Penelope Roll: No. Actually, this is — our tax expense has 2 component parts. One is corporate level taxes where maybe we have some corporate level tax expectation around realized gains that are in blockers, but we also have the excise tax. So if you break down the components, we actually had a reversal of some corporate level taxes that we had estimated in Q4, that we realized weren’t going to be at the level we expected, not a material amount, but it’s driving down the net number. So the excise tax is still at a level that we believe we will have a strong level of spillover going into next year if you break down the pieces.
Operator: Our next question comes from the line of Kenneth Lee with RBC Capital Markets.
Kenneth Lee: Just one follow-up on the relatively subdued portfolio activity in the quarter and the expectation that you could see a pickup as the year progresses. How much of that pickup would — could be driven by either a pickup in M&A activity or other factors realizing that a good portion of the origination volumes are probably dependent more on incumbent borrowers?
Unidentified Company Representative: Yes. We’re hoping it’s a little bit more from a pickup in M&A activity. And we’re starting to see some initial signs very early, but some initial signs that, that might occur now that there’s a little bit more stability and less noise in the market. I think — we haven’t seen a lot of volume, obviously, this year, but the volume that we have seen has been very high-quality companies because those are the kinds of companies that are able to transact in this market. So that’s one piece of good news. And — but you certainly should expect us to continue to see backing our existing portfolio companies as — if the environment stays light, sponsors certainly are going to be focused on tuck-in M&A as they have been in the first quarter. So it should be a mix of both, but again, we are starting to see some early signs of new M&A.
Kenneth Lee: Got you. Very helpful there. And 1 follow-up, if I may. In terms of the new investment commitments you highlighted in the release for April, I noticed there was a pickup in terms of fixed rate investments as part of the mix. Wondering if that’s due to the outlook for rates or whether there are any other factors at play there?
Kipp DeVeer: I think it’s just an anomaly of April. I mean, to be honest, nothing strategic to take away. I’d have to go poke back through what the April pipeline. In fact, actually came through, but nothing material or interesting going on there, Ken.
Operator: Our next question comes from the line of Mark Hughes with Truist.
Mark Hughes: Yes. the activity in the first quarter and then in April, a little heavier in the first lien — is that more defensive? Is the — that’s more attractive relative to second lien, for instance?
Kipp DeVeer: Yes. I would say that the — I mean, made the point about M&A picking up. The predominance of new deal activity, I’d say, that we’re working on has been built around financing with direct lending providers, right? We said about 95% of the deals done in Q1 got done away from syndicated markets, which kind of inclines borrowers to not participate in first lien, second lien deals. So the preponderance of what we’ve been working on, and I think the market is seeing generally has been floating rate senior secured unitranche deals. That’s really what’s leading the way. So that’s…
Mark Hughes: And then looking at interest coverage, so 1.7x for the Q1, if you could model that out is that just about the bottom if we look at the forward curve and depending on what happens with the economy is this about as bad as it gets or as low as it gets?
Kipp DeVeer: Yes. I mean it’s hard to predict because it’s so specific to where you — what the direction of travel is you think on rates, right? We still — as we mentioned, we see pretty good underlying company performance. So I think that number is going to be driven by rates. If you’re playing off the forward LIBOR curve, it should improve from here, right? Everything else held equal?
Unidentified Company Representative: Yes, running the forward LIBOR curve through our model, it does bottom out at 1.7.
Operator: Our next question comes from the line of Paul Johnson with KBW.
Unidentified Analyst: Only have one question, maybe 2 parts to this. But Ivy Hill has grown to be a fairly large part of the portfolio, I believe it’s about 11% as of this quarter. And a large part of the growth in the income from that investment come from the growth in investment income versus the management fees from Ivy Hill. But I was kind of hoping to maybe get a sense of how you view the risk of that investment, I guess, versus your current portfolio and how you would expect that to perform over a choppier credit environment? And the second part of that question as well is just what the current environment moves for that business? If that’s potentially something Ivy Hill benefit from people looking to utilize more of their balance sheet through CLO issuance, et cetera. Any thoughts there would be interesting to hear.
Kipp DeVeer: Yes. I mean let me give you the short answer, and then I’ll give you a slightly longer answer, but the short answer is we remain very optimistic about our investment in Ivy Hill. It’s been a great performer for us for a 15-year period. It delivers what we think are unbelievably attractive returns relative to the risk. Again, we’ve talked about this in the past, but it literally generated a roughly 15% IRR to ARCC over a 15-year period with almost no . We provided a little bit more financial disclosure on it, so people could understand it. But I’ll say one other thing. There’s a belief here that we’re investing in a CLO business, which is really not the case anymore. Most of Ivy Hill’s investments today are actually in bilateral loan funds and only about 25% of the AUM that they invest today are in traditional CLOs that have securitizations that are reminiscent of old CLOs. The other thing that’s important is if a middle market bank loan asset manager that tends to be materially less levered, both as a company as well as with its underlying funds, then the competitors you might be thinking they compete with.
So it’s a big investment for us. I don’t expect it, frankly, to grow from here because I have some of the same thoughts around concentration, both as a percentage of the outstanding assets as well as the outstanding income that comes from Ivy Hill, I think it’s reached its limit for the time being. Until the company continues to grow. But we feel, again, extraordinarily good about the dividend at Ivy Hill and the cash flows that come from that investment. We run a lot of sensitivities. We spent a lot of time with them thinking about what a more uncertain market could mean for them. And I feel that we’ve battle tested all of the assumptions such that I feel great about it.
Operator: . Our next question comes from the line of Robert Dodd with Raymond James.
Robert Dodd: On the kind of capital instruction fees this quarter, obviously, pretty low, but both lower originate or gross fundings but also a lower rate on that. I mean is that — can we just lay that the fleet of obviously about 25% of what you funded this quarter as IBL probably don’t get a fee on that — 80% was follow-ons. So sometimes you don’t necessarily get the same fee structures there. I mean should we look at this quarter as kind of a one-off because of the mix of deployments this quarter? Or are those fees going to be a little structurally lower going forward at least in the coming environment?
Kipp DeVeer: Yes. I mean — I’m going to — all I’d say, yes, Robert, I appreciate the question. Thank I mean it’s lower certainly because of Ivy Hill, right? So if you back out the Ivy Hill investment where we don’t take origination fees, it’s more in line with historicals, it’s around 2%. But I’ll let just comment on fees in the market, which I think have gone up a little bit.
Unidentified Company Representative: Yes. Well, versus last quarter, probably flat but up versus a year ago. But nothing’s changed this quarter. You shouldn’t read into that as meaning anything has changed in the market. It’s — probably the most important factor is the funding to existing portfolio companies being such a big percentage. The other thing is also in prior quarters, we’ve done some very large transactions and large transactions often come with higher fees and if we’re able to syndicate a piece of those larger transactions, then the effective fee rate on our final hold is going to be even higher versus this past quarter where we didn’t benefit from that. So those are some of the other factors.
Operator: Our Next question is a follow-up question from Casey Alexander from Compass Point.
Casey Alexander: I’m just wondering if you could contour the larger usage of the ATM program during the quarter, 13 million shares is way more than you guys have done in any particular quarter. Usually things like that are associated with a high level of investment activity and yet your investment activity in the quarter was relatively muted. So I was just wondering if you could contour that for us.
Kipp DeVeer: Yes. I mean I think it’s — look, I mean, it’s there to obviously take advantage when we think there are advantageous periods to issue in small amounts more than in the past, but I think relative to the company’s overall market cap, not particularly substantial. Some of it was the point, Casey, that you made in your prior question about being defensive and some of it came early in the quarter when we actually did have higher leverage, and we’re looking to deleverage a little bit. But probably more of that than new investing. I guess the only other thing I’d say is we did, as I mentioned, have 1 or 2 larger transactions in the quarter . And my guess is we’re capital planning for those and thinking about ATM issuance, we were planning on obviously participating in a couple of transactions that fell away.
