Q1 2022 Main Street Capital Corp Earnings Call
Greetings and welcome to the main Street Capital Corporation first quarter earnings Conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Zach Vaughan with Dennard Lascar Investor Relations. Thank you attack you may begin.
Thank you operator, and good morning, everyone. Thank you for joining US for main Street capital Corporation's first quarter 2022 earnings Conference call Main Street issued a press release yesterday afternoon that details the company's first quarter financial and operating results.
Document is available on the Investor Relations section of the company's website at Maine S T capital Dot com.
A replay of today's call will be available beginning an hour. After the completion of the call and will remain available until May 13.
Information on how to access the replay was included in yesterday's release.
We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage.
Please note that information reported on this call speaks only as of today may six 2022, and therefore, you're advised that time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
This call will contain forward looking statements. Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intends will should may or similar expressions.
These statements are based on management's estimates assumptions and projections as of the date of this call and there are no guarantees of future performance.
Results may differ materially from the results expressed or implied in these statements as a result of risks uncertainties and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or SEC dot Gov.
Main Street assumes no obligation to update any of these statements unless required by law.
During today's call management will discuss non-GAAP financial measures, including distributable net investment income.
Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures.
Certain information discussed on this call, including information related to portfolio companies was derived from third party sources and has not been independently verified and now I'll turn the call over to main Street's CEO Dwayne Blake.
Thanks, Zack good morning, everyone and thank you for joining us today we.
We appreciate you taking the time to join US we hope that everyone is doing well.
Joining me today with prepared comments are David Macdonald, our President and Chief investment Officer, and Jesse Morris, Our Chief Financial Officer, and Chief operating Officer.
Also participating for the Q&A portion of our call is Nick Meserve, our managing director and head of our private credit investment group.
On today's call I'll provide my usual updates regarding our performance in the quarter.
So providing updates on our asset management activities. Our recent declarations of our supplemental dividend in June and monthly dividends for the third quarter, our expectations for dividends going forward.
Our recent investment activities and current investment pipeline and several other noteworthy updates.
Following my comments, David and Jesse will provide additional comments regarding our investment strategy.
Investment portfolio financial results capital structure and leverage the impact of rising interest rates on our future net investment income and our expectations for the second quarter after which we'll be happy to take your questions.
We are pleased that main street delivered very strong first quarter results with net investment income per share and distributable net investment income or D. NII per share amounts that matched our quarterly record set in the fourth quarter and with D. NII per share that exceeded the monthly dividends paid to our shareholders during the quarter by over 19%.
The continued strong performance of our underlying portfolio companies resulted in additional fair value appreciation of our investments in these companies and when combined with our continued success in executing new lower middle market and private loan investments increased the fair value of our total investment portfolio at quarter end to $3 7 billion and resulted in a record.
Net asset value per share of $25 89.
These positive results and the continued momentum in each of our core strategies provided us with the confidence to recommend that our board of directors approve another supplemental dividend payable in June 2022, representing our third consecutive quarter with a supplemental dividend.
Our lower middle market and private loan strategies, which we consider to be our primary investment strategies, both delivered positive investment originations in the quarter, resulting in a net increase in lower middle market investments of $57 million and a net increase in private loan investments of $114 million.
We continue to believe that the strength of our differentiated investment strategies, including our highly unique lower middle market strategy combined with our diversified group of portfolio companies and our growing asset management business will allow us to consistently deliver superior results for our shareholders and we are very excited about our outlook for the remainder of 2022.
The operating performance across most of our portfolio companies has continued to be strong and this strong performance combined with ongoing organic and acquisition growth activities at several of our high performing portfolio of companies also provides us continued optimism about our ability to generate incremental fair value and net asset value per share increases in the future.
Sure.
We've also continued to make considerable progress on our asset management business. This includes progress at MSC income fund the non traded BDC, we advised through our external investment manager, which maintain a fully invested portfolio at the end of the first quarter.
We remain excited about our plans for the fund as we continue to execute on our investment strategies and other strategic initiatives and we are optimistic with our outlook for the future performance of the fund.
At Emmis private loan fund one we continue to grow both as capital commitments from investors and its investment portfolio through its co investment activities with main Street and MSC income fund and our private loan investment strategy. We are excited about the growing benefits, we expect to receive from this relationship in 2022.
After completing our fundraising activities for the fund we expect a total portfolio of approximately $200 million when fully invested.
The continued growth and favorable performance at both funds provides us confidence that we will receive increased future contributions from our asset management business.
The growth of our asset management business has also been significantly beneficial to our ability to execute our private loan strategy and we expect these benefits to increase in the future.
With our fundraising activities for EMS private loan fund now complete we are excited about moving onto the next stage in the growth of our asset management business.
We remain excited about our strategy for growing our asset management business within our internally managed structure and increasing the contributions from these unique benefit to our main street stakeholders.
Based upon our results for the first quarter and the positive performance of our existing portfolio companies combined with our favorable outlook in each of our core investment strategies and for our growing asset management business.
And the benefits of our efficient operating structure and strong liquidity position.
Earlier this week, our board declared a supplemental dividend of $7 five per share payable in June and monthly dividends for the third quarter of 2022 of $21.05 per share payable in each of July August and September representing a four 9% increase from the third quarter of 2021.
The supplemental dividend for June , which is our third consecutive quarter with a supplemental dividend is due to our favorable forms in the first quarter, which resulted in D. NII per share that was 13th over 19% greater than our monthly dividends paid during the quarter.
As a reminder, we currently expect to recommend that our board of directors declared future supplemental dividends to the extent D. NII significantly exceeds monthly dividends paid in future quarters, consistent with our practice for the last three quarters.
As we previously communicated as a result of the combination of our favorable outlook for the year and our current expectations for future supplemental dividends. We currently expect a significant increase in total dividends paid to shareholders over the next few quarters when compared to the prior year.
Now turning to our current investment pipeline, we are pleased to maintain a number of attractive opportunities in our lower middle market and private loan strategies.
As of today, I would characterize our lower middle market investment pipeline as average we remain excited about the quality of the investment opportunities in our current pipeline and about the prospects for follow on investments in existing portfolio companies as we and our companies actively look to execute on various growth opportunities.
Based upon the combination of these highly attractive opportunities for follow on investments in some of our top performing companies and with some of our best management teams.
And our position as the industry, leading partner for lower middle market companies and their management teams, which results from the benefits of our unique combined debt and equity investment offering and our ability to be a long term to permanent partner for the companies we invest in.
We are confident in our expectations for continued attractive new lower middle market originations in 2022.
We're also very pleased with the performance of our private credit team over the last few years and a significant growth and provided for our private loan portfolio and our growing asset management business and as of today I'd characterize our private loan investment pipeline as above average.
With that I will turn the call over to David.
Thanks, Dwayne and good morning, everyone as Duane highlighted in his remarks, we believe our strong first quarter financial results demonstrate the strength of main street's platform, our differentiated investment approach and our unique operating model.
We're excited that our performance during the quarter resulted in a record level of interest income earned which is a direct result of our strong lower middle market and private loan originations in the fourth quarter. We're also pleased to report that the overall operating performance for the majority of our portfolio of companies continue to be strong in the first quarter, resulting in both a significant increase.
And our NAV per share and attractive dividend income received from our lower middle market portfolio companies during the quarter.
As a result of our strong performance our first quarter operating results achieved a GAAP return on equity or ROE of 14.
14, 2% on an annualized basis for the quarter and 19, 9% for the TTM period, which we believe is very attractive.
Each quarter, we try to highlight key aspects of our differentiated investment strategy and or discuss relevant trends in our business that we believe our shareholders will be interested in learning more about.
We have generally focused these discussions on our lower middle market strategy, which continues to be the largest and most profitable segment of our investment portfolio.
For today's call, we thought it would be useful to spend some time on the second largest segment of our investment focus which is our private loan portfolio.
This strategy has grown significantly over the last five years and invest primarily in senior secured debt private equity sponsored businesses.
Our private loan investments are generally originated either directly by our internal investment professionals or through strategic relationships with other investment funds.
Our private loan investments are typically first lien debt investments with attractive yield profiles and favorable terms.
As of quarter end, 99% of our private loans secured debt investments are first lien floating rate loans, which have an attractive weighted average yield of eight 2%.
Five years ago, we announced our strategic decision to dedicate significant resources towards growing the middle market segment of our business, while deemphasizing, our middle market portfolio, which as a reminder, our typically investments in larger syndicated loans.
We set a goal of having our private loan portfolio of grow to a greater percentage of our assets and our middle market portfolio, which seemed ambitious at the time since the middle market portfolio was one eight times the size of our private loan portfolio.
During this period of repositioning we're also purposeful and setting a goal to maintain our emphasis on our lower middle market portfolio and growing our lower middle market portfolio to approximately 50% of our total assets at fair value.
From year end 2016 through the first quarter of this year, we've increased our private loan portfolio from $342 million or 17% of our total portfolio at fair value to $1 $2 6 billion and.
And 34% of our total portfolio at fair value.
This represents an increase of 268%.
Over the same period of time, we reduced our middle market portfolio from $631 million or 31% of our total portfolio of fair value to $397 million or 11% of our total portfolio at fair value, which represents a 37% decline. We also doubled our cornerstone lower middle market portfolio.
From $893 million to $1 8 billion.
And today, the lower middle market portfolio represents close to 50% of our total assets at fair value and more than the private loan and middle market portfolios combined.
Our purposeful and intentional strategic shift to grow our private loan portfolio was primarily driven by our belief that an attractive and growing direct lending environment would exist in the future and that private loan investments provide an attractive risk adjusted return profile.
Today, the weighted average yield on our private loan portfolio was meaningfully higher than in our middle market debt investments. In addition to higher yield we're confident that the smaller size of our private loans and the negotiated nature of our private loan credit agreements provide better structural protections when compared to larger middle market loans for.
For which we do not typically have significant input into the underlying credit agreements.
Based on the capabilities and relationships of our private credit team.
Growth of our private loan platform and the velocity of our deal flow Mainstreet is also benefited from our ability to share our private loan investments with other funds managed fleet managers.
Our external manager a private loan strategy effectively allows main street to leverage our investment professionals time and platform. So mainstreet can benefit from the attractive fee based income we received from third party clients. While at the same time, providing highly attractive investment opportunities and returns for those clients.
Today, we manage portfolios are primarily private loans on behalf of third parties, including the MSC income fund and our recently closed MFS private loan fund one.
We look forward to continuing to grow our fee income and opportunities to manage additional third party clients in the future.
Now turning to the overall composition and results from our investment portfolio. The contributions from our lower middle market portfolio continue to be well diversified with 60% of our lower middle market companies with equity investments, having appreciation at quarter end and was 63% of our lower middle market companies contributing to our digital dividend income over the last 12 months.
Our investment activity in the first quarter included total investments in our lower middle market portfolio of approximately $78 million.
Which after aggregate repayments on debt investments and return of invested equity capital resulted in a net increase in our lower middle market portfolio of approximately $57 million.
During the quarter. We also made approximately $201 million in total private loan portfolio investments, which after aggregate repayments of debt resulted in a net increase in our private loan portfolio of approximately $114 million.
Finally, we had a net increase in our middle market portfolio of approximately $2 million.
As of March 31, we had investments in 205 portfolio companies spanning across over 50 different industry segments.
Our largest portfolio company represented approximately 2% of our total investment portfolio fair value at quarter end and 3% of our total investment income for the last 12 months. The vast majority of our portfolio investments represented less than 1% of our assets and our income.
At quarter end, our lower middle market portfolio included investments in 75 companies representing over $1 $8 billion of fair value, which is 19% above our cost basis.
As of March 31 main Street's private loan portfolio included total investments of approximately $1 3 billion.
Our fair value across 79 unique companies and.
In our middle market portfolio, we had investments in 36 companies, representing approximately $397 million of fair value.
The total investment portfolio at fair value at quarter end was approximately 109% of the related cost basis.
In summary main streets investment portfolio continues to perform at a high level and deliver on our long term goals with that I will turn the call over to Jesse to cover our financial results capital structure and liquidity position.
Thank you, David and now turning to a summary of main Street's financial results.
Dwayne and David commented, we're very pleased with our operating results for the first quarter.
Total investment income increased by $16 6 million or 26% over the same period in 2021 to a total of $79 4 million.
Driven by increases in interest and fee income, which were partially offset by a decline in dividend income inter.
Interest income for the quarter represents a new quarterly record and as a result of our record investment activity in 2021.
Included in the total investment income for the quarter as a reduction of $2 1 million and the net impact of certain income items considered less consistent or nonrecurring where compared to the first quarter of 2021.
These items were also $3 9 million lower than the average of the prior four quarters, which speaks to the overall strength and quality of the earnings in the quarter.
Operating expenses, excluding noncash share based compensation expense increased by $3 6 million or 18% over the same period of the prior year largely driven by increases in interest expense and compensation expense.
The increase in interest expense was driven by higher borrowing levels to support the increase in portfolio of investments.
Partially offset by a lower weighted average interest rate on borrowings as compared to a year ago.
The increase in compensation expense is primarily due to increased head count.
Our base compensation and increased incentive accruals. These.
These increases were partially offset by a reduction to compensation expense, resulting from changes in the fair value of deferred compensation plan assets and corresponding liabilities.
The ratio of total operating expenses, excluding interest expense as a percentage of average total assets was one 5% for the trailing 12 months and one 1% for the quarter on an annualized basis, which continues to be amongst the lowest in our industry.
As the assets managed by the external investment manager continue to grow the benefit to our operating results increases the manager earned $5 $7 million of management fee income during the quarter.
Which represents an increase of $1 8 million from the first quarter of 2021.
The contribution of the manager to our net investment income was $5 1 million during the first quarter, an increase of $1 5 million from the same period of the prior year.
Through the allocation of $2 8 million of operating expenses for services, we provided two and $2 3 million of dividend income received from the external investment manager.
The external investment manager ended the first quarter of 2022 with total capital under management of over $1 5 billion.
Net investment income increased by $12 5 million or 31%, while distributable net investment income or NII increased by $12 9 million or 31% both over the same period last year.
The NII, which is net investment income excluding the impact of noncash share based compensation expense as a key measure of our performance.
We recorded net unrealized depreciation on the investment portfolio of $17 8 million during the quarter, including net depreciation of $20 7 million in the lower middle market portfolio $3 2 million in the private loan portfolio and $1 6 million in the other portfolio.
These were partially offset by unrealized depreciation of $7 5 million revaluation of the external investment manager.
Zero point $6 million in the middle market portfolio, and 0.4 million relating to deferred compensation plan assets, all before counting for reversals of net realized gains and losses recognized during the quarter.
The decrease in the fair value of our external investment manager was driven primarily by a reduction in market multiples for its publicly traded peer set partially offset by the growth in the external investment managers revenues due to increased assets under management.
The operating results for the first quarter, resulting in an increase in net asset value or NAV.
$65 2 million and an increase in NAV per share of <unk> 60 to.
To end the quarter with $25 89 per share.
There is no changes in the number of investments on nonaccrual status at nine which comprises 6% of the total investment portfolio at fair value and three 1% on a cost basis.
Overall capitalization and liquidity remained very strong with total liquidity in excess of $535 million as of March 31.
We continue to believe that our conservative leverage profile and strong liquidity and continued access to capital our significant strengths that have us well positioned for the future.
Earlier this week, our shareholders approve the reduction of our regulatory minimum asset coverage ratio from 200% to 150%, which became effective on may 3rd.
As we stated on our last earnings call, the primarily coal and obtaining the approval for the reduced minimum asset coverage ratio is to provide us greater operational flexibility during times of significant macroeconomic disruptions.
An additional benefit of the reduced coverage ratio is the flexibility it provides us to protect and grow our investment portfolio under certain market conditions, such as periods of robust net originations when we may not be able to raise additional equity capital at a pace with keeps up with our investment activity.
We expect to continue to be prudent in our utilization of leverage and intend to operate with a regulatory asset coverage ratio target range of 240% to 210% and our regulatory debt to equity ratio target range of <unk> seven times to <unk> nine times.
Coming back to our operating results D NII per share for the first quarter matched the record established in the fourth quarter of 2021 at <unk> 77 per share an increase of 15.
For 24% from the same period last year. In addition to Eni per share for the quarter exceeded our regular monthly dividends per share paid to our shareholders by <unk> <unk> per share or 19% the sixth consecutive quarter that DNI per share has exceeded the monthly dividends.
During the quarter.
Including the March supplemental dividend of $7.05 dividends paid during the quarter was <unk> 72.
An increase of eight 9% over dividends paid during the same period in the prior year. Our board also recently approved a supplemental dividend for the third consecutive quarter of $7.05 payable in June of 2022.
One additional item that I wanted to touch on is the impact of rising interest rates.
With the additional $500 million in low cost fixed rate notes that we issued in 2021.
As of the end of the first quarter, 81% of main streets outstanding debt obligations.
<unk> fixed interest rates.
This mitigates our exposure to higher interest expense store in a rising interest rate environment.
On the other hand as of the end of the first quarter approximately 73% of our debt investments.
Bear interests at floating rates with the majority subject to contractual interest rate floors, and with a weighted average floor of approximately 105 basis points.
As a result future increases in interest rates will result in increases to interest income, which will exceed the increase to interest expense.
We maintain an interest rate sensitivity table in our quarterly investor presentation, which will be posted on our website today.
As an example, an increase in interest rates of 50 basis points from those in effect at quarter end would have a net positive impact to net investment income of approximately $4 9 million or <unk> <unk> per share on an annual basis.
A 100 basis point increase in interest rates from those in effect at quarter end.
It resulted in a benefit of approximately $12 5 million or <unk> 17 per share on an annual basis.
It is important to note that the majority of our variable interest rate investments were based on contracts.
Reset quarterly, whereas our credit facility interest rate resets monthly as a result, we will have a quarterly lag and the realization of benefits from these rate increases in interest income and net investment income until the third quarter with a small increase in interest expense in the second quarter.
Lastly, rising interest rates in general can have an unfavorable impact to the fair value of our investments.
Finally, as we look forward given the strength of our underlying portfolio and the investment environment. Thus far in the first half of 2022 that Duane and David mentioned in their remarks.
We expect another strong earnings quarter in the second quarter of 2022 with expected <unk> per share of at least 72 per share or more.
With that I will now turn the call back over to the operator, so we can take any questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing your sarkies.
One moment, please while we poll for questions.
Thank you. Our first question is from Robert Dodd with Raymond James. Please proceed with your question.
Hi, guys.
Congratulations on the quarter.
Dividend income from portfolio companies on the <unk>.
Asset management was up year over year.
I 45, I don't know yet, but it's not that that looks like.
It looks like from the lower middle market portfolio companies the dividend income was down double digit percentages.
At that point is still higher than any quarter, rather than the quarters last year.
Is there anything thematic.
In terms of is it is it just because you know.
So the quarters of last year.
Perhaps outsized or is there any segments particular industry segments, where the dividend income.
Middle market was down more than more than others.
Any color you can give us there.
Sure Robert Good morning, Thanks for joining US again this morning.
What I would say on the dividend income as it is down quarter over quarter, particularly when you look at the last couple of quarters, which we had highlighted.
You'll work quarters of elevated income I think we always try to.
You will call out items that could be either unusual or nonrecurring and I'd say that the last couple of quarters. We did have higher amounts of dividend income.
That fit that category. This quarter, we really don't have any of that that type of income. So it's a much more stable recurring level of dividend income. If you look at the companies that contributed I would say that it's no.
No surprise, our best performing companies and if you look at the top 10 companies in the first quarter. It would be very very consistent with what you would've seen where the top 10 companies in the fourth quarter of last year as well as the full year. So I wouldn't say, there's anything there that is.
Kind of a trend or anything that's troubling to us obviously, we'd like dividend income.
To be as high as possible, but we still view the the level that we achieved in the first quarter to be a healthy level of dividend income I mean, if I wished appointed anything it could be just given the environment. We're in which obviously includes a lot of uncertainty.
I do think youre seeing some of our companies kind of tend to be a little more conservative in the in the kind of the uncertain backdrop, we have and that could have contributed to the number being down slightly in the first quarter versus the last couple of quarters, but overall I think we're still very pleased with how the operating companies are performing as a whole and we're happy with that level of dividend income.
Got it thank you.
And that relates to the next question I mean, obviously, you have great relationships with middle market portfolio companies.
What are you hearing from them now say on.
Labor cost raw materials cost per se I mean, obviously, we all know the macro.
But.
And has anything changed over the last few months so.
Six months ago in terms of what they're telling you about concerns on macro on the macro front or are they just.
Dealing with it carrying on.
Sure Robert I'll give some some comments and I'll, let David add on to the extent. He has some additional comments that he would add on but I'd say just like they have for the last couple of quarters that the portfolio companies are dealing with challenges across the board on each of the items that you touched on your labor.
So material supplies and then just availability.
Both of those and it's not just a cost issue, but it's just actually finding availability of both labor and supplies and materials. So that has continued to be a challenge.
And we expect will continue to be a growing challenge going forward, we're fortunate at least to date.
You know that our companies have been able to navigate that I think you've always heard us say that we really like our position in the lower middle market being partners for individuals that own. These companies that manage these companies for for decades not years, and we really think they do a great job of managing your opportunities as well as challenges and we continue to see them.
Really good job here and there.
Current environment, just like they have for the last couple of quarters in the last couple of years going back to the COVID-19 kind of environment in dealing with those challenges.
I'll, let David add on if he has any additional comments there.
No I think he covered it duane thanks.
Okay well. Thank you on that and then last question for me on the asset management side, I mean, I wouldn't see revenues up.
Now that you've got I think it was the dividend was $2 3 million in the fourth quarter.
$2 3 million again, which is more than double what it was in the first quarter of last year.
So significant and Thats not included in the Opex offset.
What worked.
I won't say expectations, but hope so I mean, it's been a good performer for you you've now got a B C. D MSC income fund that.
We used to that you've got the private fund any incremental initiatives.
That you can talk about on on growing that asset management business, because obviously, it's a great return to shareholders without having to put.
Additional.
Capital.
Sure sure Robert So what I would say is obviously for the last year or so we've been focused on.
<unk>.
<unk>.
Changes, we've been implementing at MFC income fund after becoming.
Advisor at the end of 2020, and then more recently on raising and growing MFS private loan fund, one which as I indicated in my comments, we finalized the fund raising process and have been actively investing in that portfolio. So while we don't have an answer for what the next generation of the asset management.
<unk> growth initiatives will be it is something that we have now turned our attention to to see what is that next evolution is it or is it another.
Private fund or is there something else.
The asset management business largely focused on our private loan strategy that we can we can look to execute on so we're in the stages of working on that but it's too early to really announce anything or give you much more color than it is in process and we expect to have success on something in the next six months to 12 months.
Okay I appreciate it thank you and congrats on the quarter and the outlook for next quarter as well.
Thanks, a lot Robert we appreciate it.
Thank you. Our next question comes from Bryce Rowe with the Hovde Group. Please proceed with your question.
Great. Thank you.
Good morning.
Let's see I wanted to maybe start maybe as a follow up to one of Roberts question. There he asked about.
The impact of the current environment on our lower middle market portfolio some of those borrowers.
You all have.
A diverse portfolio and.
Get look into larger companies smaller companies and Thats certainly a bit.
Different and unique for the space.
Are you seeing any divergence.
In terms of borrower health.
Between the lower middle market.
The larger private loan and middle market companies.
So I wouldn't say that we've seen a big divergence I think similar to the lower middle market private loan companies and.
Our portfolio had performed well.
I think that.
As you said, we are closer to the lower middle market, just given our position as a significant equity owner versus.
The primary lending relationship we have in that in our private loan portfolio, but all the feedback we get both from the companies and the sponsors and then what we see come through from a quarterly and monthly reporting standpoint on their financials has continued to be positive. So I think they are similarly dealing with all the challenges that existed in the marketplace, but to date we haven't.
<unk> seen anything that was.
You kind of a broad trend across the board you do as we always have had in the past you have certain companies in the portfolio that are performing at a higher or better than others and that's always been the case, but I'd say those are more company specific issues than anything that's more more broad based from a overall economy or youre kind of supply chain inflation standpoint.
Okay.
Duane.
And then.
Maybe maybe just around some of the pipeline comments you described lower middle market as the average private loan is above average.
On the other side of originations.
I guess theres prospects that youll see slowing.
Repayment.
The activity with higher rates, just curious if that effects.
Lower middle market and private loan.
Equally and.
If that is in fact the case.
There is there some potential for maybe.
<unk> net portfolio growth.
As repayments, possibly slip.
Yeah, Brian I would say when you look at the impact of the current rate environment on repayments, if theres going to be an impact I would say it would be on the private loan segment.
With that being said I would say that so far in the quarter. We've had a couple of our investments pay off so we haven't seen a significant impact on the repayment expectations purely because of the rate environment, but I do think longer term as you see rates increase if theres going to be a bigger impact is most likely.
On that private loan.
And middle market segments for that matter as opposed to lower middle market and I'd say, that's always been our view that the lower middle market companies are going to repay us much more based upon just free cash flow from operations or some type of an exit transaction as opposed to a more traditional refinancing where the private loan portfolio, we would be more based upon.
You've kind of market activity trends and if they see an opportunity to refinance at a lower rate and you can see that refinancing activity happened more in that in that portfolio than you would in the lower middle market.
We haven't seen that impact happened to date and as I referenced earlier did see a couple of our private loan investments repay through a refinancing here in the in the most recent couple of months.
Okay, Okay alright.
Maybe one more from me.
On the right side of the balance sheet, you've got you've got a debt maturity notes maturity coming up here in 'twenty two.
Just curious how youre thinking about that.
Especially with higher and higher base rates and possibly wider spreads in that and that notes market are you comfortable or perhaps taking the.
Outstandings on our credit facility or a bit higher than where we had kind of approach that in a different way.
Sure Brian I think what you said is the way we're looking at it as Jesse mentioned in his comments we were active.
In 2021, specifically near the end of 2021 in October we went out and raised an additional $200 million of.
That obviously with hindsight that timing was was really good probably should have done you should have done more but.
It's kind of all we had capacity for at the time, but that was essentially done to set us up to make sure we had.
Enough liquidity and kind of flexibility to deal with that.
Pending maturity as well as the very significant growing pipeline that we had seen youre developing for the fourth quarter. So we feel like we've got our capital structure and balance sheet.
In good position to deal with that maturity.
Also as you know have the option to continue to issue equity under the ATM should we continue to see good portfolio activity.
Likely see us.
Utilize a combination of the ATM issuance and the revolver.
To fund our needs, including the potential needs in December , but obviously, if there is an opportunity.
Where there is.
An opportunity in the market to take advantage of the issuance then we'll continue to monitor that but I think that's the that's the approach that we're taking when we look at that that pending maturity.
Yeah.
Great. Thanks, Duane Thanks for your time this morning.
I appreciate it.
Okay.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Our next question comes from Kenneth Lee with RBC Capital markets. Please proceed with your question.
Hi, good morning, and thanks for taking my question just one on the private loan side I really appreciate the additional disclosures there.
Wondering if you could just give us a little bit more color.
What's driving the above average pipeline and how you think about that.
There are this year thanks.
Yeah.
Sure.
If I can point to anything other than our private credit team has done a great job. The last couple of years of.
Youll, forming new relationships across the private equity sponsor universe, and where we're seeing their efforts not just here recently, but over the last couple of years kind of come to fruition with.
A number of really attractive recurring opportunities from sponsors I've got niche here with me, Nick if theres anything else that you'd want to add in terms of the pipeline we're seeing yes.
Our current pipeline as above average.
I would say overall the market does feel softer than last year.
But last year was a record breaking year across the board both in private credit and M&A.
And so I think youre looking at 'twenty two it still feels above above average if you look at the long term cycle.
But it's definitely a little slower than last year.
Gotcha very helpful. There.
And then in terms of the in terms of a follow on question if I may.
You mentioned in India.
My remarks, how rising rates could have an impact on valuation and investments.
I'm wondering if could just further expand upon this I presume.
Within the equity investments, but just wanted to get a little bit more details about that thanks.
Sure I think.
It's hard to give much detail there can't other than when Jesse provided that comment I think what we're communicating is that all things being equal a rising rate environment, while it will be good for our income statement will we will not be good for our balance sheet and thats purely based upon valuation methodologies methodologies, which will include kind of cost of capital.
As part of the evaluation process and its cost of capital goes up particularly on the debt side that net net will be a negative factor for equity valuations and if you look at our debt investments.
If the marketplace today allows the opportunity.
To invest in new debt investments that have a higher yield than your existing portfolio than just on a relative comparable basis your existing investments.
The value of those investments from a from evaluation process will will be negatively impacted so that's what Jesse was was referring to when we talked about that but other than kind of those those broad brushed your comments it remains to be seen what the long term impact is and then if you look at kind of the rising rate environment and inflation as a whole if those.
Issues continue to persist and get worse then.
It is expected that's not a good thing for the economy, which again long term is not a good thing for equity valuations. So at a at a macro level. That's what that's what Jesse was referring to in his comments.
Gotcha very helpful. Thanks again, thank you can we appreciate it.
Thank you there are no further questions at this time.
This now concludes our question and answer session I would like to turn the floor back over to management for any closing comments.
Thank you again to everyone for joining us. This morning. We appreciate your interest in main street, and we will look forward to talking to you again in early August .
Ladies and gentlemen, thank you for your participation. This does conclude today's conference you may now disconnect your lines and have a wonderful day.
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