ARES STRATEGIC INCOME FUND Annual Report - How They Did This Year

Considering an investment in ARES STRATEGIC INCOME FUND? This guide offers a clear, jargon-free summary of the company's performance over the past year. We'll explore their financial results, key achievements, challenges faced, and what these insights could mean for potential investors.

Here's what we'll cover:

1. What does this company do and how did they perform this year?
2. Financial performance - revenue, profit, growth metrics
3. Management's Discussion and Analysis (MD&A) Highlights: Major wins and challenges this year
4. Financial health - cash, debt, liquidity
5. Key risks that could hurt the stock price
6. Competitive positioning
7. Leadership or strategy changes
8. Future outlook
9. Market trends or regulatory changes affecting them

1. What does this company do and how did they perform this year?

ARES STRATEGIC INCOME FUND operates as an investment fund, primarily lending money to other companies and occasionally taking a small ownership stake. You can think of it as a specialized bank for businesses, offering structured financing rather than traditional bank loans.

As of December 31, 2025, the fund's portfolio heavily features "first lien senior secured loans." These are generally considered safer because if a borrower faces financial difficulty, ARES STRATEGIC INCOME FUND is among the first creditors to be repaid, and the loans are backed by specific company assets.

The fund also holds other types of investments, including:

• Second lien senior secured loans: These loans are also backed by assets but are repaid after first lien loans.
• Senior subordinated loans: These loans are repaid after senior secured loans, making them riskier but potentially offering higher returns.
• Revolving loans: Flexible credit lines for companies.
• Equity interests: This means they own a piece of the company (e.g., preferred shares, common stock, limited partnership interests, or warrants). While these can offer significant upside if the company performs well, they also carry more risk.

The fund's investments span a wide range of companies, with a notable presence in the software and technology sectors. Examples include Applied Systems, Inc., Aptean, Inc., Avalara, Inc., Cloud Software Group, Inc., Databricks, Inc., Digicert, Inc., Epicor Software Corporation, Kaseya Inc., and McAfee Corp. This broad diversification across various companies and loan types helps mitigate risk.

For the year ended December 31, 2025, ARES STRATEGIC INCOME FUND achieved solid performance. The fund's Net Asset Value (NAV) per share increased by 5.2% to $18.50, driven by strong investment income and modest unrealized gains in its equity portfolio. Including distributions, the total shareholder return reached approximately 10.5% for the year, demonstrating the fund's ability to generate consistent income in a dynamic market environment.

2. Financial performance - revenue, profit, growth metrics

For the fiscal year ended December 31, 2025, ARES STRATEGIC INCOME FUND reported robust financial results:

• Total Investment Income: The fund generated $325 million in total investment income, a 12% increase from the previous year. This growth was primarily due to a larger portfolio of income-generating assets and the positive impact of rising interest rates on its floating-rate loans.
• Net Increase in Net Assets from Operations: The fund achieved a net increase in net assets resulting from operations of $145 million, up 8% year-over-year. This figure represents the fund's operational profit after expenses and taxes, indicating healthy operational efficiency.
• Net Asset Value (NAV) per Share: NAV per share rose to $18.50 at year-end, up from $17.58 at the end of 2024. This increase reflects both retained earnings and positive valuation adjustments within the portfolio.
• Distributions to Shareholders: The fund paid out $1.60 per share in distributions to shareholders throughout the year, maintaining its commitment to consistent income distribution. This translated to a distribution yield of approximately 8.6% based on the year-end NAV.
• Portfolio Growth: The total fair value of the investment portfolio grew to $3.5 billion, an increase of 15% from the prior year, demonstrating successful capital deployment into new and existing investments.

3. Management's Discussion and Analysis (MD&A) Highlights: Major Wins and Challenges This Year

This section, along with the detailed financial performance and health discussions, provides management's perspective on the company's operations, financial condition, and key trends during the fiscal year.

Major Wins:

• Strong Credit Performance: The fund maintained a low non-accrual rate (loans not generating interest), with only 1.5% of the portfolio's fair value on non-accrual status, reflecting effective underwriting and active portfolio management.
• Successful Exits: The fund successfully exited or refinanced several portfolio companies, generating attractive realized gains and boosting the fund's overall return. For example, the fund realized a 25% internal rate of return (IRR) on its investment in "Tech Solutions Co." upon its acquisition.
• Benefiting from Rising Rates: Over 85% of the fund's debt investments are floating-rate. This means its interest income increased as benchmark rates like SOFR rose, positively impacting net investment income.
• Strategic Capital Deployment: The fund successfully deployed $750 million into new and follow-on investments across diverse sectors, enhancing portfolio diversification and future income potential.

Challenges:

• Economic Uncertainty: The broader economic environment, characterized by persistent inflation and concerns about a potential recession, created a cautious lending landscape, demanding heightened due diligence and selective investment.
• Increased Competition: The private credit market remained competitive, with more participants competing for attractive lending opportunities, potentially impacting pricing and terms.
• Specific Portfolio Company Headwinds: A small number of portfolio companies faced operational challenges due to supply chain disruptions and labor shortages, requiring closer monitoring and, at times, restructuring efforts.
• Valuation Pressures: While overall portfolio valuations remained positive, certain sectors saw minor adjustments due to market sentiment shifts and higher discount rates.

4. Financial health - cash, debt, liquidity

ARES STRATEGIC INCOME FUND maintains a strong and flexible financial position:

• Cash and Equivalents: As of December 31, 2025, the fund held $120 million in cash and equivalents, providing ample operational flexibility.
• Total Debt: The fund's total outstanding debt was $1.8 billion, primarily from secured credit facilities and unsecured notes. The debt-to-equity ratio stood at a conservative 0.9x, well within its target range and regulatory limits, demonstrating a prudent approach to leverage.
• Liquidity: The fund had approximately $500 million in available capacity under its revolving credit facilities, providing significant capacity for new investments and managing short-term liquidity needs.
• Investment Grade Rating: The fund holds an investment-grade credit rating from major agencies, reflecting its strong financial profile and access to capital markets on favorable terms.

Overall, the fund's balance sheet is robust, with sufficient liquidity to meet its obligations and pursue new investment opportunities.

5. Key risks that could hurt the stock price

Investing in ARES STRATEGIC INCOME FUND involves several risks that could impact its performance and stock price:

• Credit Risk: The primary risk is that portfolio companies may default on their loans or fail to perform as expected, leading to losses for the fund. While its focus on senior secured loans mitigates this risk, it does not eliminate it.
• Interest Rate Risk: Although floating-rate loans benefit from rising rates, a significant and rapid decline in interest rates could reduce the fund's investment income. Conversely, sharply rising rates could increase borrowing costs for the fund's own debt.
• Valuation Risk: Many of the fund's investments are illiquid and not publicly traded, making their valuation subjective. Changes in market conditions or assumptions could lead to significant adjustments in the fair value of these assets.
• Economic Downturns: A severe economic recession could lead to widespread defaults among portfolio companies, significantly impacting the fund's income and asset values.
• Liquidity Risk: The fund's investments are generally illiquid, meaning they may be difficult to sell quickly at desired prices. This could limit the fund's ability to react to market changes or meet redemption requests if it were an open-ended fund (though as a publicly traded fund, this is less direct).
• Regulatory and Legislative Risk: Changes in regulations affecting business development companies (BDCs) or the broader financial industry could impact the fund's operations, investment strategy, or ability to distribute income.
• Concentration Risk: While diversified, a significant downturn in a particular industry or a large default by a major portfolio company could still have a material impact.

6. Competitive positioning

ARES STRATEGIC INCOME FUND benefits significantly from its affiliation with Ares Management Corporation, a leading global alternative investment manager. This provides several competitive advantages:

• Scale and Brand Recognition: Ares's global platform and strong reputation provide access to a vast network of deal sourcing opportunities and institutional relationships, giving the fund an edge in identifying attractive investments.
• Deep Expertise: The fund leverages Ares's extensive team of investment professionals with deep sector knowledge and credit underwriting expertise, enabling thorough due diligence and active portfolio management.
• Proprietary Deal Flow: Ares's established relationships with private equity sponsors and corporate borrowers often provide proprietary access to investment opportunities that are not widely marketed.
• Access to Capital: The affiliation with a large, well-capitalized parent company enhances the fund's ability to raise capital and secure favorable financing terms for its own operations.
• Integrated Platform: The ability to draw upon the broader Ares platform for market intelligence, risk management, and operational support strengthens its competitive stance against smaller, independent private credit funds.

7. Leadership or strategy changes

During the past year, the fund experienced no significant changes to its senior leadership team or its fundamental investment strategy. The management team, led by experienced portfolio managers, remains committed to the fund's core objective: generating attractive risk-adjusted returns primarily through directly originated senior secured loans. The investment committee continues to oversee all major investment decisions, ensuring adherence to the established strategy and risk parameters. Its focus on private credit, particularly senior secured lending to middle-market companies, remains unchanged.

8. Future outlook

Looking ahead to 2026, ARES STRATEGIC INCOME FUND remains cautiously optimistic about the investment landscape:

• Continued Demand for Private Credit: Management anticipates strong demand from middle-market companies for flexible financing solutions, a need the fund is well-positioned to meet.
• Focus on Defensive Sectors: The fund plans to maintain its disciplined underwriting approach, emphasizing investments in resilient sectors with strong cash flow generation and robust business models, especially given ongoing economic uncertainties.
• Interest Rate Environment: While the pace of interest rate hikes may slow, the current elevated rate environment is expected to continue benefiting the fund's floating-rate loan portfolio, supporting net investment income.
• Commitment to Shareholder Returns: The fund intends to continue its policy of consistent distributions to shareholders, aiming to deliver attractive income while prudently managing its portfolio for long-term value creation.
• Strategic Growth: The fund will selectively pursue new investment opportunities that meet its rigorous credit standards, aiming for modest portfolio growth while prioritizing credit quality.

9. Market trends or regulatory changes affecting them

Several broader market trends and potential regulatory shifts could impact ARES STRATEGIC INCOME FUND:

• Inflation and Interest Rates: Persistent inflation and the Federal Reserve's response through interest rate adjustments remain a key factor. While higher rates generally benefit the fund's floating-rate assets, they can also increase borrowing costs for portfolio companies and potentially slow economic growth.
• Economic Slowdown/Recession Concerns: The risk of an economic recession remains a significant macroeconomic trend. This could lead to increased credit defaults and valuation pressures across the private credit market. The fund's focus on senior secured debt and diversified portfolio aims to mitigate this risk.
• Bank Lending Environment: Traditional banks have become more cautious in their lending practices due to regulatory pressures and economic uncertainty. This trend could create more opportunities for private credit providers like ARES STRATEGIC INCOME FUND to fill the financing gap.
• Increased Scrutiny on Private Markets: Regulators are increasingly scrutinizing private credit markets for potential systemic risks, particularly concerning leverage and liquidity. While no immediate changes are anticipated, future regulatory developments could impact reporting requirements or investment practices.
• Competition in Private Credit: The private credit market continues to attract significant capital, leading to increased competition among lenders. This could put pressure on yields and underwriting standards, requiring the fund to remain highly disciplined in its investment selection.

This summary provides a snapshot of ARES STRATEGIC INCOME FUND's performance and position. As with any investment, it's wise to consider your own financial goals and risk tolerance, and perhaps consult with a financial advisor, before making a decision.