Q4 2022 Main Street Capital Corp Earnings Call
Greetings and welcome to the main Street Capital Corporation fourth 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 Sir you may begin.
Thank you operator, and good morning, everyone. Thank you for joining us for main Street capital Corporation's fourth quarter 2022 earnings Conference call.
Joining me today with prepared comments are Duane Hughes.
<unk> Executive Officer, David Macdonald, President and Chief Investment Officer, and Jesse Morris, Chief Financial Officer, and Chief operating Officer.
Also participating for the Q&A portion of the call as Nik Miss our managing director and head of private credit investment groups.
Main Street issued a press release yesterday afternoon that details the company's fourth quarter and full year financial and operating results. This 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 March 3rd.
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 February 24th 2023, and therefore, you're advised the time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
Today's 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.
Actual 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 at 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 sorry.
Certain information discussed on this call, including information related to portfolio companies was derived from third party sources and has not been independently verified.
Now I'll turn the call over to main Street's CEO Duane Hughes job.
Thank you Jack.
Good morning, everyone and thank you for joining us today.
We appreciate your participation on this morning's call, we hope that everyone's doing well.
On today's call I'll provide my usual updates regarding our performance in the quarter, while also providing a few updates on our performance for the full year.
I'll also provide updates on our asset management activities. Our recent declarations of another supplemental dividend payable in March and our regular monthly dividends for the second quarter of 2023 our.
Our expectations for dividends going forward are.
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.
Portfolio financial results capital structure, and leverage and our expectations for the first quarter of 2023, after which we will be happy to take your questions.
We're very pleased with our fourth quarter results, which closed a record year for main street across several key performance indicators with significant positive momentum for 2023.
Our results include New quarterly records for net investment income or NII per share and distributable net investment income or NII per share significantly exceeding our records achieved in the third quarter and representing the sixth consecutive quarter in which we set our matched our NII per share record.
This consistent strong performance demonstrates the continued and sustainable strength of our overall platform.
It fits of our differentiated and diversified investment strategies and the underlying quality of our portfolio companies.
We're also pleased with the positive results included strong contributions from both our lower middle market and private loan investment strategies.
In our asset management business, providing us confidence about the recurring nature of these positive results in the future.
As a result of our strong performance our quarterly D NII per share exceeded $1 per share for the first time and we generated an annualized net income return on equity of over 20%.
We're also pleased with the strong results for the full year, which also included record NII per share and D. NII per share and allowed us to end the year at a record net asset value per share.
After these record breaking results and some meaningful capital markets activities, we entered the new year with a strong liquidity position and a conservative leverage profile.
We remain very encouraged by the continued favorable performance of our diversified lower middle market and private loan investment strategies.
We remain confident that these strategies together with the benefits of our asset management business and our cost efficient operating structure will allow us to continue to deliver superior results for our shareholders over the long term future.
These positive results and our favorable outlook for the first quarter resulted in a recommendation to our board of directors for our most recent dividend announcements, which I will discuss in more detail later.
Yeah.
Our net asset value per share increase in the quarter due to the impact of the fair value increases in several components of our investment portfolio and a positive impact of our equity issuances in the quarter.
Our lower middle market portfolio companies continue their strong performance overall, which resulted in another quarter of meaningful fair value appreciation in the equity investments in this portfolio.
And we are excited about the new and follow on investments we've made in our lower middle market portfolio companies during the quarter.
We expect that these follow on investments will drive additional fair value appreciation in these portfolio companies in future quarters.
Yeah.
We also benefited from meaningful fair value appreciation in our private loan portfolio.
And in the value of our wholly owned registered investment adviser through a combination of portfolio company specific and broader market base drivers.
We also continue to have favorable investment activities in the fourth quarter.
Our lower middle market investments of $152 million in the quarter resulted in a net increase in lower middle market investments after repayments of $127 million.
This capped off another strong year of activity with total lower middle market investments of $373 million for the year, resulting in a net increase of $264 million.
Our private loan investment activities in the quarter included new investments of $86 million, which after aggregate repayments resulted in a net decrease in our private loan investments of $26 million.
For the year, we completed $713 million of new investments, resulting in a net increase in our private loan portfolio of $335 million.
Given our favorable liquidity position after our recent capital market markets activities, which Jesse will address in his comments, which we achieved despite a very challenging capital markets environment.
We are very well positioned to continue the growth of our investment portfolio over the next few quarters.
We've also continued to produce positive results of our asset management business.
Funds, we advised through our external investment manager, including MSC income fund, a non traded BDC and EMS private loan fund won a private credit fund continued to experience favorable performance in the fourth quarter.
This positive performance resulted in significant incentive fee income from our asset management business.
And as a result, we received significantly higher dividends from our asset management business.
We remain excited about our plans for these funds as we execute on our investment strategies and other strategic initiatives and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund.
We are also optimistic about our strategy for growing our asset management business within our internally managed structure.
<unk> working to increase the contributions from this unique benefit to our main street stakeholders and we look forward to sharing additional details as we execute our plans for this business in 2023 and work to create additional value for the next few years.
Based upon our results for the fourth quarter combined with our favorable outlook in each segment of our business and the benefits of our efficient operating structure.
Earlier this week, our board declared a supplemental dividend of $17.05 per share payable in March representing our largest and sixth consecutive quarterly supplemental dividend.
Our board also declared regular monthly dividends for the second quarter of 2023 at 'twenty, two and a half cents per share payable in each of April may and June representing a four 7% increase from the second quarter of 2022.
The increased supplemental dividend for March as a result of our strong performance in the fourth quarter, which resulted in D. NII per share that was 37 cents.
Our 56% greater than our monthly dividends paid during the quarter.
The March 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12 month period of 45 per share.
Representing an additional 17% paid to our shareholders in excess of our regular monthly dividends.
Including these supplemental dividends or DNI per share for the fourth quarter exceeded our total dividends paid by <unk> 20 per share.
We are pleased to be able to deliver the significant additional value to our shareholders. While also maintaining a significant portion of our excess earnings to support our capital structure and investment portfolio against risks from the current economic uncertainties that may be realized in 2023 and to further enhance the growth of our NAV per share.
As we previously mentioned, we currently expect to recommend that our board declared future supplemental dividends to the extent D. NII significantly exceeded our regular monthly dividends paid.
In future quarters, and we maintain a stable to positive net asset value.
Based upon our expectations for continued favorable performance in the first quarter. We currently anticipate proposing an additional supplemental dividend payable in June 2023.
Now turning to our current investment pipeline.
As of today and after a robust activity for the fourth quarter I would characterize our lower middle market investment pipeline is below average.
While the near term pipeline is currently below average we remain highly confident in our ability to generate significant new lower middle market investment opportunities in 2023.
Yeah.
We also continue to be very pleased with the performance of our private credit team and a significant growth. They are provided for our private loan portfolio and our asset management business.
And as of today.
<unk>, our private loan investment pipeline as average.
With that I will turn the call over to David.
Thanks, Dwayne and good morning, everyone.
The year end provides a good opportunity to look back at our history and highlight the benefits of our unique and diversified investment strategy and discuss how this has enabled us to deliver attractive returns to our shareholders over an extended period of time.
We believe looking back at our history also supports our intent to continue to execute our unique and highly differentiated strategy in the future.
Since our IPO in 2007, we have increased our monthly dividends per share by 105% and we have declared cumulative total dividends to our shareholders of $36 65 per share or over two four times, our IPO price of $15 per share.
Our total return to shareholders since our IPO calculated using our stock price as of yesterday's close and assuming reinvestment of all dividends received since our IPO was eight.
Fixed times money invested this.
This compares very favorably to two five times money invested for the S&P 500 over the same period of time and a significantly higher when compare compared to our BDC peers.
As we've previously discussed we believe that the primary drivers of our long term success happen and will continue to be our focus on making both debt and equity investments in the underserved lower middle market.
Growing our private credit activities for the benefit of our balance sheet and for the clients of our asset management business, which clearly benefits our shareholders and our industry, leading cost structure, which provides for a strong alignment of interest between our management team and shareholders through our team's meaningful stock ownership and incentive compensation plan, which is tied to our ability to achieve.
<unk> financial results for our shareholders.
Most notably and uniquely our lower middle market strategy provides attractive leverage points and yields on our first lien debt investments, while also creating a true partnership with the management teams of our portfolio companies through our flexible equity ownership structures.
This approach provides significant downside protection through our first lien debt investments, while still providing the benefits of alignment and significant upside potential with our equity investments made alongside our portfolio Company management team partners.
Our long term historical track record of investing in our lower middle market copper coupled with our view that this market continues to be underserved gives us confidence that we will be able to continue to find attractive new investment opportunities in this important cornerstone of our business in the future.
In 2022 main street invested $373 million in our lower middle market strategy.
$137 million of this capital is deployed in five new lower middle market platform companies with the remaining $236 million represented follow on investments in existing fees and lower middle market companies.
Consistent with our comments in prior quarters. These follow on investments were made to support the growth strategies in some of our highest performing portfolio of companies, which makes this aspect of our lower middle market investment activity very exciting for us.
Consistent with our guidance in prior quarters 2022 represents the strongest year of add on investments in our lower middle market companies and main Street's history.
Our follow on investment investments are typically used to support multiple objectives, including acquisitions diversification opportunities product or geographic expansion and recapitalization transactions.
These follow on investments support proven management teams that intrinsically clothes less investment risk when compared to providing capital to new portfolio companies.
Since we have significant equity owners in our lower middle market companies, we benefit from participating alongside the proven managers in these businesses as they strive to achieve meaningful equity value creation.
As we've stated in the past our lower middle market portfolio companies perform over time naturally deleverage with free cash flow generated from operations.
This also allows us along with our lower middle market portfolio management team partners to benefit from the distributions received from this cash flow.
Given the strength and quality of our lower middle market portfolio, we expect dividend income to continue to be a primary contributor to our results in 2023.
Additionally, this deleveraging coupled with the attractive underlying operating results in our lower middle market portfolio companies allowed us to achieve $75 million in fair value of appreciation and realized activities.
This benefit in our lower middle market equity investments is unique among our BDC peers with value appreciation along with realized gains serving to offset losses will naturally incur in our investing activities.
Our unrealized equity appreciation also provides potential upside to main street net asset value that other bdcs simply do not have.
The last important area I'd like to cover regarding our 2022 accomplishments are the impressive contributions that are private credit team delivered during the year.
Our private credit team continued to execute on our strategy to dedicate significant resources towards growing the private loan segment of our business, while deemphasizing, our middle market portfolio, which as a reminder, typically includes investments in larger syndicated loans.
Our purposeful and intentional strategic shift over the last five years to grow our private loan portfolio is primarily driven by our belief that an attractive and growing direct lending environment exists and that private loan investments provide an attractive risk adjusted return profile for main street.
During 2022 main street invested $713 million in our private loan strategy, which helped increase our private loan portfolio by 29% and purposely decreased our middle market portfolio by 17%.
As a result at year end, our private loan portfolio had grown to represent 36% of our total investments at fair value and the middle market portfolio declined by 300 basis points to represent 8% of our total investments at fair value.
As Dwayne discussed earlier, our private loan capabilities also support our key strategic intention to continue growing our asset management business.
Now turning to our car portfolio as of December 31, we had investments in 194 portfolio companies spanning across more than 50 different industries.
Our largest portfolio company represented three 4% of our total investment income for the year and three 2% of our total investment portfolio fair value at year end.
The majority of our portfolio investments represented less than 1% of our income and our assets.
Our investment activity in the fourth quarter included total investments in our lower middle market portfolio of $152 million, which after aggregate repayments on debt investments and return of invested equity capital resulted in net increase in our lower middle market portfolio of $127 million.
During the quarter, we also made $86 million and private loan investments, which after aggregate repayments of debt investments and return of invested equity capital resulted in net decrease in our private loan portfolio of $26 million. Finally during the quarter. We had a net decrease in our middle market portfolio of $19 million.
At year end, our lower middle market portfolio included investments in 78 companies representing over $2 $1 billion of fair value, which is over 20% above our cost basis.
We had investments in 85 companies in our private loan portfolio, representing $1 $5 billion of fair value.
In our middle market portfolio, we had investments in 31 companies representing $329 million of fair value.
The total investment portfolio at fair value at year end was 109% of the related cost basis and additional details on our investment portfolio at year end are included in the press release that we issued yesterday.
With that I will turn the call over to Jesse to cover our financial results capital structure and liquidity position.
Thank you David.
<unk> Duane and David's comments, we are pleased with our operating results for the fourth quarter, which included a number of quarterly records and capped the year with main street achieving records for net investment income distributable net investment income and net asset value on a per share basis.
Our total investment income for the fourth quarter represented another consecutive quarterly record increasing by $31 7 million or 38, 6% over the same period in 2021 to a total of $113 9 million.
The fourth quarter surpassed our most recent quarterly record for total investment income.
In the third quarter 2022.
By $15 5 million or 15, 7%.
Including meaningful increases in interest dividend and fee income, which demonstrates the continued strength and momentum of our investment and asset management strategies.
Interest income increased by $32 5 million from a year ago, and $11 3 million over the third quarter.
We estimate the continued benefit from increases in benchmark index rates drove a little over half of the increase over the third quarter with the remainder driven primarily by the continued growth in our portfolio debt investments.
In addition, the combined favorable impact of certain elevated income items in the fourth quarter.
Including dividends and accelerated prepayments repricing or other activity that were considered less consistent.
It was approximately $2 million or <unk> <unk> per share above the average of the prior four quarters.
And was comparable to such income amounts earned in the fourth quarter of 2021.
Our operating expenses for the quarter increased by $7 million over the fourth quarter of 2021, largely driven by increases of $7 1 million and interest expense.
$1 5 million in general and administrative expenses.
And <unk> 7 million in share based compensation.
Partially offset by a decline of $1 5 million in cash compensation related expenses.
And an increase of <unk> 8 million and expenses allocated to the external investment manager.
The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets was one 4% for the year and.
<unk> continues to be amongst the lowest in our industry.
Our external investment manager contributed 7 million to our net investment income for the fourth quarter.
An increase of $2 1 million from the same period of the prior year, primarily due to a $1 9 million increase in incentive fees earned.
During the quarter, we recorded net fair value appreciation.
Including net realized losses, and net unrealized appreciation on the investment portfolio of $36 2 million, including net fair value appreciation of $24 2 million of our lower middle market portfolio.
$9 2 million or a private loan portfolio and $10 4 million in our external investment manager.
These were partially offset by net fair value appreciation of $8 8 million and.
In our middle market portfolio.
Net asset value or NAV per share increased by 92 for the third quarter and by $1 57, or six 2% when compared to a year ago to a record NAV per share of $26 86 at year end.
We ended the fourth quarter with 12 investments on non accrual status comprising approximately <unk>, 6% of the total investment portfolio at fair value and approximately three 7% at cost.
While not material to our.
<unk> expectations for the next quarter, we did resolve a large and very long standing non accrual in the first quarter 2023.
Which will impact these nonaccrual status at March 31, 2023.
We continue to believe that our conservative leverage strong liquidity and continued access to capital our significant strengths that have us well positioned for the future.
Given our belief in the importance of liquidity.
And our conservative capital structure as we indicated on our third quarter conference call. We continue to explore additional sources of debt financing.
During the fourth quarter, we were active on the capital front, including the execution of a new SPV credit facility.
With commitments of $255 million.
The execution of a 100 million unsecured private placement notes.
The repayment of the $185 million due on our 2022 notes at maturity.
And a net 71 million raised from equity issuances under our aftermarket program.
As a result of these actions we ended the year with strong liquidity, including cash and availability under our credit facilities of $617 million.
Taken together with an additional 110 million provided by additional capital activities in January 2023, and.
Including the issuance of 50 million additional unsecured private placement notes.
And the expansion of commitments under our corporate credit facility by $60 million.
We believe this provides us with the liquidity necessary to continue to be opportunistic.
Pursue attractive investment opportunities in 2023.
While continuing to maintain a conservative leverage profile and healthy liquidity in these uncertain periods.
Our regulatory debt to equity leverage.
<unk> total debt, excluding our spic's debentures divided by net asset value.
0.79, and a regulatory asset coverage ratio was 227%.
Both of which are improvements from the third quarter and are intentionally slightly below the conservative end of our target ranges of 0.8 to <unk> nine times and 210% to 225% respectively.
Coming back to our operating results our return on equity for the fourth quarter was 28.
8% on an annualized basis, and 12, 6% for the year.
<unk> per share for the quarter was a record $1 <unk> per share.
<unk> the total regular monthly dividends per share paid to our shareholders in the fourth quarter by 37 per share or approximately 56%.
<unk> per share for the quarter eclipsed our prior record in the third quarter of 2022 by.
By <unk> 15 per share or 11, 7% and increased by 25.
Our 32, 1% over the same period last year.
Total dividends paid in 2022 for $2 94, five cents per share, including 35 per share in supplemental dividends.
An increase of 14, 4% over total dividends paid during 2021.
As Dwayne mentioned, given the strength of our operating results and the outlook for 2023, our board approved a supplemental dividend of $17 <unk> per share.
Payable in March 2023.
With this supplemental dividend total dividend declared dividends for the first quarter of.
2023, or <unk> 85 per share.
Representing an 11, 8% increase over the total monthly and supplemental dividends paid in the fourth quarter of 2022.
And the total annualized yield of approximately eight 5%.
As we look forward.
Given the strength of our underlying portfolio, we expect another strong top line and earnings quarter in the first quarter 2023.
With expected <unk> per share of at least 98 per share.
And with the potential for upside driven by the level of dividend income and portfolio investment activities during the quarter.
With that I will now turn the call back over to the operator, so we can take any questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue. We ask that you limit your questions to one and a follow.
So that others may have an opportunity to ask questions for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Robert Dodd with Raymond James. Please proceed with your question.
Hi, good morning, congratulations on another good quarter.
Sure.
Okay.
And they can come in if I kind of I know, it's hard to know.
Not just predict but in this quarter, if I take count that.
The dividend from the asset manager on my 45, it was still a really strong.
<unk>.
Given quarter, just from a portfolio of companies.
2021 with.
But.
Can you give us any color you can give us some color in the past about how long the car.
Vincent <unk> portion of the portfolio at that income comes from can you give us any color.
And even maybe how much of that income from portfolio companies.
So more or any any breakdown you can give us a call at the types age.
The concentration of the portfolio companies is coming from.
Sure Robert Thanks for the question, we're happy to give you those details as you said and youll be able to see this when you see that the 10-K the contributions on the dividend income side are pretty broad based if you take out MSC income fund.
It would take another 12 companies on the lower middle market side before you get to 50% of the remaining dividend income. So we think it's a it's nice diversity contributions from a broad base of companies see a once you get past that 12, Theres a very large number of other companies that are that are meaningful contributors. So as you heard us say in our comments we.
Feel good about how the lower middle market companies are performing you see that in both the appreciation we recognized in the quarter, but you also see it to the question you raised here to the point you raised here with the broad based dividend income that we saw from the portfolio in the fourth quarter.
Got it got it thank you.
And then the other question.
The lower middle market pipeline, you said, it's below average.
Got you also gave a lot more.
But can you give me why.
Currently is it below average do you think is it is it.
A function of the outlook on the economic environment for <unk>.
To get to back to average or above average do we need more certainty in the economy, because obviously sellers.
The business out and that's why it's not sponsored.
Speaking about the middle market deal.
So they might have different views on the economy any color on what it takes to get a rebound.
In the pipeline on that side of it.
Sure Robert.
That statement, we provide each quarter is always highly judgmental. So you've heard this one for a long time I'd say its below average today largely because the third quarter fourth quarter were both very very active very robust time periods.
In my comments, while it is below average today, it's not a concern I think we feel very confident very good about the ability of our platform to consistently generate lower middle market opportunities.
Over the long term just as we sit here at this point in time, it's a little bit slower, but it's not a big concern for US I think we expect to be active that's why we've prepared ourselves from a capital structure standpoint to continue to be active and continue to grow in that area and we just need the market to you know to reset a little bit and see that the sellers' expectations go back into.
It would be and in line with where we need them to be from an execution standpoint, I'll, let David add any additional comments he has there Robert so.
When we think about the comment on how we characterize it the near term outlook is really mostly impacted by Q1, 'twenty three and how we see our closing has taken place in that period of time, but I'd say at the lower middle market has always been lumpy the medium term Q2 and beyond.
We have a better visibility towards the pipeline growing so I wouldn't be concerned relative to the overall market and taking making too many assumptions about it being.
Unattractive or not being able to surface or type of opportunities. We're very confident that the year will play out well relative to the opportunity set we're still dealing with family owned businesses, they still need to transact and we've got a very active kind of medium term pipeline that's out there.
Got it thank you and again congratulations on the quarter.
Thank you Robert we appreciate it.
Our next question comes from Bryce Rowe with B Riley. Please proceed with your question.
Thanks, a bunch good morning, guys.
Brian .
Let's see I just wanted to I wanted to kind of dive into the fair value Mark here in the quarter nice to see NAV up and obviously contribution from the ATM, but also unrealized.
Our net gain type of activity.
You highlight in the press release that some I guess 33, lower middle market portfolio companies sold net up.
Appreciate it and then 2007 depreciation Kinion can you kind of similar to Roberts question around dividend. Bret can you talk about is there is there are a portfolio company that is having an outsized impact.
From a from a mark perspective here in the quarter.
Sure Brian So I would say that you know when you look at our appreciation on our lower middle market side, there's a number of companies.
They continue to outperform significantly and we see it to Robert prior question on the dividend income side and on your question here you also see it on the unrealized appreciation and just looking at schedule here I'd say there is there is kind of six or seven companies that contributed.
Significantly to the unrealized appreciation during the quarter, what I'll also tell you and I won't give you numbers by names, but I would say that those same companies are also a lot of the primary contributors to the dividend income. So we've just got some companies that despite the challenges we see in the economy with inflation supply chain quality labor et cetera.
You know these companies as you've heard us say in the past our excellent managers excellent teams and they've been able to navigate the challenges not just navigate them, but continue to excel and youre seeing that come through and the continued appreciation on the fair value side and on the dividend income contributions okay. Okay. That's helpful.
And then.
Maybe maybe on on the asset management activities and the and the dividend into into the BDC here here in the quarter obviously.
This uptick in the dividend looked like the incentive fee income kind of ticked up pretty meaningfully in the fourth quarter is that is that a sustainable level or is there anything in that income debt.
That wouldn't be considered kind of recurring.
Yes, Brian I would say there was one transaction in the quarter that benefited both main street directly. It also benefited MFC income funds so that transaction.
Will not be recurring but even without that transaction, we would have seen some.
Incentive fee income that MSC income fun, so while it's very very difficult to predict what happens in the in the in the future even one quarter out.
I would say as we sit here today, we would expect to have some incentive fee contribution from our asset management business. It may just be down a little bit from where it was in the fourth quarter, primarily are directly attributable to that one transaction that I referenced okay. Okay.
And then maybe last one for me.
You you all highlight.
Non accruals are today, obviously, not a not a meaningful piece of the portfolio, but can't.
Can you talk about kind of the puts and takes quarter on quarter. I guess, you had 12 non accruals today versus 11 last quarter and you did highlight some.
Realized loss.
Loss activity and I'm, just curious if those non accruals generated some of that.
Yeah, I'll, let Jesse you add any additional detail that he has here, but I would say that during the quarter.
From memory, we had one one net add so not a lot of movement. As you said I think the portfolio as a whole continues to perform well we do have some names that have underperformed and when they underperform.
On the private loan or a middle market side, you know the first thing. We do is look for the private equity sponsor in terms of what they're going to do.
In relation to supporting the company and I would say that we've seen.
In most situations that private equity sponsors continue to be very very supportive, which obviously is a good thing and a big part of our investment strategy.
In the private loan segment, but we have had a couple of where the performance was such that the private equity firms.
Either we're not supportive of we needed to do a restructure that either caused the non or non accrual or the.
Realized loss activity, but I'll, let Jesse give any additional specifics he can he can add on.
That's exactly right. We had we had one that came on that was.
The movements and I think you probably heard it in my commentary, but we are we expect to have another one come off and.
In the first quarter of this year.
Got it okay.
I'll leave it there I appreciate it.
Thank you.
Our next question comes from Kenneth Lee with RBC Capital markets. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Just one on the asset management business.
You mentioned briefly in the prepared remarks about actively working on growing the business.
Realize that it's still a little early days, but I'm wondering if you can just talk a little bit more about what sorts of activity Youre working on and also maybe you could just wondering if you could just comment upon what you're seeing in terms of either fund raising or our investor demand.
For the product there thanks.
Sure. Thanks, Thanks for the question Ken.
While it is early because we haven't launched anything I'd say consistent with our messaging for the last year or longer our desire is to grow the asset management business I think it would be natural that our that our next step there would be another private fund or a private vehicle similar to EMS private loan fund one I think the good news for us and you could see it in my comments.
Also see it in the incentive fees, we earned during the quarter that fund has performed really well. So I think the Lps of the investors. There are very pleased very excited about that performance. So we are somewhat confident that once we launch it another vehicle there'll be a significant amount of interest from those existing Lps and.
The outcome the eventual outcome.
Success, we have there will be a how successful we are bringing new Lps in specifically on the institutional side. So I'd say that that's the big question in terms of how large will that next vehicle be but I think we've got a high level of confidence that we'll have a new vehicle in the near term and that that that new vehicle will have strong reception at least from the existing Lps.
And our first private vehicle.
Got you very helpful. There.
And just one follow on if I may.
Just on the build liquidity position.
Wondering if <unk>.
If you're comfortable with your liquidity position as it is or do you see a further.
And liquidity position over the near term there. Thanks.
Thanks, Ken I think you probably heard us say over a long period of time that one of the big things that we value is.
As liquidity, we always want to be in a position, where we can not only be defensive but we can be on offense. So we always want to be in position to support our lower middle market companies, whether that's in good times or bad. We also want to make sure that when the market is most attractive which is when no. One else has capital that we can be on an offense you've seen us do that through each.
The big.
Step backs in the economy, whether it was the great recession or more recently here during Covid and if you look at some of the best performing companies specifically on the aluminum market side that we touched on earlier in response to some of the other questions. Several of those investments were made right in the middle of Covid and we wouldn't have been able to do that had we not had our very conservative capital structure and significant liquidity.
Position. So we're always focused on maintaining significant liquidity I think we've done a great job.
Over the last two or three months of really enhancing our liquidity and our capital structure, but youre going to see is always focused on being in a in a conservative position. So we can do what I just touched on but I'll, let Jesse add any additional any additional comments he wants to add.
I think you covered it.
Got you great very helpful. Thanks again.
Thank you again.
Our next question is from Mark Hughes with true Securities. Please proceed with your question.
Yeah. Thanks, good morning good.
Morning, Mark.
Finally, quite a bit loan pipeline average you know this is kind of a.
Hello deal environment, you seem pretty optimistic about that.
Just interested in your thoughts on what's driving that.
Sure I do think overall you know for the last couple of months you have seen a slowdown in the overall market for from my standpoint is purely you know my personal opinion, I think thats because the private equity firms have been needing to reset their expectations given the significantly higher cost of capital that exists in today's marketplace I think to some extent that's happening.
So I do think that.
Youll see that.
Part of the marketplace from an activity standpoint is starting to improve and I think we've already seen that here more recently, but I would give credit to our private credit team over the last couple of years, including during Covid largely because of what we just talked about us having liquidity and having a capital structure that allowed us to continue to be active we did a great job and we built some what we think are some really.
Good high quality relationships with private equity firms that we want to be doing business with so we continue to see good deal flow I do think we just like everybody else is being very prudent in how we approach the market but.
From our standpoint, when a private equity firm is trend transacting in this marketplace.
We think the quality of that transaction is likely better because they've survived what's going on in the broader economy and that private equity firm is excited about moving forward with that investment. Despite the fact that theyre going to pay a higher cost of capital at least on the on the debt capital side. So we think it's a good environment to be investing for those reasons and obviously, we as we touched on earlier you had the ability to.
To be active and be selective.
Where it makes sense, given our conservative capital structure, and our liquidity position, but I'll see if Nick wants to add any additional comments on that on that point I think the way you got nailed the overall theme like the other one is repayments are downs typically across the industry and so with lower repayments are need to re spent that money is lower and so our total total transactions might be.
But the dollar amount we will spend in total on a net basis, we'll be where we target for the year.
Yeah. Thank you for that.
Just a kind of a step back the lower middle market, if we do run.
Brought into a slower economy is that going to perform from a credit perspective refresh me on the kind of the dynamics there.
Sure. So I'll I'll provide a couple of comments and then if David wants to add on he can but I'd say the key points. We look at one is you know most of our lower middle market portfolio is fixed rate debt as opposed to floating.
They're not being impacted by the rising rate environment is one of the big positives, we see in that part of our strategy. The management teams. There. They obviously are dealing with inflation and supply chain labor et cetera, but they are not worried about the capital structure, because they've got a very well capitalized strong investor and mainstreet and the capital structure and they are not seeing at least for.
The majority of that portfolio are not seeing their interest expense changes as market rates have improved. So we think that's a big positive today than even we think it'll be continue to be a big positive going forward. The reason, we've always valued our kind of really.
Favored our lower middle market investment strategy as our primary strategy is that we are directly aligned with the people that run that business day to day. The individuals that are the management teams that are typically the majority owners of these businesses, they're living with that company day to day with our customers vendors employees. So when we've seen them execute in times of stress again, whether it's <unk>.
<unk>, great recession, whatever time periods do you want to pick clearly they are dealing with challenges just like everybody else's, but in our opinion and I'd just our opinion our experienced long term over the last 20 years is that they will outperform the market just because they are making changes on a real time basis. These businesses are not large so when they make a strategic decision to Youtube to pivot to address it.
Going on in the marketplace. It has an impact almost immediately so that's something that we've always.
It is a big positive.
We're doing that one because it's the right thing to do but they're also doing it because they are the majority owner of the business in most situations. So those are the two biggest things I'd highlight but I'll, let David add any additional color.
I think Duane covered most of it just a couple a couple of additional points one is that the <unk>.
Most part we're backing existing managers that had been in the business for a lengthy period of time have seen cycles up and down in the past and they know what to do they are proactively looking at there.
Operating expenses looking where they can cut their very nimble as small businesses.
Look ahead very proactively they also have less leverage on the front end and we'd see in a normal private equity type of transaction just total leverage so their coverage is better and the overall portfolio is very seasoned at this point. So if you look at the 75 companies. We have many of them into the portfolio for an extended period of time that have naturally deleverage. So.
They're really well situated for a tougher economic climate, if if we happen to be there.
Individually the industry segment.
I appreciate it thank you.
Thanks Mark.
Our next question comes from <unk> Abraham with UBS. Please proceed with your question.
Hi, everyone. Thanks for the question just to put a finer point on some of the capital structure commentary so leverage.
Our regulatory leverage dropped down to seven nine I believe so is the message here that you guys are comfortable running at the bottom or are below the range and you know how you're thinking about timing on when that could go up and.
Also just so you know how do you couple that with the equity issuance that you're able to do here.
Sure. Thanks for the question and thanks for joining US this morning on the call.
Hey, we're very comfortable being above or below the range, obviously, where we're a little bit more on the conservative side today I'd say that as you know very much intentional just given the current economic environment kind of the overall backdrop that we're dealing with.
In terms of when will it move the other direction it'll it'll all be driven primarily by the pace of opportunities in our lower middle market strategy, and then secondarily, our private loan strategy, but we're comfortable and you can see it in our quarterly results were comfortable that we can deliver best in class returns not just from an industry standpoint, but compared to other public companies with that.
Running it at higher levels of leverage and we think that's a huge part of the benefit that a shareholder or an investor gets from investing in mainstreet youre getting a very very good return and we think youre getting it on a very a very positive or favorable risk adjusted basis.
Got it Okay, and then just maybe on the dividend how are you guys thinking about the base versus the supplemental dividend and you know what would it take to get a bump up in the base at some point.
Yeah.
Sure. So I think we've been trying to be fairly consistent for the last year or so in terms of setting our policy and I'd say that we're not planning on making changes there. So our long term goals and when we say long term goals three years to five years not kind of two to three quarters is to deliver a consistent recurring and growing monthly dividend historically has been.
Kind of 3% plus or minus I think in this environment. Most recently, we've been above that closer to 5% and I think near term, we would expect that to continue to be the case on the supplemental.
It's going to be directly attributable to how much distributable net investment income or D. NII are we able to generate in a quarter in relation to the monthly. So are our dividend for March is based upon the fourth quarter's results were because I think I may have touched on in the prepared comments, but we exceeded the monthly dividend.
By a very wide margin I think it was 37 cents off the top of my head and we paid out about half of that a little bit less than half of that in the supplemental. So that's that's the Uda approach. We've taken the last couple of quarters. I think we'll continue to take that conservative approach and the reason, we're not paying out more.
As though even though we feel really good about the portfolio and is performing at a super Super high level. There is additional risk in the economy. We think it's prudent to reserve some of that just in the interest in case things you take a step back we would not think it would be prudent to be paying out 100% of your dividend 100% of your earnings in dividends today, because there's a number of fab.
<unk> that would say, yes, there is risk in the economy that that would support not doing that so that's why you see us taking oh.
Fairly conservative approach in how we're how we're paying debt that supplemental dividend.
Got it makes sense and maybe one last quick one you mentioned that six or seven companies contributed materially to the to the appreciation. This quarter are those in any specific sector or was that kind of cross sector.
When you say sector, you mean industry or you mean by strategy industry Yeah.
Yes, I would not say that there are specific to an individual.
Industry a sector I think if you look at it you know our portfolio in the lower middle market.
Continues to be very very diverse.
And when you look at the top contributors there I'd say that they are across a wide range of different industries.
Got it. Thank you. Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Erik Zwick with.
Please proceed with your question.
Thank you good morning, there's been a number of comments this morning with regard to credit quality and there's still.
On some excess risk in the economy and the outlook and I'm curious you know from what your track.
And the data that you have are you seeing any early signs of deterioration.
Asian or concerns about credit quality, there and heightened amendment requests or <unk>.
Internal watch list growing or any companies that are maybe getting close to the covenant breaches anything along those lines at this point.
Yeah, Eric I would say that when you look at changes there I wouldn't say that we've seen a huge change I think when we look at underperformance at a specific portfolio company level or more broad based.
It continues to be very company specific and not not something that is driven by the broader economy.
David Nick Jesse you guys jump in here, but we're not seeing a systematic or thematic kind of issue across the portfolio just like any environment some companies perform better.
He has underperformed, but I would say that the relative over performance underperformance has not changed dramatically here in the most you know the most recent months, but you guys add on if you have a different different view a different opinion on it.
Well the only thing I'd add is that if you look at our diversification, we're very purposefully and intentionally diverse across a lot of different industry segments. Some of which are counter cyclical. So we do feel like we're well positioned as well positioned that we can be obviously, if you have a major change in the overall economy will feel that impact, but right now we're pretty comfortable.
With where we sit.
Thanks, I appreciate the commentary there I just one more for me just with regard to the strategy to deemphasize the middle market portfolio. I think you mentioned its about 8% at fair value of the total portfolio now is the goal to bring that down to zero or do you still occasionally see.
Attractive opportunities to invest within that portion of the portfolio.
Sure Eric I mean, we've been trying to deemphasize or not trying we have been deemphasizing the middle market strategy for a number of years. So five six years ago. We said publicly that we were going to be working to deemphasize that and pivot to the private loan strategy and I think we've been highly successful in doing that and I think it's been a significant.
Contributor to our success over the last couple of years and Youll see US continue to do that we don't expect it to go to zero we do.
We want to maintain that that capability.
There could be step that comes up from time to time.
Where it makes sense to continue to be active there, but I think youll see us continue to you know to.
To minimize those activities going forward.
Got it thanks for taking my questions today. Thank you Eric we appreciate it.
We have reached the end of our question and answer session I would now like to turn the floor back over to Dwayne Zach for closing comments.
Thank you Maria Thank you again, everybody for joining us this morning for our call. We really appreciate your interest in and support of main Street and we look forward to talking to you again in early may.
This concludes today's conference. Thank you for your participation you may now disconnect your lines.
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