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Ares Capital (NASDAQ:ARCC)
Q2 2021 Earnings Call
Jul 28, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon. Welcome to the Ares Capital Corporation's second quarter ended June 30, 2021 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded on Wednesday, July 28, 2021. I will now turn the call over to Mr.

John Stilmar, managing director of Ares Investor Relations.

John Stilmar -- Managing Director of Investor Relations

Thank you, and good afternoon. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings.

Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings or core EPS. 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.

A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information in this conference call and the accompanying slide presentation, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranty with respect to this information.

The company's second quarter ended June 30, 2021, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the second quarter 2021 Earnings Presentation link on the homepage of the Investor Resources section of the website. Ares Capital Corporation's earnings release and 10-Q are also available on our company's website. I will now turn the call over to Mr. Kipp DeVeer, Ares Capital Corporation's chief executive officer.

Kipp DeVeer -- Chief Executive Officer

Thanks, John. Hello, everyone, and thank you for joining the call today. I'm here with our co-presidents, Michael Smith and Mitch Goldstein; our chief financial officer, Penni Roll; and several other members of the management team. I want to start by highlighting our strong second-quarter results, and then I'll provide some thoughts on the current market and the company's positioning.

This morning, we reported second-quarter core earnings of $0.53 per share, up from $0.43 per share last quarter and $0.39 per share a year ago. This was the second-highest core earnings result in the company's history. Our leading market position drove record new commitments of $4.9 billion for the quarter, which in turn led to robust interest and fee income. Our second-quarter GAAP earnings per share of $1.09 increased from $0.87 last quarter and $0.65 a year ago.

Very good portfolio company performance and favorable market conditions drove our investment valuations higher, and we witnessed both realized and unrealized gains. As a result of these positive factors, our net asset value grew to a new record of $18.16 per share. Given the higher level of earnings, we've been generating consistently and our positive outlook for the business, we increased our quarterly dividend from $0.40 per share to $0.41 per share. Let me now provide a high-level overview of current market conditions and how it's influencing our investment activity.

As we have all witnessed, the economy is in the midst of a strong recovery and this is driving higher levels of transaction activity in our market. Announced private equity deal activity in the U.S. is on track for the highest level in over a decade and corporate M&A activity remains robust as companies are focusing on expanding or adding new verticals to complement their existing business models. Greater than 70% of our new commitments in the second quarter were driven by corporate or sponsored M&A.

Today, Ares Capital is the largest BDC and our company, as you know, is managed by one of the largest global direct lending platforms in the market today. We are witnessing more and more companies increasingly seeking the flexibility of our capital, the certainty of closing we can provide, and the long-term partnership approach that we can deliver with our financing solutions. We believe the sound approach we delivered throughout the pandemic and the recovery seems to be paying substantial rewards for further enhancing our already strong market presence. The other trend that's supporting our growth is the widening of our market opportunity as the private markets continue to scale.

We are seeing larger companies increasingly seek direct lenders with scale, particularly those like ARCC that can commit to meaningful hold sizes and transactions. While these larger borrowers are valuing the speed, benefits, and certainty of close that we can provide compared to a bank or syndicate-led solution, 2020 showed that having a consistent, well-capitalized capital provider like us as a financing partner is of great value. We believe that many of our competitors were not open for business during the pandemic and market participants took notice that we were very active throughout this period. This has enabled us to gain share as the private markets continue to grow on the upper end as an alternative to traditional market providers.

As a result, we're continuing to source attractive relative value investments in both the middle and upper ends of our market. As we commit larger amounts to larger companies in our book, the weighted average EBITDA of our originations for the quarter was 30% higher than the prior two-year average and our overall portfolio weighted average EBITDA doubled over the past three years to an average of $146 million. While larger companies have a greater impact on the dollar value of our portfolio, we continue to maintain our interest in the core middle market where we have focused most of our investing activities over the years. By a number of companies, our portfolio is well-distributed in terms of size of borrower with the majority of our loans going to companies with EBITDA below $100 million.

Remaining active within the core middle market allows us to form relationships with a broad spectrum of companies and create significant positions of incumbency. This incumbency in smaller companies allows future origination opportunities with these portfolio companies as they grow. We believe these advantages are delivering further market share gains for us as new commitments for the past three quarters are 30% higher than Ares Capital's historical record for annual deployment. We believe this increasing activity is not only driven by the scale of the capital solutions that we provide, but also by our differentiated sourcing opportunities that come from 17 years of cultivating relationships with borrowers and sponsors.

In the second quarter, incumbency positions and existing portfolio companies accounted for 63% of the number of commitments made during the quarter, and repeat sponsors accounted for 95% of our sponsor-backed investments that we made. As these advantages continue, we are able to increase both the quantity and the size of our investment opportunities. In the second quarter, we saw a 31% increase in our number of transaction opportunities and a 47% increase in the estimated aggregate dollar amount of deal activity when compared to the quarterly average for the past five years. The growing breadth of our pipeline allows us to see a larger and more diverse set of investment opportunities, which ultimately allows us to be highly selective.

We continue to finance only approximately 5% of the new deals we review. Ultimately, we believe our competitive advantages and careful credit selection result in a highly diversified and attractively positioned portfolio. As Michael will discuss later in more detail, our portfolio continues to perform well with weighted average EBITDA growth of 12% over the last 12 months, lower nonaccruals at cost, reduced watch list names, and continued valuation improvements. Let me now turn the call over to Penni to provide more details on second-quarter results and some other updates on our financing activities.

Penni Roll -- Chief Financial Officer

Thanks, Kipp. Good afternoon, everyone. Our core earnings per share of $0.53 the second quarter of 2021 were driven by a strong level of capital structuring service fees from record new originations in our capital markets activities as well as higher recurring interest and dividend income driven by our net portfolio growth in the past quarter. Our GAAP earnings per share was $1.09 for the second quarter of 2021, including net realized gains on investments of $0.14 and net unrealized gains of $0.56.

The net unrealized gains primarily reflect performance improvement and higher company valuations in certain of our equity investments as well as continued tightening of credit spreads on our loan book relative to the end of the previous quarter. At June 30, 2021, our stockholders' equity grew to $8.1 billion, resulting in a record net asset value per share of $18.16, an increase of 4% from a quarter ago and nearly 15% since the second quarter of 2020. Our total portfolio at fair value at the end of the quarter was $17.1 billion, and we had total assets of $18 billion. As of June 30, 2021, the weighted average yield on our debt and other income-producing securities at amortized cost was 8.8% and the weighted average yield on total investments at amortized cost was 7.7%, as compared to 8.9% and 7.9%, respectively, at March 31, 2021.

At June 30, 2021, 79% of our total portfolio at fair value was in floating-rate investments. Additionally, excluding our investment in the SDLP certificates, 88% of the remaining floating-rate investments had an average LIBOR floor of approximately 1%, which is well above today's current one- and three-month LIBOR rates. Shifting to our capitalization and liquidity, we had an active quarter focused on raising additional debt, extending debt maturities, and reducing our cost of debt. During the quarter, we took advantage of a continued historically low rate environment and issuer-friendly conditions in the investment-grade market.

We issued $850 million of unsecured notes maturing in June 2028, which was a record low coupon for us or any BDC for a seven-year issuance. We also had the opportunity to reopen our existing July 2025 notes and issued an additional $500 million at a premium which resulted in an effective yield to maturity of just over 2% on the incremental amount. Besides the unsecured note issuances during the quarter, we also upsized our revolving credit facility by $269 million to $4.2 billion, upsized our SMBC funding facility by $75 million to $800 million, along with pushing out its maturity to May 2026. And lastly, we priced our BNP funding facility down to LIBOR plus 180 basis points.

Considering these activities, we now have committed secured revolving facilities of $6.9 billion with a fully funded weighted average borrowing rate of LIBOR plus 180 basis points and a weighted average remaining maturity of nearly four and a half years. We ended the quarter with nearly $5.7 billion of total available liquidity and a debt-to-equity ratio net of available cash of $325 million of 1.12 times up from 1.02 times at the end of the first quarter. While our leverage ratio will vary over time depending on activity levels, we will continue to work to operate within our stated target leverage range of 0.9 to 1.25. Overall, we continue to believe our strong balance sheet and financial position remains one of our most competitive advantages and enables us to actively invest in all market environments.

Before I conclude, the increased third-quarter dividend of $0.41 per share is payable on September 30, 2021, to stockholders of record on September 15, 2021. I will now turn the call over to Michael to walk through our investment activities for the quarter.

Michael Smith -- Co-President

Thanks, Penni. I'm going to spend a few minutes providing more detail on our investment activity and portfolio performance for the second quarter of 2021 and also provide an update on post-quarter-end activity and our backlog and pipeline. During the second quarter, our team originated a record $4.9 billion of new investment commitments to a diverse set of high-quality companies across 19 distinct industries. As Kipp mentioned earlier, the continued growth in our platform has allowed us to expand our addressable market opportunity and be a meaningful solutions provider to a broader array of companies.

We continue to focus on the highest-quality credits, which positions us well to finance what we believe are the most attractive transactions and companies. While the market remains strong, we find the market very investable and believe the strategic advantages around our size and scale have enabled us to find compelling investments with strong risk-adjusted returns. Shifting to our portfolio. We continue to construct a highly diversified portfolio, which currently has 365 distinct portfolio companies and an average hold position at fair value of only 0.3%.

The portfolio is well-diversified across industries, sponsor, and asset classes. Additionally, we believe the portfolio is attractive as it relates to the enterprise value of the companies we provide financing with a weighted average loan to value of approximately 47% at the end of the second quarter. Portfolio performance continues to be strong, benefiting from the many competitive advantages of the platform and from our upmarket focus. In the second quarter, our portfolio companies with greater than $100 million of EBITDA had growth rates that were more than three times those of companies with EBITDA below $50 million.

It is also worth noting that the weighted average EBITDA growth for our four largest industries, inclusive of software and software services, healthcare services, commercial and professional services, and durables, which represents about half of the portfolio for fair value had EBITDA growth rates 35% higher than the portfolio weighted average growth rate in aggregate. This underscores our approach of overweighting large companies in what we believe are the most attractively positioned industries and sectors of the economy is further enhancing our performance. While the weighted average portfolio grade at fair value remained effectively unchanged last quarter at 3.0. The number of companies that have been graded as either one or two declined by 40% compared to the levels experienced a year ago.

Furthermore, our nonaccrual rate at cost declined to 2.9% from 3.3% last quarter and is nearing pre-pandemic levels. The number of companies on nonaccrual status remained flat with one removal and one addition. Before concluding with the discussion of our pipeline and backlog, I wanted to quickly comment on this quarter's increase in NAV which was driven by both strong portfolio performance and net appreciation in investment values. A majority of the quarter's portfolio appreciation was supported by improved valuation of our equity investments.

The source of this appreciation highlights a key differentiator for the company versus many other BDCs and direct lending funds in the market in terms of portfolio construction. We believe a modest equity co-investment portfolio and attractively structured preferred equity positions, along with our expertise of taking equity positions in certain restructurings, all help drive significant value creation for our shareholders alongside our long and stable debt portfolio. I will finish with a brief update on our post-quarter and investment activity and pipeline. From July 1st through July 22, 2021, we made new investment commitments totaling $470 million, of which $430 million were funded.

We exited or we repaid on $267 million of investment commitments, generating approximately $31 million of net realized gains on exit. As of July 22, our backlog and pipeline stood at roughly $1.4 billion and $110 million, respectively. Our backlog contains investments that are subject to approvals and documentations and may not close or we may sell a portion of these investments post-closing. I will now turn the call back over to Kipp for some closing remarks.

Kipp DeVeer -- Chief Executive Officer

Thanks a lot, Michael. In our view, the company is performing well on all levels. We're generating robust earnings, making attractive new investments with compelling risk-adjusted returns, experiencing improving credit performance, and enjoying growth in our net asset value. The increase in our quarterly dividend is a reflection of the optimism that we have around our earnings power and the strength of our competitive position in the market.

And while we acknowledge that the COVID-19 pandemic and the challenges that it brought are not completely over. We have a positive view for 2021 and believe the current environment provides a great backdrop for Ares Capital and for our shareholders. That concludes our prepared remarks. We're happy to open the line for questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question today will come from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch -- KBW -- Analyst

Hey. Good afternoon, and thanks for taking my questions. First one I have is regarding the dividend. You guys had the $0.01 dividend increase that you guys announced this quarter, which was really nice to see and kind of showed the earnings power you guys project going forward.

But as I look going forward, you guys ended 2020 with some pretty large spillover income. And then as I look at the result in 2021, you guys had some very large gains, which is obviously good. Now a lot of those are unrealized and I know there's a difference between tax and GAAP accounting. But it looks like you guys may be in a position at some point rolling into late 2021 or 2022 to potentially need to pay out a meaningful amount of maybe special or supplemental dividends down the road.

Does that thought process sound correct? And also on that, what is your philosophy in terms of potentially paying out special or supplemental dividends because different BDCs have taken different approaches they're paying out large ones or paying out smaller ones over time or do you need a kind of a core and supplemental? Just thoughts around that would be helpful.

Kipp DeVeer -- Chief Executive Officer

Yes. Hey, Ryan. Good afternoon. It's Kipp.

So I was going to kick this to Penni just for the technical point because there's some reasonably complicated accounting and 40 Act stuff that, frankly, she's better at describing than I am. And then perhaps I'll come back on and just give you some thoughts more broadly about the dividend increase and thinking around specials. But, Penni, do you want to answer Ryan's first question directly, if you would?

Penni Roll -- Chief Financial Officer

Yes. Sure. So, Ryan, on the just technical point, as a we can spill over enough earnings kind of as long as it doesn't exceed our current dividend payout level, which if you do a run rate on the $0.41 is $1.64 and we ended last year with $1.04. I agree with your comment that we have a lot of additional things happening that would indicate that we could be growing the spillover this year.

But I think we still have room between roughly the $1.04 we spilled over last year and the run rate we're currently paying. So I think we have some flexibility. So from a technical point of view, I don't think you'll see us in a position this year where we are required to pay something out like others have stated that they need to do to make sure they have met the RIC requirements. So we won't be in a position to, I guess, as you said, be required to pay something.

Still have some cushion there. So maybe with that, Kipp, I'll turn it back to you for thinking about how we look at it more philosophically.

Kipp DeVeer -- Chief Executive Officer

Yes. Thanks, Penni. That's great. So, Ryan, obviously, with the dividend increase, you can imagine this was front of mind at our board meeting and our discussion among the management team.

I mean, I think, look, the dividend increase for us was exactly as you laid out here. We've, over the last however many quarters, but it's a lot consistently outearned the dividend on a core basis. And we've always insisted on the core earnings, for the most part, meeting or exceeding the dividend on a quarterly basis. And your comment about optimism that that's likely to continue is reasonable, right, which is obviously why we're trying to show the trajectory of a regular dividend increase this quarter for the first time and obviously, are hopeful for the future.

Personally, I think that the management team has taken the tack that looking at specials is probably best done around tax cleanup at year-end, and the philosophy has typically been to retain some spillover income and I'll acknowledge that it's pretty significant at this point. So we don't have a real determination today, but we do have a determination to take a look at that at year end. In terms of philosophy, we've tended to pay specials out if we choose to pay them over a longer period of time just to reward shareholders that have been with us for a while, but obviously, also to continue to keep shareholders interested in the company rather than sort of provide a onetime reward. So I think it's something for the future, not as much for today.

But the great news is we're materially out earning the dividend on both the core and certainly on a realized sort of distributable income basis, and it's something that we're going to continue to work through.

Ryan Lynch -- KBW -- Analyst

OK. Penni, I appreciate the technical commentary, and, Kipp, I appreciate the philosophical commentary on the dividend. The other question -- my follow-up question I had was probably directed at you Penni. Over the last several years and really even the last several quarters, you guys have really continued to boost your liability structure to really probably having a best-in-class structure.

And a lot of that has come with very attractive unsecured debt offerings. It feels like the whole entire investment-grade BDC market is also coming into its own, really over the last several years and really specifically the last several quarters. So I'm just curious, though, I saw you guys increased and upsized some of your credit facilities recently. I was just wondering what was the thought process behind that? Because at some point, it seems like, given the strength of the investment-grade market for the BDC space and your guys' ability to tap it, it would seem that it would make sense that maybe downside some of those because there is a cost of those unfunded commitments and given kind of how your guys access to the IG market, it seems like it may make sense to reduce those a little bit because you got drop flexibility, but just wanted to hear your thoughts on that kind of philosophy.

Penni Roll -- Chief Financial Officer

Yes. I mean, that's a great question. I mean, if you look at just where we are growing to maybe part of it is keeping a little perspective of the size of our balance sheet. Because if you go back a year ago, we were about $15 billion, and today, we're $18 billion with growth prospects particularly as we've just seen the amount of opportunities we've had this year for investing in our space.

So we do have the need to have, I guess, flexible financing. And we think having available capital in the context of revolvers is important because you want the flexibility of funding deals repaying deals, if we raise additional capital, we want immediate use of proceeds. So we're not sitting in cash. So that revolver allows us to have that flexibility around the movement of money in and out of the balance sheet around our investing activities.

So the question then of if you look at where we are today on pricing. I think I mentioned in my comments that if you look at the aggregate committed revolving capital, the funding rate is LIBOR plus 180 on a weighted average basis, which is still pretty compelling in the context of where LIBOR is today but does arguably compete with the low end of where you can invest or issue in the investment-grade market. So we think it's important to have both. We are happy for the opportunity to lower our cost of term debt funding as we've taken advantage of the markets.

We know those ebb and flow over time. But right now, I think the reason why we've seen us issue more in that space is to take advantage of that historically low rate environment that we've all been experiencing. I think it's healthy for our balance sheet to have the latter maturities that we built but we want the financial flexibility with the revolvers in a growing balance sheet. And the reality is, it doesn't cost a lot to carry that unfunded commitment.

We're probably paying somewhere between 50 basis points in the unfunded. So I kind of look at that as a low price to have that flexibility that we've grown to enjoy around the way we built the capital structure.

Ryan Lynch -- KBW -- Analyst

OK. I understood. Appreciate the time today, and really nice quarter, guys.

Kipp DeVeer -- Chief Executive Officer

Thanks, Ryan.

Operator

Our next question will come from Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi. Good morning, Kipp. About the capital raising in the space, a lot of that now is coming from players that are both larger and perhaps, more importantly, ramping up into direct lending. Can you talk about what that's done on the large market side of origination? And then does it push you to respond with more aggressive fundraising yourself on the Ares platform?

Kipp DeVeer -- Chief Executive Officer

I mean, I'll take the second piece of it. We're not doing anything any differently in terms of capital raising. We've got a fair amount of dry powder across the platform in the U.S., whether it's the BDC or elsewhere. So I don't think we'll be making any big changes in terms of how we've raised capital historically going forward.

Look, I mean, there's, I think, one player in particular as folks have read the press that have been raising a tremendous amount of capital outside of the public BDC channel, but targeting our markets. It's had a modestly negative impact on the market in terms of pressure on spreads, pressure on terms, and that kind of stuff. But for us, it's been at the margin. There's a little bit of concern, but I say that all the while having just obviously created the most significant originations quarter in the company's history.

So I'm not all that concerned. I really still believe that we have the best set of relationships out there, the longest track record in the public BDC space, and just a great competitive position from which to play into. We look at a lot of deal flow across a lot of industries, some of it sponsored some not, and we built real capabilities there just to make sure that at times where we see a competitive pressure like that, we have the ability to walk away from deals that aren't fits for us because we have so much deal flow coming concurrently and behind it. And that's always been the philosophy.

So for us, it's just continuing to really diversify and build that origination platform. So we can drive strong originations and despite some of the pressures this quarter and maybe last quarter from that potential competitor, I think you're referring to we've had two really good origination quarters, and the company is growing, the earnings are growing. And obviously, we were able to push a dividend increase as well this quarter, which is great. So it's not of a high level of concern at this point.

But we'll acknowledge that.

Mitch Goldstein -- Chief Financial Officer

Hey, Kipp. It's Mitch. Finian, the only thing I would add is that we've mentioned this over the years is one of the advantages we've developed over the last decade is in any given quarter, 40% to 60-plus percent of our gross originations comes from our existing book of business, and I think that was sort of the case this quarter. And so that tends to be our least competitive dynamics.

And so when that quantum of originations comes from our existing book of business, you sort of, as Kipp said, can be more selective when the competitive factors tend to get increased versus a more selected market?

Kipp DeVeer -- Chief Executive Officer

Yes. Thanks. Mitch, that's a great point.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Yes. That's helpful. Just a follow-up on Ivy Hill pretty similar consistent asset side, but it looks like you've had a couple of vehicles roll off in the past few quarters. When you say there's anything to see there in terms of the size of Ivy Hill underneath that is in your -- or I guess, how would you describe your -- what's happening with your strategy there, your growth plans there?

Kipp DeVeer -- Chief Executive Officer

Yes. I mean, I say this over and over again when we get asked about Ivy Hill and Mitch's very close so he can chime in, too. But Ivy Hill has been an unbelievably successful portfolio company of ours and one that we've continued to grow since its inception. So from time to time, you'll see some vehicles roll off, but they tend to come with ramps of new vehicles.

So our goal there is for continued growth, continued investment in that company because the money we've invested there has obviously generated great returns. In this quarter, we did sell some assets to them as they're looking to ramp new things. And obviously, the dividend that I think was increased, it was either last quarter or the quarter before is stable from the last quarter this year, and we wouldn't expect any changes. I mean, we continue to be excited about investing in that company, and they're generating great returns.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Great. Thank you.

Kipp DeVeer -- Chief Executive Officer

Yes. Thanks for the questions.

Operator

Our next question will come from John Hecht with Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Good morning, guys, and thanks for -- or congratulations on another good quarter. First question is just kind of basic modeling question. And I know the capital structuring fees can vary quite a bit depending on kind of end-market activity. But Kipp, based on your comments, it seems -- and also Mike's comments about the pipeline support, it seems like the deal environment is pretty strong.

So is it reasonable to think that that line item will be elevated relative to, call it, recent averages for at least a quarter or two?

Kipp DeVeer -- Chief Executive Officer

Yes. I mean, it's not all -- hey, John. By the way, thanks for the question. It's not all that out of line.

Right? So, I mean, the majority of the new fees, the fees coming in are linked to obviously new fees that were originations. This quarter did like some in the past, experienced a couple of larger transactions where maybe there isn't a hold along with our participation on a larger deal. But look, I mean, it's right around 2% of new commitments, which is about the average if you look back historically. So as you think about modeling, while the number is high, I think the number is high, mostly driven by the fact that the originations number was so significant.

John Hecht -- Jefferies -- Analyst

OK. That's helpful. And then second, a bit of a higher-level question. Kipp, over the last several years, you guys have been talking about kind of the opportunity set given that the banks were -- the average high-yield size offering might have been increasing and so forth.

So maybe kind of you were able to capture some incremental market share there. You seem pretty constructive in your comments about the deal flow now on the opportunity side. I'm wondering, has anything changed? Are the banks doing anything, either more or less aggressively that would change that kind of thesis, and/or are there other markets, maybe larger loan sizes that you guys can go after kind of how is the opportunity set evolved over the past year and a half or so.

Kipp DeVeer -- Chief Executive Officer

Yes. I mean, I think with COVID, I wouldn't say the banks have materially changed their behavior. I think what has happened is larger and larger pools of assets, obviously, ones that we manage and ones that some of our competitors manage have taken market share. Right? And these larger club deals at the upper end of the middle market or I guess what historically was the upper end of the middle market just seemed to be more frequent.

Right? And the borrowers that are looking for solutions are finding them valuable. Certainly, they're finding them unbelievably valuable during sort of that COVID and slow recovery from COVID period where doing deal with a few partners and you knew that it would get done well really was valuable. And the point on the competition, I think we're seeing more and more -- we're seeing -- we're gaining market share as one of the leading players because we can obviously lead deals, we can structure them. We've got the capacity for substantial holds the quality competitors that we see in the space are doing the same thing.

And I think they're gaining market share, too, and that's coming probably at the expense of the smaller syndicated transactions, which are at the upper end of our mark. And I think the more capital we have, the less we're bringing in smaller players perhaps for small holds in the deals that we're leading. So I think this period is another one where the large direct lenders with strong teams, strong originations, and good track records, we're attracting investor capital and they're becoming increasingly preferred partners for private equity and for companies generally.

John Hecht -- Jefferies -- Analyst

OK. Great. Appreciate the color. Thanks, guys.

Kipp DeVeer -- Chief Executive Officer

Thanks, John.

Operator

Our next question will come from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities LLC -- Analyst

Great. Good afternoon, everyone. Great to see the momentum here. I guess first question, just want to touch on the mix of unitranche.

And obviously, that's grown pretty meaningfully over the past few years, currently, I think, 22% of the investment portfolio. And so it feels like that's been an attractive opportunity, but love to maybe just drill down around how you guys are thinking about the longer-term mix of unitranche, whether you're targeting a certain level or how much you'd be comfortable with? And just in terms of that growth, how much has been a function of just, I guess, what you're seeing in the broader market, maybe with larger borrowers? Or is it just simply that's where there's been more attractive risk rewards more recently?

Kipp DeVeer -- Chief Executive Officer

Thanks, Devin. Yes. It's a good question. I think some of it plays off the comments that I gave to John's question, which is the the large unitranche, I think, is an incredibly attractive product, right, for borrowers and that it's easy to use and can be done with one or two or three people depending on how large it is.

And it's definitely kind of seen an increase in uptake, I think partially because of COVID to the comments I made earlier, but I think that there's a lasting trend here where the large direct lenders have the ability to do larger and larger unitranches either on their own or together. To be honest, as a percentage of the mix, I don't think we've really talked about that much as a team. I mean, we view them generally as being some of the best risk/reward assets at the company frankly, in the market. So we're going to continue to be happy seeing that as a substantial source of kind of new originations.

But no big thoughts other than that, but I think it's something that's increasingly taking market share to your question and to John's question.

Devin Ryan -- JMP Securities LLC -- Analyst

Yes. OK. That's helpful, Kipp. And then A follow-up, I guess, John touched on in his question as well, but thinking about the capital structuring fees.

In the fourth quarter, of last year, I think you have $3.8 billion of gross commitments and you had $93 million of capital structuring fees. And then this past quarter, you have $4.8 billion, an incremental $1 billion of commitments, still $93 million kind of the same level of capital starting fee. So trying to think about, like, is there fee compression occurring there? Or just more broadly, how we should think about kind of the relationship moving forward, if at all, but just trying to figure out from a modeling perspective to the extent we see strong activity.

Kipp DeVeer -- Chief Executive Officer

Yes. So, I mean, the quick answer is the percentage of kind of pure structuring and capital markets fees, i.e., not commitment fees were higher in the fourth quarter of last year. Right? We were engaged in a couple -- and this is not dollars, but in terms of mix, we're engaged in a couple of transactions that are relative to the overall origination size, where we simply didn't end up with a final hold in the name. That was a little bit less true this quarter, i.e., the originations that we're holding are higher, right, the transactions where we're acting in a more capital markets-oriented way were lesser because we're finding some pretty nice companies to invest in.

So, I mean, I think generally, when you guys are modeling, if you look historically, 2% of originations, I think, is always a pretty good place to anchor your numbers. But it's just going to move around depending on that mix. And if you think about Q4 versus Q4 of last year versus this quarter, it's just a slightly different mix.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. OK. That makes sense. I'll leave it there.

Thank you very much.

Kipp DeVeer -- Chief Executive Officer

Yes. No. You're welcome. Thanks for the question.

Operator

Our next question will come from Terry Ma with Barclays. Please go ahead.

Terry Ma -- Barclays Capital, Inc. -- Analyst

Hey. Good afternoon. Can you maybe just talk about the SDLP and the strategy for that vehicle going forward? The size has been more or less the same over the last year? So is that about as big as it's going to get? Or is there a longer-term strategy there?

Kipp DeVeer -- Chief Executive Officer

No. I think we're -- Terry, thanks for the question. I think we're very open to continuing to grow it. Remember, we don't -- we can't tell our companies kind of how to do things.

And obviously, doing a deal with SDLP, which obviously is a joint venture requires a borrower wanting to do something not just with Ares Capital, but with obviously some other counterparties that are involved in that joint venture. I wouldn't really take anything away from it. Right? Sometimes it has more uptake in a quarter than at other times. But we still have a lot of confidence in the program.

We like it as an investment and still view our partners there as valuable. So no change in our thoughts or outlook around SDLP.

Terry Ma -- Barclays Capital, Inc. -- Analyst

Got it. Is there -- I guess, is it being done in a way? Or is there anything different compared to the legacy program, the SDLP -- or the SSLP, I'm sorry?

Kipp DeVeer -- Chief Executive Officer

Is there happening with legacy SSLP? No.

Terry Ma -- Barclays Capital, Inc. -- Analyst

Is there anything about the SDLP that's being done differently than the legacy program before it.

Kipp DeVeer -- Chief Executive Officer

Yes. I mean, there are a few nuanced differences, obviously, in that we have more than one capital partner. Right? So there are a couple of different folks involved in that joint venture. AIG and Varagon being one, another insurance company who we've heated their desire to not be public.

And, yes, there's some different I don't know, maybe mechanics of the vehicle that we've structured slightly differently. If you remember from SSLP, way back when, its wind down. It didn't go exactly how we might have hoped. And our negotiation with GE back then probably wasn't as pleasant as we might have hoped it would be.

So I think that we've structured the program in a way that we've taken some of those learnings from the past and made sure that we don't end up with sort of any of those issues to the extent we ever chose to wind it down, but that's something that's frankly not even a discussion around the table today. But, yes, I mean, certainly, there's some nuances and some learnings from what we did with GE versus what we have in place today that we've put into place.

Terry Ma -- Barclays Capital, Inc. -- Analyst

Got it. That's helpful. Thank you.

Operator

Our next question will come from Melissa Wedel with J.P. Morgan. Please go ahead.

Melissa Wedel -- J.P. Morgan -- Analyst

Good afternoon, guys. Thanks for taking my question. As we see the portfolio yield sort of taking a little bit lower each quarter, I'm attributing part of that to the competitive environment that I think you touched on earlier. But then also, should we think about that as being a function of sort of the larger companies that you're increasingly allocating capital to.

And if that's the case, should we also think about that being sort of related to any increased comfort level running toward the higher end of your target leverage range? Thanks.

Kipp DeVeer -- Chief Executive Officer

Yes. I mean, I think some of it looking backwards is just LIBOR resetting, but luckily and thankfully, that's pretty much behind us. But, yes, it's all of those things. I mean, it's a more competitive environment now than it certainly has been over the course of the last, let's say, at least four quarters ago, for sure.

So it's partially that. And, yes, I think larger companies obviously can command a lower cost of financing. So I think the combination of those two things are the two best conclusions, I'd agree with them.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. And then just thinking about the sort of aftermarket program that you guys have. Is that something that you'd expect to sort of tap more regularly going forward? Should we be expecting that?

Kipp DeVeer -- Chief Executive Officer

Well, I mean, I think we're happy that the stock price is finally sort of trading to levels that at least make sense to us, showing a material premium to book. And with that, the ATM is a nice tool to issue some accretive equity. I mentioned that I really do think coming out of COVID and into this recovery that we've gained market share, and we think that there's reason for us to grow the company based on the investment environment being attractive. And as Mike said on the call or in the prepared remarks, more than investable.

I mean, pretty attractive. But yes, the ATM is a nice tool to have, so it is not to come surprise the market with an overnight equity deal as we've done in the past. So we view it as a useful tool, but it's at the margin. Right? The amount of stock that we're actually able to issue in the ATM is quite limited.

But the good news is we're doing it on an accretive basis. that's low cost that allows us to continue to grow the business.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. Thanks, Kipp.

Kipp DeVeer -- Chief Executive Officer

Thanks for the question.

Operator

Our next question will come from Casey Alexander with Compass Point. Please go ahead.

Casey Alexander -- Compass Point -- Analyst

That's OK. My questions were asked and answered. Thank you.

Kipp DeVeer -- Chief Executive Officer

Thanks, Casey.

Operator

Our next question will come from Robert Dodd with Raymond James. Please go ahead.

Rob Dodd -- Raymond James -- Analyst

Just touching on the equity, and it was touched on in prepared remarks. I mean that seemed to generate a lot of the appreciation. I mean, my math says about two-thirds of the appreciation in unrealized depreciation this quarter came from the equity book, diversified across a lot of assets, not concentrated. Can you give us any color? I mean, you mentioned it's company performance and market environment.

I mean, is it 50% multiple, 50% performance? I mean, any color you can give us on exactly the relative weighting to the market driving that valuation versus the performance of the underlying businesses.

Kipp DeVeer -- Chief Executive Officer

You're -- thanks, Rob. Yes, I mean, your math is pretty much spot on in terms of the mix. Right? I mean the most significant driver of the fair value improvement was the equity portfolio. Look, we've seen good profit growth, obviously, as we mentioned, about 12% EBITDA growth in the portfolio, which we talked about in the prepared remarks.

So some of it is improvements in profit to companies and that's in companies that certainly have some recovery from COVID. I mean, iif you did your industry cuts, it's healthcare and consumer. I mean, there's certainly some fair value improvement in the energy portfolio, which has been more difficult over the last 12 months. But then for sure, you have to acknowledge, too, that valuation broadly for most assets, but certain certainly, private equity and private companies has increased substantially, and you're seeing much, much higher purchase prices in new transactions.

And obviously, you've seen pretty robust equity markets, which is how we think about valuing our equity portfolio. So I think it's all of that.

Rob Dodd -- Raymond James -- Analyst

OK. OK. I appreciate that. Just a related follow-up.

-- probably for Penni, because it's a tax question. If these equity positions or broadly markups in the portfolio were realized, how much of those gains would be salable. I mean, if we go back to Alcami, obviously, you could shield a lot of that because of going all the way back to Allied. And a tax yield that you still retain.

And obviously, a bit salable, it's permanent NAV growth if and when those realizations happen. I mean, my math -- looking at the Q looks like there's about $800 million in available tax shield still left. Is that the right kind of number where that level of realized gains could flow to permanent NAV growth versus flowing to spillover?

Penni Roll -- Chief Financial Officer

Yes. I think you're looking at the footnote we have in the SOI.

Rob Dodd -- Raymond James -- Analyst

Yes. I am.

Penni Roll -- Chief Financial Officer

Yes. There are capital loss carryforwards as even I think Ryan mentioned earlier, there are book tax timing differences. You referenced it with the Allied acquisition. So there are things that are there that we have to go through the tax process to determine what's utilizable against the gains along with those differences.

I think if you go back to our 10-K where we typically give an annual update on capital loss carryforwards, we had a few hundred million of even loss carryforwards we could use. So somewhere between the carryforwards and maybe built-in losses, which is the way I think about what you're referencing there are opportunities to shelter future capital gains and therefore, not have a tax distribution requirement for the gains that we realized -- But there are a lot of things to figure out in the context of timing differences and other differences that exist. But directionally, that's a good way to look at it.

Rob Dodd -- Raymond James -- Analyst

Understood. Yes. Nobody wants to do their tax return early. Right? So I appreciate that.

Thank you.

Operator

This will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.

Kipp DeVeer -- Chief Executive Officer

Sure. No. Just thanks to everybody for joining the call and hope you enjoy a bit of rest and relaxation here toward the end of the summer after what continues to be a crazy year. But thanks for the support of the company, and we will be in touch.

Thanks.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through August 11, 2021, at 5:00 p.m. Eastern Time to domestic callers by dialing (877) 344-7529 in and to international callers by dialing 1 (412) 317-0088. For all replays, please reference conference number 10156455.

An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital's website.[Operator signoff]

Duration: 57 minutes

Call participants:

John Stilmar -- Managing Director of Investor Relations

Kipp DeVeer -- Chief Executive Officer

Penni Roll -- Chief Financial Officer

Michael Smith -- Co-President

Ryan Lynch -- KBW -- Analyst

Finian O'Shea -- Wells Fargo Securities -- Analyst

Mitch Goldstein -- Chief Financial Officer

John Hecht -- Jefferies -- Analyst

Devin Ryan -- JMP Securities LLC -- Analyst

Terry Ma -- Barclays Capital, Inc. -- Analyst

Melissa Wedel -- J.P. Morgan -- Analyst

Casey Alexander -- Compass Point -- Analyst

Rob Dodd -- Raymond James -- Analyst

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