys foresee the ability to still be able to generate significant capital structure and fees going forward even in this competitive environment?

I am glad you noticed. We do. We tend to earn higher fees than most others, because we actually lead our deals. Other people say that they do, but they don’t. So hopefully that’s continued evidence of kind of the way that we come at the market some of our advantages frankly in terms of our approach. This quarter saw higher fees sometimes in this case just because of mix, right, so the more new deals, new portfolio companies you are engaged with the higher your fees tend to be, sometimes if you are just adding on or kind of redoing or upsizing an existing deal you don’t take a full fee on all the capital. So, my guess is there is a little bit of the bump this quarter, it’s just the percentage of new is higher than it was last quarter, but look I am, I think that our advantage is truly leading deals and writing big checks and people need commitments. It remains real in the circumstances and the situations where we are choosing to get involved in today’s market. So, I do think its evidence of perhaps some things that we maybe doing differently than others.

Okay. And then if we move to the liability side of your balance sheet looking into 2018, you all have about $1 billion of debt coming due some convertible notes and then an unsecured bond later in 2018. You guys just did a very low cost, very attractive $750 million bond this year. Do you guys foresee this bond, did you guys just issue basically being the replacement to the unsecured debt that’s coming due in 2018 and that the additional pay-down of those unsecured debt issuances that are coming due in 2018 will then be paid down or you guys would draw from your revolver to repay those or do you guys foresee doing more unsecured bond issuances in 2018 to replace those bonds that are coming due?

Yes, I will let Penni take this. I am not sure we know right, we think we took advantage of an attractive market for us to issue some longer term fixed rate liabilities, but one debt issuance doesn’t necessarily replace another, I mean I look forward and I will turn it over to Penni going to maturities, I will just say that to us seems very easy to resolve on multiple fronts to your point either using excess liquidity, drawing under the revolver, doing another deal etcetera. So, I mean, Penni feel free to jump in if you have anything to add…

Yes, I really look at the August issuance we just did, which we were able to tap the market at a time where we could get extremely efficient pricing. What we have always tried to do is to go to the market when we have the right market to issue into and we would like to have the flexibility to do that. So, I feel like the deal we just did basically de-risks any refinancings into 2018. Clearly, we have a lot of capacity now on our revolving lines of credit. And I said in the prepared remarks we look at basically that flexibility of just repaying the January 2018 convert maturities, which are small at $270 million with our revolving lines of credit. And then when we look into ‘18 it is nice to be in the market. So at least on an annual basis we get the right opportunity to do that and I think we will continue as we have done in the past to watch the markets and look at times to issue debt at a time where it is the right pricing, but also considers having a continued maturity ladder that’s very prudent that we built over time.

Okay. Does that make sense? And then one final question, while I know it’s not a large portion of your portfolio, but you guys actually be in the venture lending space. Can you just provide what was the thought process behind getting out of that asset class?

Sure. Look we got into the venture finance business years ago we are a much smaller company. I think that we assessed that the long-term opportunity to grow that business into something that would really be additive and meaningful at our company today at its scale was going to be difficult. Right. The portfolio in total had 200 plus, $200 millionish of invested capital. The loans are small. They are complicated. They require a lot of oversight and they just became something that was for us too challenging to monitor in terms of as a percentage of fair value, but the good news was not if we exit a small portion of our business, we are able to sell most of the portfolio obviously as you saw in the press release to Hercules that we have got a lot of respect for and we thank obviously for collaborating with us on that transaction and we will just retain a few investments there in a smaller team as we exit the asset class, but nothing more than that, just too difficult to scale, too complicated, too far away from the core of what we are doing here these days.

Okay, that’s all for me. Thanks for taking my questions.

Yes, thanks Ryan.

Next we have Doug Mewhirter of SunTrust.

Hi, good afternoon. Two smaller questions and then one bigger picture question. My two smaller questions which are unrelated from each other, first, was there any tailwind from LIBOR in the uptick, a sequential uptick in the yield?

Yes, I don’t have an exact measurement of maybe what it added, but the benefit of LIBOR, look, if it continues to go up, I think we will finally start to see in the earnings in Q4 and into 2018. So, just as a reminder most of our assets at LIBOR floor is at 1, this is probably the first full quarter where we have seen benefit of LIBOR above 1. So, we are hopeful that there is some tailwinds at our back vis-à-vis for the rate increases I guess we will hear about a new Fed governor and all that to where we go from here, but I think so.

Great. Thanks. My second smaller question is I noticed you did a fairly sizable loan, second lien loan to what appears to be an E&P company. I thought that was interesting given sort of the industry got shell-shocked during the last downturn and people stayed pretty far away, including you and I was just kind of surprised to see that in there. Is there anything I guess special about the deal or the company or the basin which attracted you to it?

Yes. We think we actually I think made two new investments in the E&P space. Look, we have said in past quarters we have a team focused on the oil and gas space. We think we think we are finding some select really interesting opportunities in the oil and gas space, commodity price deflation, inflation kind of not expecting in the future certainly what we saw over the last 5 years. I think broadly the energy and oil and gas space is still quite a problem that will need to be resolved by a lot of folks, but yes, we found two deals where we saw significant merit relative to two specific company opportunities operating in really good geographies with really high-quality assets, so happy about both.

Okay, great. My last I guess bigger picture question, we have heard the last couple of quarters about too much capital in the private debt space chasing too few deals, which has definitely ramped up the competitive pressure, but I have also seen a tremendous amount of capital raising in the private equity space with which to me would create the feel for more deals to sort of rebalance that supply demand situation. Do you see it the same way or is sort of the private debt side still sort of overwhelming what’s coming into the private equity side?

I think there is a balance and maybe a natural extension between the fundraising in both. I mean, there has clearly been a lot of money raised in private equity. I think that will certainly continue to help provide good deal flow in our sponsor business, which is obviously our largest business here. But now, I think they are sort of symbiotic. The reality is investors are looking for alternative assets in a world where I think they view yields in traditional fixed income to be uninspiring and they see a lot of volatility in the public equity markets.

Great, thanks. That’s all my questions.

Next, we have Chris York of JMP Securities.

Good afternoon, guys and thanks for taking my questions. So, maybe Kipp or Michael, what was the weighted average cash yield of the loan portfolios to Hercules?

About 12%.

12%.

12%, okay. And then Kipp, could you maybe expand on your comments and potentially you share some observations on the threat of new entrants affecting your business given that your size and scale for the average size of your obligor is generally thought to provide some barriers to entry?

Yes. I mean look in the prepared remarks I think we tried to lay out some of the competitive advantages that we feel that we have vis-à-vis some of the new entrants. So, in any investment business you like this or like private equity, you are kind of selling your capital, but we think ours is a frankly more attractive capital relative to a lot of new entrants. We have got a strong platform. We have got really longstanding relationships in the industry. We have got a brand name here in a company that I think means something and stands for something and tested through cycles. Just a long track record of reliability, I think for our clients and those are all things that a lot of the new guys are working to build today. So, I think our history in the market and the longstanding franchise that we have here just continues to allow us to compete quite effectively with those folks and all the money in direct lending I would say is not created equal. So, I don’t really have any additional thoughts beyond that.

Makes sense, okay. And then maybe staying on competition, so I presume we are aware some of the chatter on leverage loan guidance and the potential for some supervisors of the banks to relax that. How do you think that would affect your business?

I don’t know. I mean, I think there has been the belief that all of direct lending is really been built on the regulatory scrutiny on banks. I would tell you that most of the large bank that we know quite well and a whole host of levels would tell you just that their businesses have changed as they have consolidated and just middle-market leverage finance and particularly making middle-market loans to small companies and holding them on their balance sheet is not part of their business anymore. They are not staff to do that. They don’t have interest in doing it. They would in fact win to us to get access to the asset class than they would rebuild those teams in the phase of regulatory relief. So, that’s not something that keeps us up at night.

Good. Last one from me, Michael, you commented in the prepared remarks and then the deck has the weighted average EBITDA growth. Now, is this generally your base case in underwriting for the portfolio over the life of the loan and I clearly recognized that mobile will be a bit different?

Yes, each will be different, but that’s generally in the entire portfolio.

Got it. That’s helpful. That’s it from me. Thanks.

Next is Leslie Vandegrift of Raymond James.

Hi, good afternoon. Quick question on the venture loan portfolio, you’ve given a lot of color on it so far but the $40 million left in the portfolio, what made you guys decide to keep that and was not – weren’t you using the SBIC license you have for that venture loan, will that be used for other loans now?

I am sorry I missed the first question. I heard what’s left there is $40 million at fair value, but why did we keep it? Sorry, I guess other people heard it and I didn’t, but we retained some of these investments, because we think that they have reasonably good option value, obviously to some upside relative to where we sit today. So, certainly any time you go out and look to sell assets, it’s easier to sell them all, but I will just say we though there was an upside in what we have retained. So we will keep around a smaller team and obviously focus on those remaining names and hopefully be able to generate some upside there.

Okay. And then the second part was on the SBIC license, originally isn’t that the portfolio you are using that in. So, will you use it for something else now?

Yes. I mean, look it’s an asset to the company, it’s something that we will look to repurpose. It certainly has a particular use, but it’s very, very small and I think it’s just under consideration as to how we handle that going forward. I don’t have the conclusion for you today.

Okay. And then on the ACAS rotation, missed the number writing it down on how much was rotated out this past quarter and then of the non-core assets that you want to give it up, how much is left as of September 30?

So, Leslie, it’s Penni. If you look at the ACAS portfolio at September 30 and there is more detail in our earnings slide deck on Page 25, if you want to dig into it a little more later, but we basically have a $1.8 billion portfolio at fair value today that has embedded in it a $94 million net unrealized appreciation. So, the portfolio and the aggregate has been written up. If you look at the $875 million at fair value that’s targeted for rotation that’s earnings 7.6% that Kipp mentioned, that unrealized appreciation today is sitting primarily in those assets, because they are primarily write-up some more junior securities. So, that $94 million, a good bit of it is already embedded in the $875 million.

Okay. Alright, perfect. Thank you.

Next, we have Terry Ma of Barclays.

Hey, just wanted to follow-up on a 30% bucket, you had mentioned asset-based lending and also private ABS market investments. Can you give us a sense of the type of returns you can generate in those businesses relative to the other 30% investments like the SDLP?

You might be a little bit premature, Terry. I mean, they are all over the map right. I mean, when you are investing in asset-based lending franchises, you have seen with some of the competition in the BDC space is done, you can buy a company that has embedded leverage, you can make direct asset level investments, which of course would have lower returns that’s sort of hard to generalize without actually coming back to people to tell them kind of what our intentions are and what our strategy is. And look in private ABS, it depends on which risk you are taking, if you are at the top of the capital structure you might make 7 or 8 and if you are the equity in an ABS transaction, you could probably make 13 to 15, but it also depends on where you are in the cycle and the type of assets. So, it’s really hard to generalize.

Got it. And then in terms of the desire to get into other types of 30% investment, is it more just a diversification thing or is there kind of like an inability to ramp the SDLP quickly or to size?

No, we are very happy with the ramp of SDLP. And as I mentioned in the prepared remarks, we think that will be a continued strong contributor to how we deploy assets in that non-qualifying asset basket. We think it will be a driver of our earnings for sure going forward. To the point on diversification, yes, sure, it’s good. I mean, we love the idea of having more diversity. We like the idea of taking what’s today a larger company into some other assets that we haven’t explored that we know that we understand well here at Ares that we think would offer strong returns for our shareholders. That’s really always been the litmus test and I think we will remain on what we are focused on.

Got it. And in terms of steady state how big the SDLP can get, is it like 10% in the portfolio, 15%, will it ever get as big as the SSLP?

I am not sure. I mean I think that the program is working really well. Part of what we are doing there is investigating the ability to scale that either with AIG and with Varagon or with other clients. With our current half, I think our investment today is under $500 million. We have got a lot of runway with the existing structure. I think how big it gets in time – time will just have to tell. Obviously, we can try to make it as big as we want to, but it obviously has to be an attractive product for our customers and our borrowers to use and of course that’s market dependence. So, I think we are happy with where we are at. We are going to keep track and we think it all continue to grow from here and we will just continue to reevaluate as the time moves along.

Okay, great. That’s it from me. Thanks, guys.

Thanks.

Well, we have time for two more questions today. And the next question will come from Christopher Testa of National Securities.

Hi, good afternoon. Thanks for taking my questions. It’s been several quarters since you guys received exempt of relief from the SEC to co-invest across the Ares platform, just curious if you have a ballpark estimate as to how much co-investment has been done since you received that exemption?

I don’t have that handy. We can probably go dig it up and maybe some of what you will hear about is what we are doing broadly at Ares in credit can come up on our Ares management earnings call tomorrow. So maybe give that a listen and we will go back and maybe pull some numbers together, but I don’t have that handy here, Chris, but thanks for your question.

Okay, no problem. And obviously, you guys have been selling out of the CLO equity which has been a really hot market to say the least that you acquired from ACAS, just wondering as of late if you are – if kind of the appetite from the traditional purchasers of those has tapered off at all given that spreads have compressed so much or if people still can’t seem to get enough of that asset class?

No, it hasn’t. There seems to be a continued sort of voracious appetite for all sorts of CLO equity. So, again I don’t think we are going to be long-term owners as we mentioned in the past of those assets. And to say that the sales that you have seen are likely to continue for all the reasons that we have discussed in the past.

Got it. And last one for me just the more high-level question in the past call it 5, 6 months or so, have you seen an acceleration in sort of broadly syndicated structure creeping into the more traditional upper middle-market?

Yes.

Okay. And would you like just can you give us an example just how bad that’s gotten, has it really accelerated a lot the past quarter, is it just more of a smoke-free, just any detail there you could give us as to just how frothy that’s gotten will be appreciated?

Yes. I think it’s sort of – it’s a slow creep that kind of comes and goes relative to how sentiment is in the market vis-à-vis a deal that comes to market. Larger deals certainly are more prone to be covenant-light. So, the barrier has always been that $50 million of EBITDA. We started to see it more and more in the 30s, in the 40s in terms of requests from folks and we just typically say no for smaller companies. We have been able to avoid a lot of the covenant-light nuisance just because of the incumbency and the scale that we have in terms of our portfolio. But I would characterize it to your description is a bit of creep, I think when there is less, I don’t know frothiness in all markets right, that’s likely to subside typically creeps in very early in the cycle and then with some dislocation kind of tends to go back away, but no, it’s definitely a concern. It’s something that we are as I mentioned in the prepared remarks very cautious about. So, I hope that answers the question.

Yes, that’s all from me. Thank you.

Thanks.

And our last question will come from Scott Sher of LMJ Capital.

Can you just clarify the loan that went down to non-accrual, what was the size of it and what’s the nature of the business and what’s the prospect of recovery?

Sure, Scott. We added one non-accrual, it’s in a company, where we have got a loan to a business called [indiscernible] owner and probably know it, it’s a branded consumer products business, they sell umbrellas and socks and gloves and all that kind of stuff. I think the prospects there are quite good. I mean, we have got two very, very strong sponsors that own the company in Freeman Spogli and Invest Corp that have a tremendous amount of equity invested below us. So, it’s on non-accrual despite the fact that it continues to make interest payments to us. So, I think we are just being conservative. We have seen deterioration in performance. It’s one of those companies that has experienced changing consumer buying patterns. Certainly, I am sure you do and I do by gloves and umbrellas and socks in a very different way now than we did 10 years ago. And I think the company is transitioning their business model and has been transitioning their business model to deal with the changing phase of retail, but I am optimistic it will get further down.

Thank you very much.

Yes. You’re welcome.