Ares Capital - Q4 2025
February 4, 2026
Transcript
Operator (participant)
Good afternoon. Welcome to Ares Capital Corporation's fourth quarter and year-ended December 31, 2025 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, February 4, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations.
John Stilmar (Partner and Co-Head of the Ares Public Markets Investor Relations)
Thank you. Good afternoon, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements 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 filing. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding the financial performance because it's one method the company uses to measure its financial condition and results of operations.
A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call, as well as the accompanying slide presentation, including credit ratings and information related to portfolio companies, was derived from or obtained from third-party sources that have not been independently verified, and accordingly, the company makes no representation or warranty with respect to this information. The company's fourth quarter and year-end 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter 2025 earnings presentation link on the homepage of the Investor Resources section.
Ares Capital Corporation earnings release and Form 10-K are also available on the company's website. And now I'd like to turn it over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Thanks, John, and hello, everyone. Thank you for joining our earnings call. I'm joined today by Jim Miller, our President, Jana Markowicz, our Chief Operating Officer, Scott Lem, our Chief Financial Officer, and other members of the management team, who will be available during our Q&A session. Let me start by providing a few thoughts on ARCC's performance, current market conditions, and our outlook for the year ahead. 2025 was another good year for our company. We generated strong financial results, supported by our stable credit quality and growing portfolio. Our core earnings per share of $0.50 for the fourth quarter and $2.01 for the full year, fully covered our dividends and drove an ROE in excess of 10% for both the fourth quarter and the full year.
Reinforcing our long-term track record of generating NAV growth with attractive dividends, we ended 2025 with modestly higher NAV per share and have now paid a consistent or growing level of regular quarterly dividends for over 16 years. The drivers of these results are embedded in what we believe are our long-term competitive advantages, which include the experience of our team, our long-standing market relationships, the scale of our capital base, and our rigorous credit standards. We remain confident that these enduring competitive advantages will continue to support compelling performance for the company in the future. Looking back on 2025, as uncertainty around macroeconomic policies from the early months of the year subsided and pressure on private equity firms to return capital to investors mounted, we saw a rebound in transaction activity during the second half of the year.
This, in turn, led to a meaningful acceleration in new investment commitments for us over the same period. Despite a relatively tepid M&A market in the first half of 2025, we remained busy, with the majority of our originations coming from incumbent borrowers as we sought to support the growth objectives of our portfolio companies. We believe that our ability to be a steady capital provider at scale through periods of economic and capital markets volatility is especially valuable to our portfolio companies and continues to lead to further market share gains as our existing borrowers consolidate their lending relationships with us. Specifically, across our top 10 incumbent transactions during 2025, we more than doubled our share of the overall financing. These incumbent transactions can offer attractive opportunities to increase our exposure to some of our best-performing portfolio companies.
Therefore, our portfolio of more than 600 borrowers is yet another factor that we believe can drive future incumbent lending opportunities and, in turn, the long-term performance of our company. While we continued to see opportunities with incumbent borrowers into the second half of 2025, the M&A and LBO markets also gained momentum. This accelerated transaction activity and new borrowers comprised the majority of our new lending activity in the second half of 2025. Reflecting the breadth of our market reach and further expanding future incumbent opportunities, ARCC added more than 100 new borrowers to the portfolio during the year, a new record for the company.... While the broader tailwinds of increasing market activity levels helped drive higher originations to new borrowers in the second half of the year, much of this growth also came from the continued expansion of our specialized industry verticals.
The deep knowledge and specialized skill set we have developed in industries such as sports, media, and entertainment, specialty healthcare, energy, software, consumer, and financial services ultimately results in access to differentiated deal flow, particularly in the non-sponsored channel. Building on the momentum we have in these verticals, our non-sponsored originations grew by more than 50% during 2025. Collectively, these factors supported a record year of gross originations at ARCC, with $15.8 billion of new commitments in 2025. Importantly, we are maintaining our highly selective approach, supported by a widening set of sourced opportunities. In 2025, our investment team reviewed nearly $1 trillion of potential investments, representing a 24% increase in the number of opportunities we reviewed relative to the prior year. We also see the merits of origination scale in our ability to garner attractive terms and pricing.
Against a competitive market backdrop, where market spreads declined before stabilizing over the course of the year, we were able to drive a modest year-over-year increase in spreads for our first lien commitments, while also maintaining LTVs in the high 30% to low 40% range and upholding our stringent underwriting and documentation standards. The quality of our portfolio remains in excellent shape as our borrowers continue to demonstrate healthy overall performance. On average, our portfolio companies are growing faster than the economy and the comparable broadly syndicated loan market. In 2025, the weighted average organic EBITDA growth rate of our borrowers was more than three times that of GDP and more than double the growth rate of borrowers in the broadly syndicated loan market. The continued growth and stability of our borrowers also contributed to improvement in portfolio fundamentals.
For example, average portfolio leverage decreased approximately a quarter turn of EBITDA from the prior year, while our portfolio's average interest coverage ratio improved to 2.2 times, driven primarily by lower market interest rates and earnings growth. Our credit quality showed stability throughout the year, as our non-accruals at cost ended 2025 in line with both the prior quarter and year-end 2024 levels, and our weighted average portfolio grade remained consistent throughout the year at 3.1. We also generated pretax net realized gains on investments of more than $100 million during 2025. These results extend our long track record of generating realized gains by successfully investing across the capital structure with the support of our industry-leading portfolio management team.
During 2025, we realized over $470 million of gross gains from our equity co-investment portfolio and our successful portfolio management and restructuring efforts. The exits on our equity co-investments over the course of 2025 generated an average IRR in excess of 25%, returning more than 3x our initial investment on average. These results further support our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, these results underscore the strength of our team and the merit of our differentiated investing strategy. Even as our overall portfolio continues to perform well, we remain steadfast in our approach to risk management and diversification.
With a 0.2% average position size at ARCC, we believe we are well positioned to minimize single-name risk and thus lower portfolio risk overall. We believe this level of diversification stands apart from many others in the industry and, in our view, will contribute to further differentiation in performance with industry averages. Against this backdrop of strong originations and stable credit performance, let me make some comments on our dividend outlook. We believe ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates. We generally set our dividend level based on our view of the earnings power of our company. While lower short-term rates present an earnings headwind, we believe there are multiple factors that can support our earnings and thus our current dividend level for the foreseeable future.
First, we believe our dividend level was set at an achievable benchmark for today's interest rate and competitive environment. Second, our balance sheet leverage remains low, below 1.1 times net debt to equity, leaving meaningful capacity relative to the upper end of our 1.25 times target range. Importantly, as we prudently... earnings will also benefit from the lower management fee rate on the marginal portfolio. Third, we see incremental growth opportunities from two of our most strategic investments, the Senior Direct Lending Program and Ivy Hill Asset Management. And as market activity increases, our ability to invest across the capital structure has historically provided us with higher-returning opportunities.... Fourth, we expect continued healthy credit performance, considering the current economic outlook, the strength and stability of the current portfolio, and the team's track record over more than 20 years.
Finally, we have more than two quarters of spillover income, which provides an additional cushion to help support dividend stability in the event that our quarterly core earnings temporarily dip below the dividend. In closing, 2025 was a great year for ARCC. We believe our results for the fourth quarter and full year will continue to show differentiation in a market where there is already increasing dispersion in financial results. With this momentum, I believe we are well positioned for a successful 2026 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet.
Scott Lem (CFO)
Thanks, Kort. This morning, we reported GAAP net income per share of $0.41 for the fourth quarter of 2025, compared to $0.57 in the prior quarter and $0.55 in the fourth quarter of 2024. For the year, we reported GAAP net income per share of $1.86, compared to $2.44 for 2024. We also reported core earnings per share of $0.50 for the fourth quarter of 2025, compared to $0.50 in the prior quarter and $0.55 for the same period a year ago. For the year, our core earnings per share of $2.01, compared to $2.33 for 2024. The decrease in core earnings year-over-year was driven in large part by the decline in base rates.
Importantly, in 2025, our core ETFs remained in excess of our dividend in all four quarters, and we generated a 10% core ROE for the year, which was in line with our historical average since inception. Looking forward, as mentioned in previous calls, it's important to consider the timing of contractual rate resets in our floating rate loan portfolio on our core earnings. Changes in base rates typically take about a quarter to be fully reflected in earnings. Therefore, assuming all else equal, the decline in base rates during the fourth quarter will create about $0.01 per share of earnings headwind for us in the first quarter of 2026. As a reminder, there typically is seasonality in our business, as origination volumes generally tend to be slower in the first quarter than in the fourth quarter.
Capital structuring service fees, which are tied to origination volumes, typically follow the seasonal pattern as well. Now turning to the balance sheet. Our total portfolio at fair value at the end of the fourth quarter was $29.5 billion, which increased from $28.7 billion at the end of the third quarter and $26.7 billion a year ago. Our net asset value ended at $14.3 billion, or $19.94 per share, down 0.35% from a quarter ago and up 0.25% from a year ago. Shifting to our debt capital. We're proud of what we've accomplished in the past year by continuing to grow and strengthen our best-in-class balance sheet. In total, we added new gross debt commitments of $4.5 billion in 2025, a new record for the company.
That progress was driven by consistent and leading execution across multiple funding channels, starting with our unsecured notes. We were active in the unsecured notes market during the year, issuing $2.4 billion of investment-grade bonds, marking our second most active issuance year since our inception. Notably, we remain the highest-rated BDC by all three of the major rating agencies. Consistent with our long-term strategy of being a regular issuer in the investment-grade notes market, we began 2026 by issuing $750 million of long five-year debt at an industry-leading spread of 180 basis points over Treasuries, which we swapped to SOFR plus 172 basis points. We have also been the beneficiary of broader investor support, as more than 75 new investors have participated in our bond offerings over the past 12 months through this transaction.
We were also active with our diverse bank capital providers, expanding our credit facilities by $1.4 billion over the course of 2025, while also reducing borrowing spreads by approximately 20 basis points on average. We are proud of the relationships we have with over 40 banks, many of whom have been long-term and growing supporters of ARCC. Finally, we continue to benefit from Ares' long-standing reputation as a top-tier manager and one of the largest CLO issuers in the market. That positioning helped us execute our largest on-balance sheet CLO in our history, with $700 million of debt priced in December at a blended cost of SOFR plus 147 basis points.
Beyond the efficiency of this transaction, our execution further broadened our funding mix by accessing the strong demand for rated asset-backed financing, secured by a significantly diverse, high-quality portfolio of assets. Collectively, our floating rate financings help the company capture the benefits of lower borrowing costs should market rates decline further. Nearly 70% of ARCC's borrowing today are floating rate, compared to approximately 50% at year-end 2024. Overall, our liquidity position remains strong, totaling over $6 billion, including available cash on a pro forma basis for the post year-end activity that I just mentioned.
In terms of our leverage, we ended the fourth quarter with a debt-to-equity ratio net of available cash of 1.08 times, versus 1.02 times a quarter ago, which still leaves us with meaningful headroom relative to the upper end of our target leverage ratio of 1.25 times. We continue to believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Furthermore, we appreciate the continued support of all of our debt investors and lenders, and we look forward to building on these partnerships in the year ahead. Finally, our first quarter of 2026 dividend of $0.48 per share is payable on March 31st to stockholders of record on March 13th. ARCC has been paying stable or increasing regular quarterly dividends for 66 consecutive quarters.
In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million or $1.03 per share, available for distribution to stockholders in 2026. I will now turn the call over to Jim to walk through our investment activities.
Jim Miller (Partner and President)
Thank you, Scott. I will provide some additional details on our fourth quarter investment activity, our portfolio performance, and our positioning at year-end, and then conclude with an update on our post-quarter end activity and backlog. In the fourth quarter, our team originated over $5.8 billion of new investment commitments, which is up more than 50% from the fourth quarter of 2024. This brought our total new commitments for the year to $15.8 billion, marking a new annual record for ARCC. About half of our new originations in the fourth quarter supported M&A-driven transactions, such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment.
Reflecting on our broad market coverage across the lower core and upper parts of the middle market, our fourth quarter originations included companies with EBITDA ranging from under $20 million to over $800 million. Additionally, we made commitments to companies across 21 industries and 58 sub-industries, demonstrating the benefit of our vertical-focused origination team in identifying specialized opportunities, which Kort touched upon earlier. We ended the year with a record $29.5 billion portfolio at fair value, a 3% increase from the prior quarter and 10% increase from the prior year. As of year-end 2025, our strong and growing portfolio remains well-diversified across 603 different borrowers. The number of companies in our portfolio has also increased nearly 10% over the past year and 72% over the past five years, further enhancing our diversification.
The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average, and our top 10 investments, excluding our investment in IHAM and the SDLP, comprise approximately 11% of the overall portfolio, which is less than half the average concentration of our relevant peers. The scale of capital available at Ares and ARCC supports our ability to execute our origination strategy and invest across the middle market, while also mitigating the impact of negative credit events in any one borrower on the credit performance of the company. The financial position of our portfolio companies remains strong. Our portfolio's average interest coverage ratio of 2.2 times increased 10% quarter-over-quarter and 15% year-over-year.
The portfolio's average leverage level also showed strength, declining about a quarter turn of debt to EBITDA from year-end 2024, and remaining stable with Q3 levels. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remain low and stable at approximately 44%. Our portfolio companies continue to demonstrate growth in their profitability. The weighted average EBITDA of our underlying portfolio companies demonstrated organic growth over the last 12 months, expanding 9% year-over-year. This organic growth rate remains in line with our 10-year average and was more than double the EBITDA growth of the borrowers in the leveraged loan market of approximately 4%. When looking across the different segments of our portfolio, we continue to see healthy performance.
We are observing positive EBITDA growth in excess of the broader economy across both senior and junior capital investments, as well in both large and small companies. We are also seeing outperformance through our industry selection as the top five largest industries in our portfolio, including software, are experiencing faster EBITDA growth than the aggregate portfolio. The organic growth rate of our borrowers underscores what we believe is one of the many merits of not being a benchmark-style investor, as we are able to be selective, not only with the companies we are financing, but also with the industries we target more generally. Supported by these underlying portfolio trends, the credit performance of our portfolio remains strong. Our non-accruals at cost ended the quarter at 1.8%, in line with prior quarter and prior year levels.
This level remains well below our 2.8% historical average since the global financial crisis, and the BDC historical average of 3.8% over the same time frame. Our non-accrual rate at fair value also remained low at 1.2% of the portfolio and well below our historical levels. Our overall risk ratings remained stable throughout 2025, and the share of our portfolio companies in our lowest risk category, grades 1 and 2, totaled 3.8% at fair value, remaining 180 basis points below our five-year average. While our overall portfolio continues to perform well, we remain vigilant in monitoring our portfolio for underlying credit issues and seek to be proactive in addressing any issues as they arise. Shifting to 2026, we've had a strong start to the new year.
Our total commitments through January 29th, 2026, were nearly $1.4 billion, an 11% increase as compared to commitments closed in January of last year. Additionally, our backlog as of January 29th, 2026, stood at $2.2 billion, which is more than 17% greater than the reported backlog at January 28th of last year. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. Furthermore, we are closely watching current market conditions to see if the choppiness in retail capital flows impacts the competitive landscape in our favor.
In contrast to managers that have concentrated their fundraising in retail-oriented products, we believe managers such as Ares, with both significant institutional and retail sources of capital, possess a more stable base of committed dry powder. This allows Ares, and in turn, ARCC, to be a consistent capital provider with the scale in the market through changing periods. As we look to the future, we believe we are well positioned to capitalize on an expanding market opportunity, supported by the collective expertise of our team and our differentiated approach. These advantages have underpinned both our leading investment performance and stock-based returns. Since our inception in 2004, our stock-based total returns have outperformed the KBW Bank Index, BDC peer averages, and the S&P 500 by approximately 40% or more.
Most recently, in 2025, ARCC generated more than 600 basis points of additional total return versus the BDC average, as measured by the VanEck BDC ETF. As always, we appreciate you joining us today, and we look forward to speaking with you again next quarter. On behalf of the executive team, I'd like to thank our team for the hard work and dedication that led to another strong year for ARCC. With that, operator, please open the line for questions.
Operator (participant)
At this time, if you would like to ask a question, please press star, then one on your touchtone phone. If you would like to withdraw your question, please press star then two. Please note, as a courtesy to those who may wish to ask a question, please limit yourself to one question and a single follow-on. If you have additional questions, you may reenter the queue. The investor relations team will be available to address any further questions at the conclusion of today's call. We'll take our first question from John Hecht with Jefferies. Your line is open.
John Hecht (Managing Director and Senior Equity Analyst)
Morning, guys. Thanks for taking my, or I guess good afternoon. Thanks for taking my questions. You guys, did you mention the position you have in software. You also mentioned that, you know, software continues to grow faster than, you know, the pretty strong rates of growth elsewhere in the portfolio. You know, but there's a big emerging fear in the market about the impacts of AI on that type of business performance. I'm wondering, do you guys—you know, are you eyeing that emerging subject? And do you have any, you know, points to make on how you think it's positioned in that regard?
Jim Miller (Partner and President)
Yeah. Hey, John. Thanks for the question. Very glad that this is the first question of the day, because obviously there's a lot of noise going on out there, and I think we really want to make sure that we hit this hard and address anyone's questions and spend real time making sure that people understand our thesis in this space and how we built our portfolio, and our strategy going forward. So look, I think the first thing I want to say is we feel very good about our software book.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
... and we don't feel any differently this quarter than we did last quarter, despite all the noise in the market. The fundamentals and the underpinnings of our portfolio and our underwriting, you know, haven't changed. And we, we did make a lot of comments last quarter in our prepared remarks on the earnings call about AI and our software book, and people could certainly refer back to that as well. But, I think, you know, I'll, I'll spend a little bit of time, and sorry if it's a little long-winded, but I, I wanna really make sure that we frame up our strategy for people today. So the first thing to just sort of remind people is we, we started investing in the software space about 15 years ago or so, here at Ares Capital.
You know, from the beginning, the number one risk that we identified in the software space was technology risk and obsolescence risk. So we said to ourselves, if we're going to have a thesis in this space and build a book, we really wanna make sure that every single software company we put in the portfolio is highly resistant to technology risk. And obviously, AI is probably the most disruptive technology risk that we could have imagined, and it absolutely is going to disrupt a lot of software companies, and I don't wanna sugarcoat it. But we still believe strongly that we've constructed a portfolio that will remain highly resistant to this risk.
So I think maybe I'll just outline a few characteristics that we've always looked for in our software companies, and that we obviously continue to raise the bar on and look for even more in our new investments. So look, the first thing, is that we primarily look to invest in foundational infrastructure software for complex businesses, right? This is software that sits at the center of the technology stack and powers all core business systems, right? It's the last type of software, in our opinion, that a company would look to switch out, because then all of your downstream systems that feed off this software might also be at risk. So we like this kind of software, where the entire business and operations of the customers are dependent on the accurate functioning of this system.
So that's, that's kind of probably the most important point, number one. We're also looking for software companies, and a lot of our software companies do this. We're looking for these companies that collect and own proprietary data. And they, they collect this data and, and build this data over many years of serving their customers, and then they use the data as a core part of their value proposition when they deliver the software, right? So we call this a, a data moat. And it's important to mention that AI is not a database. AI doesn't house data. It can't replicate proprietary data. So we really believe that these data-enabled software companies will prove resistant, and these types of companies, you'll find a lot of these types of companies in our portfolio.
We also are looking for software companies that serve regulated end markets, like healthcare, financial services, as a couple of examples. There's lots of these regulated end markets, where the need for accuracy and auditing of information is really high, and the penalties for lack of compliance can be severe, right? So, you know, John, you think about, like, Jefferies is not going to rip out its core infrastructure software and replace it with an AI-based solution anytime soon, in our opinion. We think it's gonna take a really long time for companies that are in these types of industries to gain enough trust in any kind of new product, if ever. So that's a really important point as well.
Obviously, we always talk about diversification in our strategy in so many different ways, and that applies to our software companies as well in terms of their customer bases, right? So we're looking for software companies that have very diverse customer bases. So even if some customers do switch to maybe an AI-generated software solution, others will remain, and they create sort of this long tail of cash flow that will, you know, hopefully survive. And, and we really do not see quick and binary outcomes that occur when you have this kind of diversified customer base, right? And it's... it sort of leads into the next point to remind people about, which is we are lenders to these companies with maturity dates. We're sitting at the top of the capital structure. We have all the assets as collateral, including intellectual property.
So there's lots of ways that we can look to recover our principal if things do start to get disrupted. And this is just a very different place to be sitting in, in the capital structure than sitting down in the equity, right? So if you look at some of the metrics on our software book, they're extremely healthy. The book itself is also highly diversified, with lots and lots and lots of different position sizes, none of which is outsized in any way. These software companies are very large and established businesses, right? The average EBITDA on our software book is $350 million. That's above the average in our portfolio. You mentioned, John, in your question, the growth rate of our software businesses remains really strong.
The software book, the LTM EBITDA growth in the software book, is growing at a faster rate than the overall average EBITDA in our book, even through the recent quarter. The loan-to-values, and this is maybe one of the most important points, the loan-to-values on our software book, our software loan book, is 37% on average. That's below the loan-to-values on our overall book, and there is just an enormous amount of equity cushion below these loans that sit in the first loss position beneath us. So there really would have to be a whole lot of value destruction that would occur before we as a lender would lose a dollar, right? So I again, sorry for being long-winded. I really want to make sure we're getting clarity out on this topic.
Maybe the last point I'll just say is we've got an incredible team of resources here at Ares. We've got a software vertical within our credit business that consists of a bunch of investment professionals that only do software credit investing. We've got an in-house AI team at a company called Bootstrap Labs, which we acquired a few years ago, which is a venture capital firm. It's been investing in AI for more than a decade, and we use all of these resources to help us evaluate every new deal we do, as well as during our quarterly valuation process, to assess the risks and the marks that we're taking on all of these names. I don't think everybody does that.
So that's something that's pretty unique to Ares and hopefully gives people confidence in the marks and the risk in the portfolio. So, you know, look, as we sit here today, we're obviously watching everything going on out there, paying close attention. Don't want to sugarcoat it, but we really see minimal near-term risk to our software portfolio, and I'd say very manageable medium to longer-term risk in the market.
John Hecht (Managing Director and Senior Equity Analyst)
That is very helpful, and appreciate the color, because I do think it's an important topic. Follow-up question is, you guys have, you know, an active pipeline, strong growth year-over-year. You mentioned, I think 50, about half of them were, you know, buyout, sponsor-related stuff. Anything to characterize the other half, and, you know, how that paints the picture for how you think the market's firming up for the duration of 2026?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, I mean, there's still a lot of add-on activity on existing portfolio companies, right? So that makes up usually the bulk of the remainder of the deal flow. Us just putting capital in to support continued acquiring of added EBITDA. So those are good uses of capital. We have not seen a, you know, real big resurgence of dividend transactions. There have been a few. Obviously, private equity firms looking to return capital are going to test the market on dividends, but I wouldn't say that that's a huge driver of our deal flow right now. It's really the add-ons. Obviously, there are refinancings still going on.
But, you know, most of the sort of refinancings and, you know, spread sort of reductions have worked their way through the system, and spreads have been really stable now for the better part of a year or so. That's not been a huge driver. There also have been some refinancings out of the broadly syndicated market, where, you know, obviously the broadly syndicated market can be a little bit volatile at times, or maybe a sponsor just, you know, wants, you know, values having certainty of capital in all environments and has come to us to take out a deal that, that currently is in the broadly syndicated market. So that's probably the preponderance of the other activity.
John Hecht (Managing Director and Senior Equity Analyst)
Great. I really appreciate all the color. Thanks very much.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Of course. Of course.
Operator (participant)
We'll take our next question from Finian O'Shea with Wells Fargo. Oh, and actually, we'll move next to Doug Harter with UBS. Your line is open.
Doug Harter (Director and Senior Equity Research Analyst)
Thanks. You know, I guess as you guys look at this current environment, clearly, Ares as a platform has a lot of advantages. You have a relative valuation gap versus your peers. How do you think about potentially playing offense, you know, and taking advantage of market weakness in this type of environment?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, great question. We certainly get excited about those types of opportunities. Historically, when there have been any kind of periods of dislocation or volatility, that's been a strength for our industry in private credit, and certainly for us at Ares, especially since, you know, our capital base is much more diversified than a lot of our peers. And so the stability of our capital and the ability for us to sort of fill gaps in the market is a big advantage. So I think, you know, we'll see what unfolds from here. But to the extent that there are any pockets of, you know, changes in supply of capital, I think we stand to benefit. I mean, we just talked about software at length.
I certainly might expect that the broadly syndicated market will have a hard time providing financing for some software businesses. And, you know, if there's very high-quality software companies that meet the standards I described earlier, I would venture a guess that the cost of capital for those companies probably has gone up a bit, and I think we might be excited to provide that type of financing to the very best of those companies. So we'll see. Again, we'll see what unfolds. Obviously, there's been some changes in the environment for some of the retail flows, and, you know, that could also create some changes in competitive behavior that we're watching closely, as Jim said in his prepared remarks. And we feel like we're in a great position, capital-wise, to step in.
Doug Harter (Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Now we'll move to Finian O'Shea with Wells Fargo. Your line is open.
Finian O'Shea (Director and Senior Equity Research Analyst)
Hey, everyone. Good morning. Thanks for keeping my place in line. So a follow-up on John's question on software. Just to push back on a couple of those points for the spirit of argument. The risk, I think, is presented pretty widely as still a few years out. You have a good sense in the book as you outlined, but what sort of developments are you looking out for that would threaten even the more, say, foundational enterprise SaaS plays? And do you see any progress toward those risks from AI in real time? Or, if not, you know, why so confident that that will take a very long time? Thanks.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. Yeah, thanks, Finian, and I would love to offline sit down and debate it at length. I think it's really hard, though, for me to see a scenario where we would find any kind of real dramatic risk or change in our view toward those core kind of enterprise software businesses or those regulated industries. Obviously just talked at length about all the reasons why. I think for us, what we're focused on is the businesses that can be disrupted, or... And I'm not going to say our, you know, portfolio is entirely clean. We have a very small amount of portfolio companies that could be disrupted, and that's where we're spending a lot of our time and focus and working with the financial sponsors and getting ahead. It's not in those core enterprise software businesses.
So I'm challenged right now to come up with, you know, scenarios where we would really see that get disrupted. And look, I think, the areas that we do think can get disrupted and where we're trying to be really disciplined on new transactions are, you know, kind of more single function software apps that sit on the edges of the tech stack. Certainly any kind of software that creates or delivers content, because AI is fantastic at creating content. So we'd be extremely careful about those. You know, data analysis or visualization-type companies, AI is exceptional at summarizing data and spitting out all different types of reports and synthesizing those. So, you know, the—I think, I just think those are the areas that are more at risk. And again, very, very small exposure in our portfolio for those.
So sorry, not a great answer. Just can't come up with risks to those core enterprise businesses.
Finian O'Shea (Director and Senior Equity Research Analyst)
Appreciate that. Hard to envision. Follow on the dividend. Appreciate the color there. It feels like there'd be like a pretty good tailwind, even though the structuring fees are lighter in today's environment, has been the volume. The deployment has obviously been fantastic. Does that sort of need to continue in your outlook or guidance, or does that maybe moderate and something else offsets that impact?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. Yeah, I mean, there's so many variables and things that change all at once, right? So it's hard to sort of look at one variable or one driver and just say, if that changes, what happens? One thing I do want to say on the structuring fee point is the fees were actually consistent during the quarter. We had another quarter where we had some transactions that we fronted for and sold right after closing, and so that dilutes the fee percentage, the sort of stated fee percentage. But actually, the fee percentage on a constant basis, if you just look at the dollars that we're holding in the book, was constant quarter over quarter. So just want to, want to hit that one.
But look, I think if, if the spread environment stays where it is now, which is obviously tight, and we see, you know, rates potentially continue to fall a little bit like the curve shows, then we're going to want to have a lot of volume like we did this quarter, in order to produce good results. And I don't see any reason why that wouldn't be the case, that we'd see that kind of volume if, the spread environment and the economic environment kind of stays where it is. If volume falls off, I would think there would be other things that are happening in conjunction with that, which, you know, maybe is less supply of capital in our space. Therefore, maybe spreads widen, maybe fees widen.
Certainly, what we saw in 2022 and 2023, coming off a super high volume year in 2021, and everything was getting tight, spreads, you know, widened 150 basis points. Volume fell off, but we obviously had a fantastic period of performance at Ares Capital through 2022, 2023, despite the lower volume. So, you know, I just think it's really hard to pick one variable. So hopefully that helps answer the question.
Finian O'Shea (Director and Senior Equity Research Analyst)
Yes, helpful. Thanks a lot.
Operator (participant)
We'll take our next question from Casey Alexander with Compass Point. Your line is open.
Casey Alexander (Managing Director and Senior Equity Analyst)
Hi, good morning, Kort, and thank you for-
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Hi.
Casey Alexander (Managing Director and Senior Equity Analyst)
Taking my questions. I do want to expand on that. I mean, you did give, you know, a little bit of color on broadly syndicated market and what that could cause to happen with spreads in software. But, I'm curious in that we've had some, at least psychological market dislocation going on since before you guys reported your third quarter results as a result of the Dimon comments and whatever. And this has continued to be, you know, picked up a lot from the media on the minds of investors left and right. And so I'm curious, why haven't we or are we about to see a widening of spreads in general?
Normally, in a period of dislocation such as this, we usually see that happen fairly quickly, and in this event, it hasn't happened. And I would add, you know, I think inflows into the non-traded market are slowing down. So, you know, I'm just curious on some comments as to why we haven't seen spreads widen or if you think they're about to.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, great, great question, Casey. I probably two points I'd make on the events you mentioned. So when we saw some of that volatility, you know, a quarter or two ago, when First Brands and Tricolor, and there was concerns about credit quality and potential blow-ups, the BSL market widened out for a pretty short period of time. And it actually did recover pretty quickly, and the fourth quarter became active again for the BSL market, and spreads kind of tightened back in that, in that side of the market. So I just, it was too short-lived, is what I would say, to drive real impact on the private market. And as you know, I'm sure there's a lag in our market.
We often see the broadly syndicated market will move up and down, and our market takes a little bit of time to react to that, which is, by the way, one of our value propositions in our market, is we don't gyrate as much, and our capital is more stable for our borrowers. And we take our time to make sure that any spread movement in the broadly syndicated market is going to be more sustained. So I think that's just what we saw for the first event you mentioned last year. We were thinking there would be maybe a more sustained period, but it just didn't really prove out. You know, on the non-traded flows, absolutely something we're watching really closely. Again, what I would say on that one is that's pretty new.
So it's really in the last month or two, max, that we've seen those flows change, and it's not like they are, on a net basis, moving wildly negative. They're really, on the whole, just kind of moving. You're seeing redemptions, but you're still seeing inflows, so they're kind of, the money's not flying into those funds like it was before, but it's still remaining pretty stable in terms of the funds that are there. I do think if it stays like that, it will impact competitive behavior for our peers that are more concentrated to that channel. And at Ares Capital, and at Ares Management, I should say, we've been purposeful about not becoming too concentrated into that channel so that we can take advantage of, maybe those kinds of changes in competitive behavior.
So again, if it stays like that, I expect it to change things, and that could absolutely be a catalyst for spread widening, but it's just too soon. You know, we're really anecdotally, we haven't seen enough volume come through the system. It's January, seasonally the slowest month of the year, but we're watching it closely. Hopefully, that helps.
Casey Alexander (Managing Director and Senior Equity Analyst)
Well, yes, it does. Thank you. My follow-up is, you know, it's been a while since the stock has traded below NAV, and certainly the recent market turmoil has been a catalyst for that. I'm sure investors, you know, would love to hear. You know, our view has always been that if you're willing to take capital from the market when you're trading at a premium to NAV, you should be willing to give capital back to the market when you trade at a discount. You guys do have a billion-dollar share repurchase program. I think investors would like to hear your willingness to deploy the share repurchase program, depending upon, you know, how volatile the markets get.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. Good question. I guess the only thing I'd say on that, Casey, is just we have purchased shares back in the past. So it's not something that we're not unwilling to do. And it's always on the table and something that we're looking at and discussing with our board based on where the stock is trading. So, other than that, I probably don't want to speak too much or give much, you know, any kind of forward-looking statements about what we might or might not do on that front, other than to say that we have done it, and we're always open to it.
Casey Alexander (Managing Director and Senior Equity Analyst)
Okay. Thank you.
Operator (participant)
We'll take our next question from Arren Cyganovich with Truist. Your line is open.
Arren Cyganovich (Managing Director and Senior Equity Research Analyst)
Thank you. Lack of knowledge in the tech sector, but, I'm going to give it a shot anyways. You mentioned the average EBITDA for the software portfolio companies. It's over 350, and they've been growing. When I look at public software companies that have been facing a lot of pressure, EBITDA is not really a metric that they use in terms of valuation because I guess they're in a higher growth phase. I was wondering if you could just describe some of the differentiation, between the software that you own versus, you know, what we might be looking at in the, in the public markets.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. I don't know that it's all that different. I just think you're—it's a difference between equity and debt thesis, right? When we're thinking about the investment strategy. So we, as lenders, are looking at the underlying cash flow of these businesses to support our loan and get us paid our money back. So we're, we're very focused on EBITDA. The equity markets and publicly traded companies are focused on forward growth to justify their valuations, and there have been, you know, extremely high expectations of future growth. And I think as you start to see some of that growth temper, that is driving a lot of the falloff in values in the public market. And that's why those public companies are always pointing to, you know, revenue metrics and growth metrics, because I just think those investors are more focused on that.
I don't think they're necessarily different types of companies. We have seen, obviously, in the lending space over the last five or six years, the development of recurring revenue loans, where there are lenders that will lend against the revenue and the forward growth, not necessarily the EBITDA or the forward achievement of EBITDA. We have been very conservative on that, and I didn't even really mention that as part of the overall, you know, the intro I did on the software topic. Another data point to even point out around our strategy, which is we've been much more conservative around recurring revenue lending than I think a lot of our peers, and it's less than, it's like less than 2%. One to 2% of our book right now is recurring revenue loans, and that's also extremely diversified.
We've had a strategy of building that book with a bunch of very small positions so that we can watch that space develop and see how it would perform. By the way, it's actually performed quite well. And those loans have actually converted into EBITDA loans, so it's actually been a good space. But we've been very conservative on that. So hopefully, that helps answer the question.
Arren Cyganovich (Managing Director and Senior Equity Research Analyst)
It does. I still need to do some reading on the sector since it's not my area of expertise, but it—so as a follow-up, the... You know, we've been waiting for the M&A markets to really open back up and the IPO markets to kind of open back up to free up some of the, you know, investments that the private equity have been holding on for longer periods. Do you feel like the software pressure is going to weigh on that timeline for 2026? And, you know, maybe what other areas outside of, you know, in this kind of story, other sectors, you know, do you see within your pipeline that might be able to pick up some of that slack?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. I mean, I think it obviously might impact in the software space, right? So, especially for the—your prior question around valuations in the public market, and when you're a private equity firm looking to buy a software company, you're obviously going to rethink value. And a lot of the private equity firms that own the existing companies pay pretty high prices. So, I certainly do expect there could be a bit of a widening of the gap on bid-ask spreads on new buyouts in the software space. You know, that being said, I still think there's going to be really attractive add-on opportunities for existing portfolio companies to potentially take advantage of lower valuations, and I think that'll be a good opportunity for us to deploy into the space.
Certainly, take private opportunities in the software space, given lower valuations will probably tick up if I had to venture a guess. There are some offsetting factors, I think, within that industry. You know, I mean, in terms of the rest of the economy, again, fundamentals feel strong, growth rates are good, and I don't necessarily see that spilling over into other areas of the economy. I think the ingredients are in place, given the sort of long-in-the-tooth nature of the hold periods on a lot of private equity funds that just continues to extend and given the, you know, apparent confidence in the overall economy for, on the part of buyers to step up and buy new companies. I think we still feel optimistic on the rest of the year.
Arren Cyganovich (Managing Director and Senior Equity Research Analyst)
Great. Thank you. Appreciate it.
Operator (participant)
We'll move next to Brian McKenna with Citizens. Your line is open.
Brian McKenna (Director of Equity Research)
Okay, great. Thanks for squeezing me in here. So maybe one more on the theme of software. Yeah, I think all the focus recently has clearly been around the negatives from AI, and no one is really talking about maybe the potential upside for your portfolio companies from AI and leveraging AI, specifically those companies away from software. So I'm curious, when you look across your portfolio today, is there any way to think about what % of your portfolio companies could actually see more tailwinds from AI than headwinds over time? And then is there actually a scenario where your portfolio collectively is experiencing more net benefits longer term?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. Thanks so much for asking, Brian. You know, we're lenders, so we're always focused on downside risks. But 100% there is upside, and I think that is missing from the discourse here in the public, which is it sort of almost feels like people think big software companies are sitting there, heads in the sand, asleep at the switch, while AI is creating competitive threats, and they're not doing anything, and it couldn't be further from the truth. We, we have great dialogue with our software companies. They are all working on augmenting their products with, you know, using AI solutions or just using AI to create additional software modules and tools to add on to their core infrastructure software.
And that's actually going to help some of these core infrastructure software businesses create new products to bolt on and upsell faster than they might otherwise have been able to do, and they already have that leg into the customer via the core enterprise. I, 100% think it's gonna be a boon to some of our companies. Obviously, as lenders, you know, help us get our money back, you know, maybe faster, but doesn't, you know, there's not a ton of upside as a lender. But back to our equity co-investment strategy, which we talked a lot about in the prepared remarks, certainly could be really helpful on those equity co-investments that we have made selectively into some of those software companies.
Brian McKenna (Director of Equity Research)
Okay, great. That's helpful. And then just one more for me. You know, just taking a step back and looking at the industry, it's clearly getting larger and larger and more competitive, and there's really a long list of firms that can write large checks in the market. So I think having intellectual capital and really a full suite of value-added capabilities are becoming that much more important. So you guys clearly have this. You noted, you know, some of the strong expertise that exists across your deal teams and just the platform more broadly.
You know, when you look at some of the differentiated deals you're winning in the market today, how much of these, you know, how much of those are a function of kind of these full suite of capabilities, if you will, and really the capabilities away from just being a provider of capital? And, you know, just trying to think through that a little bit more.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, it's all about those capabilities and not just about being a provider of capital. So, you know, it's a combination of so many different things. I think first and foremost, are the amount of people and the talent that we have on our origination and investment team. We do believe we still have the largest investment team in the direct lending industry, and that means we have a lot of people out there calling on companies, trying to source opportunities, and that deal flow takes longer to germinate and result in an actual transaction.
We could be out talking to, you know, CEO or management team or a board of a, of a non-sponsored company for years, building a relationship, and there might not be any transaction to do, and then all of a sudden they wanna do something, and they pick up the phone and call us because we've been building that relationship. So this is something that does not happen overnight. Takes a really long time to build those relationships that lead to this kind of deal flow. And, you know, so it starts with the team, starts with those touch points, but then it also combines with the fact that that team is out there offering a huge amount of flexibility of products, right? We're not out just saying, "We can be your senior lender, your bank." We're saying, "We can be your junior capital provider.
We can give you equity co-investments. We can start as a mezzanine lender, and then down the line, if you want a senior lender, we can become that lender." So we're really trying to explain to these companies that we can be their capital provider for the next 10-20 years, not just the next 3-5 years, and I think that really resonates. So it's all those things combined. It's not really just, you know, one thing, and I do think we're ahead of our, of our peers in that respect.
Brian McKenna (Director of Equity Research)
Thanks so much.
Operator (participant)
We'll take our next question from Robert Dodd with Raymond James. Your line is open.
Robert Dodd (Analyst)
Hi, guys. Quick one from me, maybe. You obviously feel very comfortable with the underwriting process you're doing on software, and you've got a well-thought-out thesis there. You seem also optimistic that maybe spreads will widen in that market if the BSL market becomes less inclined to finance new software LBOs, et cetera. I mean, so looking at that, would that make software even more attractive to you from a risk-return perspective? And would you be looking to potentially increase your allocation to software over the next, you know, call it 12-24 months?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah. Good question, Robert. I-- Look, I... We will have to see what unfolds, I think is what I would say. I don't, I... It could go in so many different directions in terms of, yeah, how, how wide spreads get, right? What types of companies are looking to raise capital. There's just so many different things that can go into that, that I don't know that I want to necessarily speculate. We, we are big on diversification, as we've said over and over in so many different ways, and software is our largest industry category. We're very comfortable with it, but at the same time, we, we like diversification. Maybe I'll just leave it at that, and we'll see what the market gives us.
Robert Dodd (Analyst)
Okay. Thank you.
Operator (participant)
We'll move next to Kenneth Lee with RBC Capital Markets. Your line is open.
Kenneth Lee (VP and Senior Equity Analyst)
Hey, good afternoon, and thanks for taking my question. Just one on the broader industry. The recent OCC, FDIC changes to the leveraged loan guidance for banks. Do you expect to see any kind of potential for meaningful change in over the competitive landscape over time, based on the change of guidance there? Thanks.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, Ken, definitely something we're watching closely. I, I, you know, I, I don't think so. The reality is, the leverage lending guidance that was put in place a while ago hasn't really been enforced, and so I think the relaxing of that guidance is not necessarily going to change behavior. I think the larger driver of, you know, regulatory behavior on banks is the regulatory capital requirements and the capital charges that banks see if they make a loan into our market, and that still remains punitive and is not changing. I just don't think the levered lending guidance change is going to make that clear.
Kenneth Lee (VP and Senior Equity Analyst)
Got you. Very helpful there. And just one quick follow-up for me. On some of the recent deals you've been seeing or some of the new investments in terms of the terms and documentation that you're seeing there, any changes more recently? And more specifically, have you been seeing any loosening of, for example, like EBITDA add backs or any other terms there? Thanks.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Not really, no. If anything, I would say there's probably a heightened focus on documentation terms, just given some of the headlines around LME transactions in the broadly syndicated markets and the looser documentation that exists in that market. There's been a little bit more of a spotlight that's been put on that. And so I think it's actually been a good thing for our space. It's woken up more of our peers to the importance of focusing on documentation. We've made that a priority here for years now, and it's a critical part of our investment committee process. We won't walk away from transactions based on documentation terms. Not really seeing a big change to that, if anything, getting better.
Kenneth Lee (VP and Senior Equity Analyst)
Got you. Very helpful there. Thanks again.
Operator (participant)
We'll take a next question from Paul Johnson with KBW. Your line is open.
Paul Johnson (VP and Equity Research Analyst)
Yeah, good afternoon. Thanks for taking my questions. I know you have been fairly conservative with the ARR structures in the past, as you said. But is there any sense of, like, the number or the percent of your software book that is below profitability today?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Below profitability, you mean negative EBITDA?
Paul Johnson (VP and Equity Research Analyst)
Y-yeah, correct.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
I don't have the numbers in front of me, but I can't imagine that there would be another software company in our portfolio outside of those ARR loans that would be negative EBITDA. And in fact, I would also venture a guess that many of those ARR loans have positive EBITDA as well, for two reasons. Number one, when we do a new ARR loan, in a lot of cases, they still have positive EBITDA, but it's not necessarily enough EBITDA to maybe justify the amount of debt. So you look at it on a revenue basis, and they're growing 50% a year, and it's going to be a lot of EBITDA in a year or two. But it's not like every one is negative EBITDA. Some of those are actually positive EBITDA at the outset.
But then secondly, a lot of the ARR loans in our portfolio have been in there for a number of years and have achieved the growth that they were expecting. And so now they are, you know, meaningfully positive EBITDA. So I mean, very, very, very small, almost de minimis amount, I would say, of our software book has negative EBITDA.
Paul Johnson (VP and Equity Research Analyst)
Got it. Thank you. That's very helpful. And then, last, I would just ask, on the PIK portfolio, which, you know, has been a good portfolio for you guys, historically. I'm just curious, though, within, on the debt side of some of the PIK assets, is there a tilt toward software within that portfolio? Or, you know, has that generally been just as diversified as the broader portfolio?
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, it's, it's around the same. We did take a look at that, and the... I'll say two things. Number one, the percentage of the software book had a slightly higher percentage of PIK in it. But the PIK in that software book is, I want to say, 99%, maybe even 100%, structured at the upfront, at the outset of the investment, not amendment PIK, right? And that's an important thing on the overall PIK book that we talk about all the time and try to disclose, which, on a consistent basis, which again, this quarter, on our overall PIK book, it's roughly 90% of the PIK interest and dividends was structured at the outset of the investment and purposefully done. Only 10% is amended PIK.
And then so again, in the software book, it's almost 100% is structured. So again, it goes back to the point that we're just not seeing weakness in the software book at all, so we don't have the need to provide any amended PIK there.
Paul Johnson (VP and Equity Research Analyst)
Got it. Appreciate it. That's all for me. Thank you very much.
Operator (participant)
Once more for your questions, that is star and one on your telephone keypad. We'll move next to Derek Hewitt with Bank of America. Your line is open.
Derek Hewitt (Analyst)
Good afternoon, Kort. So, how large are you willing to grow both the SDLP and Ivy Hill over the next year or so, kind of given the more favorable economics versus the core portfolio? And then are there assets on the balance sheet today that could potentially be sold down to those entities?
Jana Markowicz (Partner and COO)
Yeah. Thanks, Derek. So I'd, I'd say, you know, if you look historically, we've had an investment in Ivy Hill go as high as 11%, and I think SDLP as high as 7%. So, those are probably good, you know, estimated guardrails for now. So we certainly value those two assets quite a bit and agree with they're very strategic to us, and, and you're right, they are, are pretty high yielding, particularly in a, a low-yield environment. So, you know, I-we certainly see, saw, you saw us grow this quarter, so I think there's a, you know, certainly in our playbook to continue focusing on those two investments over the course of this year.
Yes, you know, we did see in the fourth quarter we did sell assets in Ivy Hill, and so that is certainly, there's certainly more assets on the balance that we could look to move down to Ivy Hill over time.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Yeah, I don't think we want to. There's not really a stated cap or a target that we manage the business toward. Again, I think we want to see how the market develops, what kind of transaction activity there is, where spreads go. All of those factors work into it. The only real cap would be the 30% non-qualifying asset cap. You know, so that would be the sort of governor on the top end.
Derek Hewitt (Analyst)
Okay, great. Thank you.
Operator (participant)
This concludes our question and answer session. I'd like to turn the conference back over to Kort Schnabel for any closing remarks.
Kort Schnabel (Partner, Co-Head for US Direct Lending, and CEO)
Great. Well, thank you all for joining us today, and for your continued support and engagement, and we look forward to reconnecting with you on our next quarterly call. So till then, stay well, everyone, and have a great day.
Operator (participant)
Ladies and gentlemen, this concludes our conference call for today.