Good afternoon. I'm Derek Hewett from Bank of America Securities. I cover the specialty finance sector, including business development companies. With us today is Kort Schnabel. He is co-president of Ares Capital Corporation, and also a partner and co-head of direct lending at Ares Management. So, thank you for joining us. So Kort, maybe could you start off by providing a brief history of Ares Capital, and then maybe discuss the investment strategy, and then your what you believe is the competitive advantage of the firm? Sure. Thanks, Derek. Thanks, everyone. Great to be here to talk a little bit about Ares Capital Corporation today. So, I guess on the history piece, starting there, we had our IPO at Ares Capital Corporation back in 2004. We went public with a portfolio of about $150 million of assets, about 30 portfolio companies, about 10 people, and over the last 20 years, have built our business into the largest publicly traded business development company in the world. We've got, about $22 billion of assets now in the portfolio, a team of almost 200 people, and 505 different borrowers. So we've been at this a pretty long time, more than almost any other direct lender out there in the market. Importantly, we've operated through all different kinds of economic environments, political environments, interest rate environments, which I know is a big question today, and we've delivered what we believe are excellent returns, certainly industry-leading returns for our shareholders. Delivering a 12% net investment return since inception for the stockholders, which actually is a outperformance of 75% versus the S&P 500. Ares Capital today is our flagship direct lending vehicle at Ares Management. It sits within our U.S. direct lending business, which manages about $120 billion of assets, and Ares Capital is our largest vehicle, it's our most flexible vehicle, and certainly the longest-standing vehicle that we operate. Excuse me. I think the point of the question, main point of the question: what makes us different? How have we achieved this success over this history, and what are some of our competitive advantages versus others? So I think maybe just starting very simply for people that aren't totally familiar with BDCs, in terms of what we do for a living, we go out, very simply find what we think are the best middle-market companies in the United States. We source most of our loans through private equity firms. We do also source non-sponsored transactions, but we go and find the absolute best credits. We make loans to these companies. We collect interest. We pass the interest on to our shareholders in the form of a very stable and consistent dividend. In terms of what we do that makes us better and different, there are lots of different factors. I'll try to be somewhat brief, but I think first and foremost, we're managed by Ares Management, right? So, having Ares as our asset manager is a significant competitive advantage for a few different reasons. Number one, it gives us access to differentiated sourcing, all sorts of stuff that comes in off the platform outside of just our core direct lending professionals that are sourcing from the private equity channel. Gives us very much differentiated access to diligence, industry contacts, people that we can call to get information on industries and businesses. And lastly, it gives us access to capital markets information. We manage one of the largest liquid credit businesses. We have capital markets teams that sit globally around the world. We have weekly calls where we're comparing notes on different market environments. And so rather than just sitting in an office, kinda head down, looking at credit information, we're also heads up, looking around at the world and looking around at different markets so that we can make educated, relative value decisions across different markets. Secondly, I definitely have to spend a fair amount of time on our investment team, the team that we've built. We have the largest team, I mentioned almost 200 people, and those people have a very long tenure with us. We have done a great job retaining people, and over a couple decades now, we've been building very deep and trusted relationships, using this team, with lots and lots of different private equity firms. Not just delivering for private equity firms at the outset of a transaction, but being there with them to follow that transaction, to provide additional capital, and those relationships cannot be replicated very quickly, that kind of trust that's built. So that, on new transactions, allows us to get last looks, allows us to often get better economics, but the size and scale of the team and the diversity of our relationships, most importantly, gives us this extremely broad funnel of different opportunities that are coming into our platform. In any given year, we are reviewing about $0.5 trillion of new investment opportunities, and we're only closing on about 4% to 5% of the opportunities that we review. So this really broad funnel, big team, wide distribution network, in terms of where we're sourcing, is in and of itself a very strong competitive advantage. If you're seeing a smaller amount of deals, you still have to get invested. That's our business. So smaller BDCs are investing in a higher percentage of what they're seeing. We're investing in a smaller percentage. It also allows us to provide capital to smaller borrowers, medium-sized borrowers, and larger borrowers. I know there's been a lot of talk about, you know, larger deals that direct lenders like we have been doing in the past couple years, and now the banks coming back, and what's gonna happen? Well, you know, we've been operating and competing with banks for a very long time. We're just gonna keep doing what we're doing, providing capital to middle-market borrowers, small borrowers, large borrowers. That differentiated sourcing certainly is an advantage. Would be remiss if I don't also talk about the power of incumbency. We talk about this a lot. Our incumbent portfolio continues to grow. I mentioned we have $120 billion of assets under management, over 500 different borrowers. Those borrowers are dynamic companies. They're always looking for more capital. In any given year, we're providing about half of our new commitments to our existing borrowers. That's a significant competitive advantage. There's a moat around that portfolio that's difficult for our competitors to penetrate. And given the way we go about doing business, the transparency, the fact that we're there through all market environments, our borrowers wanna come back to us for more capital, not go to their competitors. Rounding out the list, I think, certainly our portfolio management team and our workout capabilities have to be mentioned. It's never obviously the strategy to have to go work out a loan and take ownership of a company, but when things are not going according to plan, and they're very much off plan, and the owner of the business is not willing to support the company with additional capital, which is rare, but does happen, you have to have the know-how and the stomach to go and take ownership of the company, put the capital in yourself, have patience to work with that borrower and come out the other side. And we know how to do that. We know how to work out these loans. We have a long track record of doing that. And we have about 50 people actually in our portfolio management team that focus on these kind of workout situations. And then maybe lastly, with our size and scale and our reputation and our track record, comes access to lower-cost capital. So we've been able to tap into the debt markets and issue lots of unsecured bonds. We just completed our largest issuance ever, a $1 billion bond deal that we did, largest issuance in the BDC space. And we're raising capital at lower rates than our competitors, and so that gives us a competitive advantage. So long-winded answer there, but hopefully that attacked it. Yeah, great. Thank you. That was very, very thorough. Let's maybe move on to your outlook in terms of growth for the industry in 2024. So, really, if you go back and look, the last couple of years have been somewhat challenging just given inflation, kinda rising rates, recessionary fears, geopolitical risk. But that said, during your fourth quarter, you tied a record in terms of core earnings for ARCC, and also book value, what was a record? So could you comment on your outlook for direct lending for 2024? Sure. Yeah, we're very happy to see the volume start to pick up now in the space. Obviously, it was a little bit slower for the last 12 to 18 months. We were doing some larger deals that would normally go to the syndicated markets, but overall volume was kinda slower. As we headed into the third and fourth quarter, we started to really see that pick up. Derek, you mentioned the fourth quarter transaction volume really showed that rebound in a meaningful way, and we're settling in here into a nice period where we're building a nice backlog and pipeline. So we feel pretty optimistic about the ability for volume to continue to grow across the industry in 2024. I think some of the things that are driving that pickup are some pressure from LPs on private equity firms to start to return capital. We've seen that a lot of sale processes that were put in place through the last 18-month period were kinda pulled, as sellers weren't quite getting the valuation they wanted. Those processes have now come back, so you have some pent-up demand, pent-up supply, sorry, some longer hold periods that exist out there in the private equity space. And so those, there's now a real impetus for those sellers to kinda move those assets and move on. So, I wouldn't say capitulation on valuation, but at least accepting probably a little bit of a less valuation than maybe they were hoping for when they pulled their process last year. You're also seeing more confidence on the part of buyers, right? They're able to have a better ability to have their interest rates in somewhat of a band when they're putting into their model. Understand that performance, economic performance has generally held up pretty well. So the downside scenarios that people were running in their buy-side models last year are not so draconian now. That's giving buyers a little more confidence. So we're just seeing that, that meeting in the middle start to pick up. And I'm pretty optimistic you're gonna see the sponsor-to-sponsor market. We're already seeing it come back. I think that's gonna really be the driver of the pickup in volume as we go in here into 2024. Okay, great. And then, moving on to credit. Credit for the sector has remained relatively positive despite this potentially higher for longer type of economic backdrop. But you are starting to see like a wall of worry in terms of rising credit costs and underlying borrower stress. How do you view Ares in terms of defaults and the stress of the underlying borrower in 2024? Do you think we're gonna get to kind of the historic long-term averages in terms of defaults, or do you think it'll just be kind of a slow, kind of steady rise over the next couple of years? Yeah. Well, we've publicly been saying for four or five quarters now that we expect defaults to rise across the industry, and, you know, we haven't really seen it, certainly haven't seen it in our portfolio. So, we've been, you know, wrong so far with that, prognostication, but I think we continue to say that we expect defaults to modestly rise across the industry as we roll here into 2024. There has to be a little bit of a lag effect, from the interest rate rises. Again, it hasn't impacted our portfolio. Our non-accrual rate is at one of its lowest levels that we've had in our 20-year history, certainly well below our average, which is around 3%. We're operating now in the low 1% range. And so we haven't seen it, but look, we're lenders, so we're conservative people by nature. We're always kind of thinking about downside scenarios, and I think we would expect to see a little bit of a tick up, maybe back to long-term averages, which, by the way, is a very manageable level. And if you look over our history, at least, you know, when there is a default or a non-accrual, that's not the end, right, of the situation. Then, we have to then start employing our tools. And the first tool we have is, we go to the equity sponsor and we say, "Hey, you guys should put in some capital. We have a long-term relationship and partnership. We're together in 10 other deals, and let's, you know, work together." And most often they say, "Yes, of course. That's what we're gonna do as the owner of the business." And there's things we can do to work with them. We certainly, at times, in periods of stress, can offer a PIK interest solution for a couple quarters. We did that through COVID, in exchange for the sponsor putting in capital. And, you know, that's if defaults do start to rise, that would be the first order in the playbook. You know, things get worse from there. I already talked about our workout experience. So we're not losing sleep about the fact that we expect defaults to maybe modestly rise, but that is our expectation. Okay. And then what is your willingness to work with sponsors that are unwilling to contribute capital to the business and are just willing to hand over the keys? And then, how should we think about it in terms of, one, the time to ultimately resolve that investment, and then secondly, how much, on average, capital, additional incremental capital needs to be contributed to, like, resolve the issue? Okay, multilayered question there. First question, I think, was, if we're working with a sponsor that does not support the company with capital, would we work with that sponsor again, right, in the future? And the answer is, it depends. So and it depends on the way the sponsor acts and carries themselves, and communicates their lack of desire to support the company. So certainly there are situations where maybe the sponsor has taken all of its capital out of the business, and has no remaining capital, even though there might have been a large equity cushion. Maybe that equity cushion has shrunk. They've already gotten an okay return, and they don't want to put in more capital. In that scenario, if the sponsor is communicating with us upfront and being honest about the situation, and has integrity, and explains their lack of desire, and gives us lots of time to work with the company to get to know management, and works in partnership with us to facilitate, I guess I would say, a consensual restructuring, then certainly we would be open to working with that sponsor again. You know, we might be a little more careful, a little more eyes wide open, but I don't think there would be a reason for us not to work with that sponsor because they've conducted themselves with integrity around that situation, and at least put us in the best position to succeed ourselves after we have to go work out that company. It would be a totally different story if, and we've certainly seen this, the sponsor sort of plays games and might say, "Yeah, sure, we'll support the company," and, you know, keeps us at bay and then at the end, says they're not gonna support, but we need to agree to an amendment, and PIK our interest, and do all this, or else they're gonna toss us the keys, and good luck. And, you know, that's pretty rare, but if a sponsor behaves in that way, then most likely we're not gonna work with that sponsor in the future. And that's, again, one of the benefits of our business at Ares, is we've built a relationship with so many different sponsors. Our portfolio is so diversified. We've got over 450 different sponsors that are represented in our portfolio. So no one sponsor is too important to us that we can just say: We're not gonna work with that sponsor anymore. So that would be a situation where maybe we wouldn't. I would say that some of my best relationships, actually, having when I was more on the front lines doing transactions, are with sponsors that we had to go through problems with. And, you know, it really comes down to being transparent with each other, and giving advance warning about how we're gonna act, how they're gonna act, and you actually build respect through that situation, actually, when it's done the right way. And so there are certainly lots of sponsors that we have great relationships with, who we have gone through some difficult investments with. I am sorry, but the second part of the question was? Is typically how long does it take to, like, resolve- Right ... a problem investment? And then, is there, like, a typical, like, incremental capital that needs to be invested- Right ... to help resolve the issue? Right. Well, the situations that get dicey, where there is a restructuring, pretty much always involves additional capital. So there's covenant defaults. Obviously, we have maintenance covenants in most of our deals, and that's an early warning sign. We can be back at the table, having a conversation. Usually, that's just a repricing of the loan, sometimes an equity injection to de-lever, but, you're not gonna end up in a restructuring situation over a covenant default or other kind of, defaults. When you really start to talk about restructuring, it's liquidity. The company needs money, and that's what always starts to cause, some strain, is: Who's gonna put in the money? I would say the amount of time, it just completely varies. There really is no, standard. What we try to do at Ares is get ahead of that situation, right? So we're constantly monitoring our portfolio companies based on headroom to covenants and then liquidity, and we're having monthly calls where we go through our extra monitor list. We also have a watch list, and then we have our non-accrual list. We're going through that every single month with our portfolio management team, with our investment committee, with all of our senior investment professionals, so that we can be communicating in advance, right? Not waiting until there's a problem, but saying, "Hey, looks like six months from now, nine months from now, there might be a liquidity issue. How are you thinking about that? Are you gonna support the company?" And so getting ahead of it solves a lot of the problems. So I don't know the timeframe. That might mean sometimes we're talking for a year about something, right? But again, those are the better outcomes when you're talking about it in advance. So I can't really say that... Sometimes things accelerate more quickly. Obviously, COVID was a crazy situation, and things happened really fast in that situation. So it really just depends on the situation. Okay, and then just in terms of the underlying borrower average EBITDA has grown roughly twofold since kind of pre-COVID levels relative today. Like, what's driven that significant growth? And can you talk about why exposure to the upper end of the middle market is attractive for Ares? Yeah, sure. So the weighted average EBITDA has grown very meaningfully in our portfolio, and it's a natural just evolution of our business, right? So as we deliver great returns to our shareholders and to the investors in our other direct lending funds, we get more capital into our system to invest, we grow. Same thing with some of our competitors. And so we're able to do larger and larger transactions. The value proposition of private credit is that we are delivering a certain financing, a bought deal, where the terms will not change. As we get bigger and bigger, we're offering that certainty to larger and larger borrowers, and those borrowers historically really only had one option when they wanted to raise term loans, they would go to banks and do a syndicated deal. Now, these bigger borrowers can come to private credit providers like Ares, and they have another option. And so as we just continue to amass capital and deliver good returns for our shareholders, we're gonna be providing capital to bigger, bigger borrowers. There really is nothing more to it than that, than a natural evolution. What we saw in the last 18 months, as banks were sort of sidelined for a period of time, was there was a massive influx of larger companies that couldn't access the syndicated market at all. So they came into the private credit market, and that really gave a jolt to our weighted average EBITDA in our portfolio, and it did kind of have a step function change for a period of time there. I do think it's important to point out, though, that while the weighted average EBITDA is in the $300 million now for our portfolio companies, the median EBITDA is about $150 million. So we have a few large borrowers, large transactions, that have skewed that weighted average up, probably higher than what in reality is the case in terms of number of transactions. So we're still providing lots and lots of loans to small borrowers, medium-sized borrowers, as well as some of these larger borrowers. I had a question, actually, in one of my meetings this morning, and the gentleman said: "Why are you still providing capital to these small borrowers? It must not move the needle for you at Ares." And so my answer was, "Well, it doesn't really move the needle economically at that moment, but there's a very big strategic advantage for us to still be providing lots and lots of capital to lots of small and medium-sized borrowers, because those borrowers will grow." And I talked about the benefit of incumbency in the beginning here, the value of having lots and lots of companies in your portfolio that you can keep providing capital to. If we're picking the best small and medium-sized ones, we will be able to finance those companies for the next 20 years. So important for us to be providing capital to all different ends of the size spectrum. But there are advantages. The larger borrowers usually are generally better credits. They're more diversified businesses. They have the ability to attract better management teams. And so, you know, that is one side benefit, but I do not wanna have anyone have the takeaway that we're gonna just all of a sudden only be moving up market. It's just one part of our larger origination platform. Okay, great. And then just given this higher rate environment, could you talk about the spreads that you're seeing for new incremental investments in senior opportunities, unitranche, and then second lien? And where do you think is the... Where are you finding the best risk-adjusted value? Yeah, so I would say regular way, senior debt, not unitranche, but just a regular senior, credit today is coming probably around an average of SOFR + 500, SOFR + 475 to 500. That's relative to the broadly syndicated market. You're seeing kind of SOFR + 350 type loans on an apples-to-apples basis on, on leverage. So we're always gonna get that premium. Again, that's the value of certainty for the private credit product. Unitranche loans, which are senior loans going through more of a full leverage multiple, are pricing around SOFR + 550, I would say, today on average. Obviously, it's a plus and minus range there, but probably around SOFR + 550. And then the second lien market has been pretty dormant, because the larger borrowers that would normally be able to tap the second lien market haven't been able to access the broadly syndicated first lien market. And so the unitranche product has kind of subsumed the broadly syndicated first lien, and then private credit second lien, which is where we've been providing most of our second lien capital. But to the extent there are second liens today, they're probably pricing in private credit market around SOFR + 800, plus or... There's a wider range there on second liens, but that's probably where I'd expect an average credit to come through there. In terms of relative value, we're not investors that try to move around too much in terms of our asset mix strategy, based on what's going on in the market. We're investors that really stick to our knitting. We keep our asset mix pretty consistent, and we do like to have second lien exposure. Today, it's about 15% of our portfolio at Ares Capital Corporation. first lien exposure, unitranche exposure, we are providing some preferred equities to borrowers. That's about a little less than 10% of our portfolio. That preferred equity exposure is pretty interesting today because it sits at a very high level in the capital structure still, with a lot of common equity beneath it. Our preferred equities are usually going through about 45% loan-to-value, and we're pretty much only doing that when we have second lien ahead of it in the capital structure, so we control the cash pay debt, and then we stretch it out a little bit. But it's an attractive security today for borrowers because it allows them to de-lever and, and save on cash interest. It's a PIK security, and we do think there's really nice risk-adjusted return in that, in that Preferred Equity asset class. So you're gonna see our asset mix be a little different than other BDCs. Most BDCs are more 100% senior secured. We like that mixture. It allows us to perform through all market environments. We have some fixed rate exposure. Actually, about a third of our portfolio is fixed rate. That didn't feel great when rates were going up, up, up, but it feels pretty good now that we're staring at rates maybe going down. So all these kinds of different things allow us to just have ballast and operate in all environments. Okay, and then Ivy Hill is becoming a bigger part of the story over the last couple years. It's now about a little under 10% of the portfolio versus about half that a couple of years ago. How should investors kind of view the Ivy Hill investment? And is it kind of fully scaled at this point, or is there opportunity to scale the portfolio even more, especially given that it's generating very, very high yields? Sure. Yeah, Ivy Hill is one of our best investments. Ivy Hill is a senior debt asset manager that manages a bunch of different debt funds, investing in very plain vanilla, low risk, first lien, senior secured loans. Not really doing unitranches, just kind of that plain vanilla bank debt, that otherwise really wouldn't have enough yield for us to hold on our own balance sheet. And so our investment in Ivy Hill has had two benefits. Number one, it's provided an excellent return, ranging in the kind of high teens for us on our equity investment in Ivy Hill over a long period of time now, about 15, 16 years. And then secondly, strategically, it allows us to get more borrowers into that Ares family, into that incumbent portfolio, that otherwise we wouldn't be able to have in that family, because, again, these are a little bit more lower yielding loans. And so with the combination of the returns, it's delivered the performance with all of their funds has been absolutely best in class, and the strategic benefits, we think it's really a fantastic part of our overall portfolio. It has grown to come around 10% of our portfolio now. It actually was up a little bit above 10%, several quarters ago, and given the strong performance there, and the high for cash flow generation, we've actually been able to... The growth of Ares Capital in other ways, we've been able to shrink that down now to about 8% of the portfolio today, I think is where it stands. I don't think we wanna really be prescriptive about or give any guidance about where, you know, it could go or what the exact right size of it is. I think that there could be an opportunity to grow it, depending on the market environment, and if we see that, that asset class start to grow. But, you know, we definitely like the size where it is today, and somewhere in that, you know, 5% to 15% band, I think, is certainly historically, where we've always operated, and I think where you probably see us have comfort. Okay, great. And then, maybe, I'll end my question with what do you think is the biggest risk in the market now for BDCs and for Ares? Yeah. I think it always has to come down to credit. That's what's always on the forefront of our mind. Obviously, I sit on our investment committee. I spend an enormous amount of my time, reading investment memos, sitting in investment committee, opining on deals. We see an extraordinary amount of transaction volume. The ability to select the right credits, not even select the right credits, but first, as I said, to see the most amount of deals possible so that you can be extremely selective on credits, is probably going to be the number one driver of performance. And so, I think if you're looking at the BDC space, you have to be pretty careful about your asset manager, and make sure that you're investing in a manager that does have that broad origination funnel. That does have workout experience, because you can be a great credit selector, but you still will go through cycles, and we've certainly been through them here at Ares, and knowing how to work through those cycles, like we did through the GFC, and when we acquired some of our biggest competitors at that time, who did not manage well through that cycle, was an important part of our outperformance. So it always comes back to credit for me. I think that's the number one risk. Okay. Wonderful. We have about two minutes left. Do we have any questions from the audience? So this morning, there was a question of Brian Moynihan about, "Is it a level playing field?" So I'm curious about your response to his response, was, "It isn't a level playing field for credit with companies like BDCs, like yourself, or private equity, private credit lenders. I missed the comment. What was he referring to, regulations or- I believe so. Yeah. Well, look, you know, we certainly get the question about regulations. We see some media reports about, shouldn't the BDC space be more regulated? We certainly see banks suggesting that should be the case. I think when we... Look, I'm not a regulator, but I think when we read what the regulators say, when they look at the private credit space, and we just think intrinsically about our space and what creates risk, I think there's probably two key things that the regulators look at. Number one is leverage, underlying leverage on the funds. As a BDC, we are among the most lowest levered vehicles possible that invest in credit, right? We're today operating at one-to-one leverage. Our regulatory limit is two-to-one, and we have stated a desire to never go above 1.25. So you think about that relative to the buyers of liquid syndicated loans that are, you know, seve, eight times levered, banks that could be north of 10 times levered. We are so much less levered. Number two, you gotta look at asset and liability matching, right? And duration of your assets, duration of your liabilities, fixed versus floating. Do those match up? What we've seen with banks is, given that they're deposit takers, their liability structures do not match their assets. And there can be situations where their liabilities can be pretty fleeting, and so that's created issues, and when you have asset and liability mismatches, combined with a lot of leverage, that's where the risk starts to really be stratospheric, right? So I think when you again look at our space, you can read the FSOC, Financial Stability Oversight Council report from last May they put out. They did an in-depth research into the whole financial system, looked at areas of systemic risk, they looked at our space, and they actually concluded in that report, they do not see any elevated levels of risk for the reasons that I just described. So I'm sure, you know, the banks would like there to be more regulation and create that level playing field, but I don't think it's justified, and I don't think the track record of a manager like us, at least, who had been around for 20 years, through lots of different parts of the economic environments, really says that there is something that should be done there. So I don't know. Those are my thoughts on that. That being said, look, I think it's a pretty level playing field. The banks have a different product that they offer, right? They offer a syndicated product. We offer a private credit product. We knew the banks were gonna come back into the market when they were out for the last 18 months, that we've been competing against banks for a very long time. We've been partnering with banks, by the way. They're not our enemies. The banks lend us money against our credit facilities for our funds. We can partner with banks on syndicated transactions as well. And so we've actually welcome them back. I think it just means a healthier level of transaction volume, a more normal operating economy. Okay, wonderful. I think we are out of time, so thank you very much, Kort. Thank you. All right.