Q1 2023 Main Street Capital Corporation Earnings Call
Greetings and welcome to the main Street Capital Corporation first quarter 'twenty twenty-three 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 exact born with Dennard Lascar Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining US for main Street capital Corporation's first quarter 2023 earnings Conference call. Joining me today with prepared comments are Duane Hughes Chief Executive Officer.
David <unk>, 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 main Street's private credit investment group.
Main Street issued a press release yesterday afternoon that details the company's first quarter financial and operating results. This document is available on the Investor Relations section of the company's website at Maine S T capital Dotcom.
A play of today's call will be available beginning an hour. After the completion of the call and will remain available until May 12.
Information on how to access. This replay was included in Yesterdays 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 five 2023, and therefore, you're advised that 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 or D and DM.
The NII is net investment income or NII as determined in accordance with U S generally accepted accounting principles.
Or gap.
Excluding the impact of noncash compensation expenses.
Management believes that presenting D NII and the related per share amounts are useful and appropriate supplemental disclosures for analyzing main street's financial performance since noncash compensation expenses do not result in net cash impact of main street upon settlement.
These refer to yesterday's press release for a reconciliation of these non-GAAP measures the most directly comparable GAAP financial measures.
Two additional key performance indicators that management will be discussing on this call our net.
Defined as total assets minus total liabilities and has also reported on a per share basis.
Street defines our OA as the net increase in net assets, resulting from operations.
Divided by the average quarterly total net assets.
Please note that 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.
Thanks Jack.
Good morning, everyone and thank you for joining us today.
We appreciate your participation on this morning's call and we hope that everyone is doing well.
On today's call I'll provide my usual updates regarding our performance in the quarter, while also providing updates on our asset management activities. Our recent dividend declarations are expectations for dividends going forward, our current investment pipeline and several other noteworthy updates.
Following my comments, David and Jesse will provide additional comments regarding our investment strategy investment portfolio.
Actual results.
Capital structure and leverage and our expectations for the second quarter.
After which we'll be happy to take your questions.
We're very pleased with our performance for the first quarter, which was highlighted by a return on equity of 14.9% and includes new quarterly records for net investment income or NII per share and distributable net investment income or D. NII per share and net asset value or NAV per share for the third consecutive quarter.
Our strong performance included continued positive results from our lower middle market and private loan investment strategies and significant contributions from our asset management business.
These results demonstrate the continued and sustainable strength of our overall platform the.
The benefits of our differentiated and diversified investment strategy do unique.
We're also pleased that we've seen our pipeline of investment opportunities in both our lower middle market and private loan investment strategies continue to grow over the last few months returning to levels more consistent with our expected base investment activity levels.
Our attractive investment pipeline together with our conservative liquidity position and capital structure provides us a continued favorable outlook for the second quarter.
Our D N I I in the first quarter exceeded the monthly dividends paid to our shareholders by 59% and the total dividends paid to our shareholders by 26%.
This strong performance allowed us to deliver significant value to our shareholders, while still conservatively retaining a meaningful portion of our income and growing our NAV per share.
These positive results and the favorable outlook for the second quarter resulted in our recommendations to our board of directors for our most recent dividend announcements, which I will discuss in more detail later.
Our NAV per share increase in the quarter due to several factors, including our retention of the excess NII per share above our dividends paid in the quarter.
The impact of the fair value increases in our lower middle market investment portfolio, and our wholly owned asset manager and the accretive impact of our equity issuances in the quarter.
Our lower middle market portfolio companies continue their overall favorable performance, which resulted in another quarter of net fair value appreciation in the equity investments in this portfolio.
As we look forward to the next few quarters, we remain excited about the benefits, we expect certain of our lower middle market portfolio companies to realize from the acquisitions. We have completed over the last 12 months to 18 months.
Largely funded by follow on debt investments, we made in those portfolio companies and we expect to see continued fair value appreciation in these portfolio companies in the future.
While our investment activity in the first quarter was a little slower than our normal quarterly activity we.
We were still pleased that we executed lower middle market investments of $59 million.
These investments resulted in a net increase in our lower middle market investments after repayments of $8 million.
Our private loan investment activities in the quarter included new investments of $44 million, which after aggregate repayments resulted in a net increase in our private loan investments of $24 million.
Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio over the next few quarters.
We've also continued to produce attractive results for our asset management business.
The funds, we advised through our external investment manager continued to experience favorable performance in the first quarter.
This positive performance resulted in a significant amount of incentive fee income for asset management business for the second consecutive quarter and as a result, we received a significantly higher contribution to our net investment income from our asset management business.
We remain excited about our plans for these external funds that we manage as we execute our investment strategies and other strategic initiatives.
And we're off to mistake about the future performance of the funds and the attractive returns we are providing to the investors of each fund.
We also remain optimistic about our strategy for growing our asset management business within our internally managed structure and increasing the contributions from this unique benefit to our mainstreet stakeholders.
As part of this growth strategy, we're happy to announce that we have formally launched our next private loan fund as a successor fund to our existing private loan investment fund and we hope to have our first closing for the fund before the end of the second quarter.
We look forward to sharing additional details and updates on the New fund on our next conference call.
Based upon our results for the first quarter combined with our favorable outlook in each of our primary investment strategies and for asset management business and the benefits of our efficient operating structure earlier. This week, our board declared a supplemental dividend of 22 and a half cents per share payable in June representing our largest in seventh consecutive quarterly supplement.
Dividend.
Our board also declared an increase to our regular monthly dividends for the third quarter of 2023 23 cents per share payable in each of July August and September representing a 7% increase from the third quarter of 2022.
The increased supplemental dividend for June as a result of our strong performance in the first quarter, which resulted in D. NII per share that was 39 and half cents or 59% greater than our regular monthly dividends paid during the quarter.
The June 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12 month period of 60 per share representing an additional 23% paid to our shareholders in excess of our regular monthly dividends and significantly increase in the current yield we are providing to our shareholders.
Including our supplemental dividends or D NII per share for the first quarter exceeded our total dividends paid by <unk> 22 cents per share or 26%.
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 the future and to further enhance the growth of our NAV per share.
We currently expect to recommend that our board continue to declare future supplemental dividends to the extent D. NII significantly exceed regular monthly dividends paid in future quarters, and we maintain a stable to positive in a V.
Based upon our expectations for the continued favorite performance in the second quarter. We currently anticipate proposing an additional supplemental dividend payable in the third quarter of 2023.
Now turning to our current investment pipeline.
As of today, I would characterize our lower middle market investment pipeline as average.
Despite the current broad economic uncertainty, we expect to continue to be active in our lower middle market strategy.
Consistent with our experience in prior periods, a broad economic uncertainty, we believe that the unique and flexible financing solutions, we can provide to lower middle market companies and their owners and management teams should be an even more attractive solution today and should result in very attractive investment opportunities for us.
We are excited about these new investment opportunities and we expect our current pipeline will be helpful. As we work to maintain our positive momentum from the last few quarters.
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 I would also characterize our private loan investment pipeline as average.
With that I will turn the call over to David.
Thanks, Dwayne and good morning, everyone.
As Dwayne highlighted in his remarks, we believe our strong first quarter financial results continued to demonstrate the strength of main street's platform differentiated investment approach and our unique operating model.
We're pleased to report that the overall operating performance for most of our portfolio of companies continue to be positive, which contributed to our attractive first quarter financial results.
The continued favorable operating performance for the majority of our portfolio companies resulted in a net increase to the fair value of our lower middle market investments during the quarter and provided increased dividend income contributions to main street.
Both our NAV appreciation and dividend income or a direct benefit of our long term strategy of maintaining a mature investment portfolio that is well diversified by end market industry vintage and security types.
Maintaining a mature and diverse portfolio has been the cornerstone of our philosophy over our 20 plus years of investment history and will continue to be a key to our investment strategy in the future.
Each quarter, we try to highlight key aspects of our differentiated investment strategy.
This quarter, we'd like to revisit several reasons why we believe that our structure as a publicly traded investment company with the significant benefits of permanent capital is a great match with our focus on investing in both debt and equity capital in lower middle market businesses.
We also believe that our permanent capital structure can provide additional value during times of increased economic uncertainty and depressed debt and equity capital investment activity similar to the economies current situation.
First on the new lower middle market origination side, we believe that our permanent capital structure allows us to be an ideal long term to permanent partner for the owners management teams and employees are privately held businesses.
One of the limitations of a typical term specific private equity fund is that they are generally required to underwrite to a rebel relatively short term holding period and generally cannot represent a longer term or permanent partnership solution for for a business owner or their management teams.
Our long term investment structure allows us the flexibility to compete for transactions based on superior structural considerations as opposed to solely on valuation.
Ultimately, we believe our flexibility generates a highly attractive investment structures that more traditional private equity funds cannot provide.
In addition, our ability to be a long term to permanent partner to the companies, we invest and allows the owners of these businesses and their management teams the ability to maintain the identity and independence of their companies. While also achieving the best outcomes for their company stakeholders.
Second our long term holding periods generate a diversified portfolio of seasoned lower middle market portfolio companies.
Out of our 79, lower middle market portfolio companies over half had been in our portfolio for greater than five years and a quarter had been in our portfolio for greater than a decade.
These seasoned investments typically have lower relative leverage profile since they are generally used free cash flow from operations to deleverage over time.
This tends to create three attractive opportunities for our high performing lower middle market portfolio companies.
The opportunity for long term equity appreciation the opportunity to pay dividends and the opportunity to efficiently take advantage of internal and external growth initiatives as they arise.
Because of our equity ownership, we are well aligned with our portfolio company owners and management teams to help them evaluate and pursue the best alternatives to create shareholder value.
Alternatively should the portfolio company faced difficult industry or economic headwinds given their lower relative leverage profile, they tend to be well positioned to work through negative cycles when they arise.
Because of main street's strong capital availability and our ability to provide both debt and equity capital solutions to our portfolio of companies. We are ideally situated to move quickly to support our portfolio of companies with add on acquisitions and other growth opportunities.
Today, the environment for add on acquisitions by our portfolio companies remained strong.
We welcome the opportunity to make incremental investments in our lower middle market portfolio companies as we strive to create long term value for main street shareholders alongside our portfolio our partners at the portfolio company level.
Now turning to the overall composition of results from our investment portfolio as of March 31, we continue to maintain a highly diversified portfolio with investments in 195 companies spanning across more than 50 different industries, among our lower middle market private loan and middle market portfolios.
Our largest portfolio company represented three 1% of our total investment portfolio fair value and three 7% of our total investment income for the last 12 months.
The majority of our portfolio investments represented less than 1% of our income and our assets.
Our investment activity in the last quarter included total investments in our lower middle market portfolio of approximately $59 million, which after aggregate repayments on debt investments and return of invested equity capital resulted net increase in our lower middle market portfolio of $8 million.
Driven by the capabilities and relationships of our private credit team. We also completed $44 million in total private loan investments, which after aggregate repayments of debt investments and return of invested equity capital resulted in net increase in our private loan portfolio of $24 million.
Finally during the quarter, we had a net decrease in our middle market portfolio of $12 million as we continued to strategically deemphasize this strategy.
At the end of the first quarter, our lower middle market portfolio included investments in 79 companies representing over $2.1 billion of fair value, which is over 20% above our cost basis. We also had investments in 86 companies in our private loan portfolio, representing $1 $5 billion of fair value and our middle market.
Folio had investments in 30 companies, representing $306 million of fair value.
The total investment portfolio at fair value at quarter end was 110% 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 additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday with that I'll turn the call over to Jesse to cover our financial results capital structure and liquidity position.
Thank you David.
Dwayne and David mentioned, we are very pleased with our operating results for the first quarter.
Which include a number of quarterly records, including those for total investment income.
And for NII per share DNI.
DNI per share and NAV per share.
Our total investment income in the first quarter increased by $40 9 million or 51% over the same period in 2022 and.
At $6 4 million or five 6% over the fourth quarter 2022 four.
For a total of 121 3 million.
Interest income increased by $34 million from a year ago, and $7 1 million over the fourth quarter.
We estimate that the continued benefit from increases in benchmark index rates drove just over half of the increases for both periods with the remainder driven primarily by the continued growth in our dead investments.
Dividend income increased by 7.6 million over a year ago.
And by 1.8 million over the fourth quarter.
The increase over prior year was driven primarily by increases in dividends.
See from our lower middle market portfolio companies and from the external investment manager, while it will increase over the fourth quarter was driven by the increase in dividends received from our lower middle market portfolio companies.
The first quarter investment income included elevated dividends and accelerated prepayments and other activity there are considered less consistent.
In the aggregate these were approximately $7 1 million or six pence cents per share above the average of the prior four quarters.
Our operating expenses increased by $12 1 million over the first quarter 2022.
Largely driven by increases in interest expense and compensation related expenses.
Partially offset by an increase in expenses allocated to the external investment manager.
Interest expense increased by $8 3 million over the prior year, driven primarily by an increase in the interest rate on our debt obligations.
<unk> from the addition of certain debt at higher interest rates and increases in benchmark index rates combined with an increase in average outstanding borrowings to fund our investment activity and support the growth of our investment portfolio.
Cash compensation expenses increased by $3 1 million driven primarily by increases in incentive compensation accruals as a result of our favorable operating performance.
And higher levels of head count to support increased investment activity and assets under management.
Noncash compensation expenses increased by $2 million, including increases in share based compensation and deferred compensation expenses.
As a reminder, deferred compensation expenses will fluctuate based on the change in the fair value of the underlying plain assets.
The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets was one 3% for the quarter.
And 1.4% for the trailing 12 month period and continues to be amongst the lowest in our industry.
Our external investment manager contributed $8 1 million to our net investment income during the quarter and.
An increase of 3 million when compared to the same period of the prior year and 1.1 million when compared to the fourth quarter.
The manager earned $3 3 million incentive fees during the quarter, an increase of $3 2 million over a year ago.
And 0.8 million over the fourth quarter as a result of the improved performance of the assets under management and ended the quarter with total assets under management of $1 4 billion.
During the quarter, we recorded net fair value appreciation.
Including net realized losses and net unrealized appreciation.
On the investment portfolio was $6 7 million.
We recorded a net fair value appreciation of 11.0 Mellon in our lower middle market portfolio.
Driven by the continued performance of our portfolio companies.
During the quarter, we resolved a longstanding nonaccrual lower middle market investments that had been carried at zero dollars on a fair value basis for multiple years, resulting in a real lot realized loss recognized during the quarter, but no negative impact to net fair value.
We also recognized $9 7 million of appreciation in the fair value of our external investment manager.
Driven by increases in peer trading multiples and increase revenues and a net fair value depreciation.
Of $8 9 million in our middle market portfolio.
At $6 7 million in our private loan portfolio.
Driven by a combination of quoted market prices changes in market spreads and the underperformance of specific portfolio companies.
Yeah.
And Eva per share increased by 37 cents or one 4% over the end of the fourth quarter and by $1.34 for five 2% when compared to a year ago to $27.23 at March 31 2023.
We ended the first quarter with 13 investments on non accrual status comprising approximately 0.6% of the total investment portfolio at fair value and approximately 3.2% at cost.
As I mentioned earlier, we had one lower middle market investment previously on nonaccrual fully realize and added two middle market investments.
Non accrual during the quarter.
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.
Our regulatory debt to equity leverage calculated as total debt, excluding our <unk> debentures divided by net asset value was 0.77, and our regulatory asset coverage ratio was two three times at quarter end and are intentionally slightly more conservative than our target ranges of zero point.
820.9 times, and 2.1 to 2.25 times respectively.
During the quarter, we were active on the capital front, including the addition of one new lender in our corporate revolving credit facility, increasing the total commitments by 60 million.
$980 million.
The execution of an additional 50 million in unsecured private placement notes in.
And the issuance of equity on our ATM program, raising a net $41 million.
We ended the quarter with strong liquidity, including cash and availability under our credit facilities of 711 Mellon.
We believe this provides us with ample liquidity continue to be opportunistic and pursue attractive investment opportunities throughout 2023, while continuing to maintain a conservative leverage profile.
Turning back to our operating results return on equity for the first quarter was 14.9% on an annualized basis and 12, 8% for the trailing 12 month period.
Both representing strong results compared to the industry.
DNI per share for the quarter was $1 seven per share an increase of four cents or 3.9% over the fourth quarter and 31 cents for 41% over the same period a year ago.
The combined impact of certain investment income and deferred compensation expense considered less consistent or nonrecurring nature.
Seven cents per share by the average of the last four quarters and nine cents per share above the same quarter a year ago.
As Dwayne mentioned, given the strength of our operating results and the outlook for 2023, our board approved an increase to our monthly dividends to <unk> 23 per share for the third quarter 2023.
And a supplemental dividend of 22 and a half cents per share payable in June 2023.
Total dividends declared for the second quarter, 2023, or 90 cents per share representing a 549, 8%.
Percent increase over the total monthly in supplemental dividends paid in the first quarter 2023, and a 25% increase over the total dividends paid in the second quarter 2022.
Looking forward.
Given the strength of our underlying portfolio, we expect another strong quarter in the second quarter 2023 with.
With expected DNI per share of at least 95 per share.
And with the opportunity to exit exceed this level.
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.
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, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
First question comes from Robert Dodd with Raymond James. Please go ahead.
Hi, guys and congratulations on the quarter, obviously, a couple of questions on all lower middle.
Portfolio company dividends and then yeah.
So on that the portfolio companies I mean, you highlighted there was some.
Unusually law high high income, but I mean looking at.
It looks like about.
Somewhere between 20 and 21 million.
From portfolio companies and dividend income pick up the asset manager to take that like 45.
The second highest dividend quarter add Bob.
Those portfolio of companies and the highest Q1 by a considerable margin can you give us any color how much of that if any.
Ron.
Oh It is obviously, it's quite unusual to see such a such a strong Q1.
Or is it just that the economy, sending a lot of mixed messages sent maybe those businesses will be doing better.
Or is there some unusual lumpiness to that particular dividend income.
This quarter.
Sure. Thanks Robert.
I would say is that just like last quarter, we had a certain number of our lower middle market companies that despite what you hear about the overall economy and the headwinds and concerns they're continuing to do really well.
Jesse highlighted in his comments that we did have some elevated or unusual activity. There. There was one lower middle market company that had a large dividend that represented a good chunk you probably 80 70, 580% of the nonrecurring portion of those dividends. So you do have that going through the first quarter, but outside of that we continue to have good production or.
<unk> across our lower middle market portfolio from a number of different companies contributing to that dividend income for the first quarter.
Got it thank you.
Well look at it.
The asset manager with Sean.
Doing well.
With the base management fees that it received this quarter five and a half.
And M. S. C. I think there's never paid more than five so is that maybe five years.
Welcome to the MFC colleagues here is.
Is that an indication of.
The growth in debt of which the start.
Starting off with talking about loan fund as well.
The you know the AUM was one four and I think.
One one.
Is that growth.
Is there how much of that is 100 U to the success beyond the MFC.
Advisory relationship.
In your argon.
Asset management initiatives.
Robert what I would say that we're seeing good performance across the entire platform you see it at main street and our numbers given the overlap of it of assets between main Street M. A C income fund as well as our private loan fund Youre also seen a good performance at the funds that we manage and that's driving contributions there through through incentive fees.
I'd say the base management fee did not increase significantly quarter over quarter, but you did see a significant benefit from an incentive fee just given the overall performance of the portfolio and the results that drives for each of those funds that we're managing.
Okay. Thank you that's it for me.
Youre welcome. Thank you next.
Next question Bryce Rowe with B Riley. Please go ahead.
Thanks, Good morning.
Maybe wanted to start with just kind of the.
Pay for the state of the pipeline so to speak.
Like last quarter, you all talked about.
Yes.
Low average to average pipeline and actually a little bit surprised that it ticked up our it seems to have picked up here.
At this point in the year, So Duane and David maybe you guys could speak to maybe what what's driving the pickup in pipeline is it just moving from winter to spring or are you seeing kind of better opportunities given.
And maybe the tighter credit conditions were seeing from other from other lenders.
Sure Brad. Thanks, Thanks for the question I'll give a quick response and I'll, let David add on what I would say is when we looked at the first quarter on our last call. We knew that there was a slowdown we're experiencing.
Deal flow really started to slow down in December and you saw the impact of that slow down through the first quarter as we move forward in the last couple of months I would say that the view we have is that the market as a whole private equity investors as well as sellers have gotten comfortable with the new dynamics of the marketplace, which the biggest changes you know would be the cost of capital on the debt capital side.
So you've seen the market as a whole.
I understand that that's a new reality and if you're going to transact.
Those those parties have decided that they can transact they may youll make other tweaks, they're structured it might be more equity less debt or there may be a difference on the purchase price from evaluation standpoint, but the market as a whole has concluded that you know that there is a good opportunity to continue to make investments in there and they're transacting again and I'd say that are improving our.
<unk>.
Both lower middle market and private loan as a result of the go to market as a whole just returning somewhat more to normal still not normal where it would have been six or nine months ago, but at least heading in that direction. David I know, if you want to add anything to that not much to add but I think that the biggest catalyst for increased volume is the fact that last year. There was so much.
Our business like Dwayne referenced on the debt availability, the market's gotten more acclimated to the new normal as far as the current conditions, so or hearing from a lot of the intermediaries. We deal with is that they're more willing to come to market because they have better visibility of what it takes on the buyer side to get deals done in the tort environment, which sometimes takes more equity.
Contributions, but that the market is accepting of that and so they are opening up the the deal flow.
The one additional thing I would add Brian I think we've said this over the last couple of quarters, but one of the things that gives us comfort. Despite the fact that we're investing into an uncertain environment from a capital standpoint, and just from an overall economic standpoint, as I always say that the quality of the deals that we're seeing that we're executing on a they're very good deals good sponsors on the private loan side probably.
The credit side and there you had a really good attractive lower middle market deals on the lower middle market side. So despite everything you read about in the newspaper you. There are companies that are doing well in the economy and we're seeing opportunities to invest you know with those teams and with those private equity sponsors in those those opportunities just one last add on is that the one stop shop element of our fine.
Lansing's has become more powerful in this market.
Buddy do both the debt and the equity means that if there are.
Intermediaries that are concerned about the dynamics that might exist in the debt environment.
Eligible about us, they're coming to us more more regularly and this kind of environment.
Got it okay.
Maybe switching gears a little bit from that.
The capital structure.
Obviously active.
And a lot of different ways here here in the past quarter.
Expanding the revolver more more private notes continuing to be active on the ATM.
Just kind of wondering why not get your thoughts around that.
There is a there is a maturity in 24, some senior notes.
Just curious how you're how you're thinking about that at this point would you be comfortable.
Maybe using a piece of the revolver capacity on our revolver to redeem that.
And any any thoughts around that would be would be great.
Sure Bryce I'd say that we don't have a definitive answer for that I think our goal is to always maintain a conservative capital structure significant liquidity position. So we've got flexibility and I think we've done a good job of putting ourselves in a position we always have the opportunity given how we've performed and how our stock price trades to utilize the ATM or other your equity is.
<unk> says as an option to support our capital structure and our liquidity position, but I think as we sit here today, we're just going to continue to monitor things if the market improves you could expect to see us active on the investment grade or private placement side. If it doesn't we have a number of other options. The a T M our secured facilities or other options.
And we think gives us the flexibility to deal with that.
That maturity in May of 2024, So I think we'll continue to be optimistic opportunistic and as it relates to what's available in the marketplace and deal with that you had that maturity here over the next 12 months or so just your own if you want to add anything to that I think he quoted Duane I mean I think.
The only thing to add is like over the last three to six months I think what you've seen from main street. It. In addition, what we did in the first quarter, but going back to the fourth quarter has continued to diversify our funding sources.
It's Duane mentioned in on the ATM side than we've historically been active.
We did at the SPV in the fourth quarter and then we did.
Some unsecured private placement notes. So I think it's looking at a combination of different sources as we get closer and closer to may of 'twenty four.
Got it okay.
Last one for me I think there was.
Press release made note of added head count just kind of curious how you're how you're staffing up our yet adding some folks too.
Maybe tackle tackle more more elements of the of the lower middle market.
Sure Bryce I think as you've heard us say in our comments and some of the Q&A here, we expect to be active we have a large growing portfolio both on the lower middle market side and the private credit side. So to the extent, we can add members to the team and we're doing that so we've had some additions here we expect to have more over the next couple of quarters and that that's the the activity that Jesse was was.
Referencing in his comments.
Got it alright, great quarter I appreciate the time thanks.
Thanks Bryce.
Next question Kenneth Lee with RBC. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just one follow up on the on the lower middle market pipeline there.
Wonder if you can just share your thoughts on.
Do you see any potential impactful from an economic slowdown or broadly across the industry.
See the slower M&A activity.
Wondering what sorts of impacts you could see down the line in terms of that pipeline there. Thanks.
Sure Ken. Thanks, Thanks for the question I'll give a quick answer and then I'll, let David add on similar to what I said early I'd say the biggest impact we've seen both in the alumina market activity, but also in our private credit business has been the change in the cost of debt capital over the last 12 months or so I think as I said earlier I think that has been a change that the market is maybe not gotten comfortable with.
But it is accepted that that's a new reality and as a result of that I think that's the biggest driver that youre seeing in terms of an improvement or recovery at least in the pipeline and the activity that we're seeing on our side I do think any investor including main street is more concern in this environment. When you look at the headwinds and the uncertainty in the in the overall economy, but we feel like our solution can be a really really.
Good morning.
When anything solution for lower middle market companies in any environment, we think it can be particularly effective in this type of an environment, where an owner operator, you know management team that owns a good lower middle market company that wants liquidity will acknowledged that they probably wont maximize value today, but our unique structure, both visit a minority investor or a a majority.
40 equity Investor, we can provide a significant amount of liquidity similar to what they were trying to achieve out of a full change of control, but allow them to either retain control from our equity ownership standpoint, or at least retain a material minority position that allows them to get some liquidity today, but also retained a significant enough of that equity.
A significant portion of that equity to allow them to continue to benefit from that company in the future and hopefully sometime in the next couple of years are realize a higher valuation than they may realize in today's environment.
I'll, just add one or two.
When we look at our lower middle market pipeline, we do have add ons as a significant portion that's grown over the years. So this is as.
As we look at the overall portfolio for lower Middle market is our company's Deleveraged as we said in my comments they have more capacity to go and be opportunistic in a time of market dislocation or concern overall in the economy. The second thing is in the lower middle market as opposed to a larger transactions the same types of transactions like <unk>.
Succession planning partner separations, the state planning take place year after year and people looked at transact and so.
The market is one that.
Certainly has ups and downs like every market, but we still see the same reasons to transact. So it should be a good environment for us.
Yeah.
Gotcha very helpful. There.
One just one follow up here.
I think in the prepared remarks, you talked about.
Potential for a fair value appreciation within the lower middle market portfolio.
And it sounds like it's going to come from potentially follow ons or acquisitions or add on site. As you mentioned is the thinking there that.
With further investments.
These companies could increase that enterprise values and therefore, there could be some equity appreciation over time or is there something else that we should be keeping in mind here. Thanks.
Sure Ken Thanks for that question, what I would say is what we intended with that comment was to reference some of our portfolio companies that are already completed acquisitions. So we're not referencing future acquisitions, but we're referencing acquisitions that they've completed over the last 12 to 18 months and as those acquisitions get integrated and they realize the synergies we may be a little more conservative than others.
And recognizing those synergies upfront, we prefer to recognize them after they've been they've been realized or they've been been executed on so we're seeing some really good activity at several of our companies that have completed acquisitions and are now realizing those synergies and as those synergies flowed through their quarterly financial statements where were seeing natural benefits on the fair value.
And we expect to see those same benefits going forward. So that's that's what we were referencing on that on that comment.
Got you very helpful. There. Thanks again, thank you.
Next question Mark Hughes with true with Securities. Please go ahead.
Yes. Thank you very much on the incentive fee income, where you're doing well.
The management is that.
How much of that is driven by your outperformance versus just some favorable market dynamics in the areas that you're in.
Mark I would say, we don't have an exact number or breakdown I would say, it's a combination of the two I think we feel like we're doing a really good job.
On the the portfolio existing portfolio company side, so you're seeing a benefit there you can see it in our dividend income that we referenced earlier, but clearly as interest rates have risen on the floating rate side, just like main street sees a benefit through our interest income you see the same type of benefit across the platform. Both at MSC income fund as well as our private loan fund.
You may even see more there because those funds are heavier weighted towards our private loan strategy, which is much more heavily weighted to a floating rate environment on the investment side as opposed to main street, having a larger portion of its debt investments be fixed rate through our lower middle market strategy.
Martin about doing it does that answer your question.
Oh, yes sure sorry.
Yes.
Great question.
Sure.
When you look at the target.
Lower middle market.
Sure.
Companies, how much do they transact with regional bank.
Ed.
For the companies that you looked at Midas.
Perhaps establish a relationship with.
Credit those tightened.
Is that going to be a meaningful catalyst or are those regional banks, maybe not even partnered with ecosystem just sort of curious your perspective.
Sure Mark I always say that our lower middle market companies are probably do have.
A higher amount of activity with regional banks. These are smaller locally focused businesses in general so as a result, they they are probably more inclined to have a relationship with the regional bank than than a national larger national based business would so while they don't or our portfolio companies wouldn't be impacted by regional banks from a a M.
Our source of financing because in our aluminum market strategy, where typically the the the only source of capital both debt and equity. So we're providing all their capital needs. Both from an initial transaction standpoint, but also their future capital needs if theyre growing organically at they're seeking growth through acquisitions. So we don't see a negative impact in our current portfolio base.
Upon a pullback in regional banks, but I do think our portfolio companies would have existing relationships with regional banks more broadly.
Very good. Thank you. Thank you.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Erik Zwick with have the group. Please go ahead.
Thank you and good morning, everyone must have kind of the topics I wanted to hit on have had been discussed already but I guess the market has changed quite a bit over the past 12 months and a number of ways from interest rates.
Yeah.
<unk> banks.
Pulling back from from some of the markets.
Curious if you could just kind of maybe summarize our highlights how that has impacted the.
Kind of the characteristics of your originations.
Which has benefited the most in terms of either spreads or covenants.
The ability to increase interest rate floors, but what you would characterize it as kind of being the most.
Most dramatic changes from them from a year ago, and then maybe kind of most important going forward as well.
Sure Eric Thanks, Thanks for the question I.
I would say in our lower middle market strategy, we haven't really seen much of an impact at all most regional banks at least from our experienced they're not going to be active players in financing M&A type transactions, where capitals, leaving the business. That's why you know our solutions in the lower middle market strategy, you fit the alumina market, so well because theres not a lot of people that are actively providing.
Debt capital to that marketplace.
So because of that even though you see the regional banks, having their headwinds in issues, we're not seeing a significant impact or really any impact from our perspective on our lower middle market strategy and our private loan strategy I would say that what you've seen and it's more for my perspective, it's less of an impact of the regional banks and it's more just a broader economic in.
Packed in a broader overall capital markets impact is that you are seeing less capital availability people that are probably less inclined to invest in as a result, we've seen the spreads that we're achieving.
On our new private loan transactions expand I'd say over the last 12 months is probably expanded by 100 basis points and that's purely based upon availability of debt capital in the marketplace and the perception that people have of the risk of investing in the current environment. So that's you know that's what I would say has been the impact on the.
The private loan of private credit side of our business, but I'd say, that's you know that's not directly attributable to the to the regional banks is just more broadly attributable to the activities by the fed headwinds in the economy and concerns about inflation and other.
Broader economic concerns Mcdonald, if you'd add anything on the private credit side, Yeah, I would add also that spreads have widened out.
Also gotten better terms across the board.
Whether that's you know slightly tighter covenants.
Less advance rates, you will lower LTV to start lower leverage to start.
Across the board in your documentation is better right now than it was 12 months ago, you said across the board that the overall terms of drifted more towards the lender then the borrower.
That's all very helpful. Thank you very much thank.
Thank you Eric.
This concludes our question and answer segment I would like to turn the floor over to management for closing remarks.
Well. Thank you again, everyone for joining us. This morning, we'll look forward to talking to everyone again in early August .
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.
Yeah.
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