Ares Capital: Portfolio Companies Going From Strength To Strength
Rather than only embark on long-winded reviews of BDC performance during earnings season, we thought we would also point out interesting items we've identified while reviewing earnings releases, investor presentations, filings and conference calls. These are faster for us to write at a time when we're constantly busy keeping up with the flood of the latest BDC information and a quicker read for our busy readers From the editor
No Cracks. No Cockroaches.
All we've heard in the financial press for months now - following the attention-getting failures of Tricolor and First Brands - is that "Private Credit" - a term fully defined by the pundits - is on the edge of some sort of credit crisis of GFC-like proportions. This is a theme that redoubled in intensity this past week with the market's sudden concern that artificial intelligence firms - presumably meaning players like ChatGPT, Perplexity and Claude - will be putting many software companies out of business in the years to come - including those borrowing from BDCs.That may be for all we know. On the other hand, we did hear from Ares Capital (ARCC) - the largest public BDC, which has a portfolio of 603 companies with a value of nearly $15bn - and the metrics being quoted by the management of the BDC do not jibe at all with these dark portents:
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 3x 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 0.25 turn of EBITDA from the prior year while our portfolio's average interest coverage ratio improved to 2.2x driven primarily by lower market interest rates and earnings growth.
Our credit quality showed stability throughout the year as our nonaccruals 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.
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
For all we know an economic slowdown might be right round the corner. However - going by what we're hearing from ARCC - it's not showing up in its portfolio company metrics. Borrowers' EBITDA is growing, and fast. Leverage is decreasing and debt service numbers are going from good to even better.
Admittedly this is just one BDC's portfolio but it's an important one that spans - according to them - the lower, middle and upper middle markets and most segments of the economy.
What are investors going to believe: as yet unsubstantiated rumors of deteriorating credit quality across the Private Credit universe or the encouraging snapshot offered by one of the top leveraged lenders? More than the direction of interest rates, it's this issue which will most influence BDC prices in 2026.our view