Q4 2023 Main Street Capital Corp Earnings Call
Operator: Greetings and welcome to the Main Street Capital Corporation 4th Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.
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.
Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a 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 Bernard Lascar and Vested Relations. Thank you, Mr. Vaughan. You may begin. Thank you, operator. And good morning, everyone.
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, just constant which is being recorded.
Now my pleasure to introduce your host.
With Dennard Lascar Investor Relations. Thank you Mr. <unk> you may begin.
Thank you operator, and good morning, everyone. Thank you for joining us for main Street capital Corporation's fourth quarter 2023 earnings Conference call.
Zach Vaughan: Thank you for joining us for Main Street Capital Corporation's fourth quarter 2023 earnings conference. Joining me today with prepared comments are Dwayne Hizak, Chief Executive Officer, David Magdal, 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 is Nick Mazur, Managing Director and Head of Main Street's Private Credit Investments.
Joining me today with prepared comments are Duane Hughes, Jacques Chief 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 Nick, Missouri, Managing director and head of main Street's 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.
Zach Vaughan: Main Street issued a press release yesterday afternoon that details the company's fourth quarter and full year financial and operating... This document is available on the investor relations section of the company's website at MainSTCapital.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 1st. Information on how to access the replay was included in yesterday's release.
This document is available on the Investor Relations section of the company's website at Maine S T capital Dotcom.
A replay of today's call will be available beginning an hour after the completion of the call and will remain available until March 1st.
Information on how to access the 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.
Zach Vaughan: 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 23rd, 2024, and therefore, you are 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.
Please note that information reported on this call speaks only as of today February 'twenty three 'twenty 'twenty four 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.
Zach Vaughan: 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.gov. Main Street assumes no obligation to update any of these statements unless required by law.
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.
Zach Vaughan: During today's call, management will discuss non-GAAP financial measures, including Distributable Net Investment Income, or DNII. DNII is Net Investment Income, or NII, as determined in accordance with U.S. Generally Accepted Accounting Principles, or GAP, excluding the impact of non-cash compensation. Management believes that presenting DNII and the related per share amount are useful and appropriate supplemental disclosures for analyzing Main Street's financial performance since non-cash compensation expenses do not result in a net cash impact to Main Street upon settlement. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or RO. NAV is defined as total assets minus total liabilities and is also reported on a per-share basis.
During today's call management will discuss non-GAAP financial measures, including distributable net investment income for D N II.
D and I I is net investment income or NII as determined in accordance with U S generally accepted accounting principles or GAAP.
Excluding the impact of noncash compensation expenses.
Management believes that presenting the NII and the related per share amount 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.
Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
Two additional key performance indicators that management will be discussing on this call, our net and net asset value or an Eva and return on equity or R. L E.
N. A V is defined as total assets minus total liabilities and has also reported on a per share basis.
Main Street defines Oro as the net increase in net assets, resulting from operations divided by the average quarterly total net assets. Please.
Dwayne Heshock: Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net asset. 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 Heshock. Thanks, Zach.
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 he shot.
Thanks, Zack good morning, everyone and thank you for joining US. We appreciate your participation on this morning's call, we hope that everyone's doing well.
Dwayne Heshock: Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone is doing well. On today's call, I will 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 dividend declarations, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates. David and Jesse will provide additional comments regarding our investment strategy, investment, Capital Structure, and Leverage, and our expectations for the fourth quarter of 2024, after which we'll be happy to take your questions. We're extremely pleased with our fourth quarter results, which closed another record year for us. Our fourth quarter performance resulted in a new quarterly record for NII per share.
On today's call I will provide my usual updates regarding our performance in the quarter.
So providing a few updates on our performance for the full year.
Also provide updates on our asset management activities. Our recent dividend declarations are expectations for dividends going forward, our recent investment activities and current investment pipeline.
Several other noteworthy updates.
Following my comments, David and Jesse will provide additional comments regarding our investment strategy.
It's been portfolio financial results capital structure and leverage.
Our expectations for the fourth quarter of 2024, after which we'll be happy to take your questions.
We are extremely pleased with our fourth quarter results, which close another record year for us.
Our fourth quarter performance resulted in a new quarterly record for NII per share.
Dwayne Heshock: DNII per share was equal to our existing quarterly record that we achieved earlier this year, a new record for NAV per share for the 6th consecutive quarter, and an annualized return on equity of approximately 23% for the quarter. Our performance in the fourth quarter continued our positive performance in the first three quarters of 2023 and resulted in new annual records for NII per share and D&I per share and a return on equity of approximately 19% for the year. These positive results demonstrate the continued and sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business, and the continued underlying strength and quality of our portfolio companies. We are further pleased that we are able to generate these returns while intentionally maintaining a conservative capital structure and liquidity position during 2023. The continued positive momentum across our platform during 2023 allowed us to deliver significantly increased value to our shareholders with a 25% increase in the total dividends paid to our shareholders in 2023. Despite this significant increase, our D&II still exceeded the total dividends paid to our shareholders by over 17%.
The NII per share equal to our existing quarterly record that we achieved earlier this year.
A new record for NAV per share for the sixth consecutive quarter.
And an annualized return on equity of approximately 23% for the quarter.
Our performance in the fourth quarter continued our positive performance in the first three quarters of 2023 and resulted in new annual records for NII per share and DNI per share and a return on equity of approximately 19% for the year.
These positive results demonstrate the continued and sustainable strength of our overall platform.
Benefits of our differentiated and diversified investment strategies.
The unique contributions of our asset management business and the continued underlying strength and quality of our portfolio companies.
We are further pleased that were able to generate these returns while intentionally maintained a conservative capital structure and liquidity position during 2023.
The continued positive momentum across our platform during 2023 allowed us to deliver significantly increased value to our shareholders with a 25% increase in the total dividends paid to our shareholders in 2023.
Despite the significant increase our D NII still exceeded the total dividends paid to our shareholders by over 17%.
In addition to these record breaking results with the continued support from our long term lender relationships and the benefits of our recent investment grade debt offering in January we entered the new year with a strong liquidity position and a conservative leverage profile and are excited about the prospects for significant growth in both our lower middle market and private loan investment.
Dwayne Heshock: In addition to these record-breaking results, with the continued support from our long-term lender relationships and the benefits of our recent investment-grade debt offering in January, we enter the new year with a strong liquidity position and a conservative leverage profile and are excited about the prospects for significant growth in both our low-inventory market and private loan investment strategy. We appreciate the hard work and efforts of the management teams and employees at our portfolio companies and continue to be encouraged by the favorable performance of the companies in our diversified lower middle market and private loan investment strategy. 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 in the future.
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We appreciate the hard work and efforts of the management teams and employees at our portfolio of companies and continue to be encouraged by the favorable performance of the companies in 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 in the future.
Dwayne Heshock: These positive results, combined with our favorable outlook for the first quarter, resulted in our recommendations to our Board of Directors for our most recent dividend announcements, which I'll discuss in more detail later. Our NAV per share increased in the quarter due to several factors, including the impact of the net fair value increases in our investment portfolio, the creative impact of our equity issuances, and our retention of the excess NII above our dividends page.
These positive results combined with our favorable outlook for the first quarter resulted in our recommendations to our board of directors for our most recent dividend announcements, which I'll discuss in more detail later.
Our NAV per share increase in the quarter due to several factors, including the impact of the net fair value increases in our investment portfolio.
Creative impact of our equity issuances.
And our retention of the excess NII above our dividends paid.
Dwayne Heshock: The continued favorable performance of certain of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant fair value appreciation in the equity investments in those portfolio companies. As we look forward to the next few quarters, we remain excited about our expectations for our lower middle market portfolio companies and the opportunity for continued dividend income and additional fair value appreciation from this portfolio in the future. Our lower middle market investment activity in the fourth quarter returned to levels consistent with our normal expectations, with new investments of $92 million in the quarter, including investments totaling $68 million in two new portfolio companies and resulting in a net increase of $66 million after repayments and other investment activities. Our private loan investment activities in the quarter included new investments of $160 million, which together with higher than expected repayment activity in the quarter resulted in a net decrease in our private loan investments of $113 million.
The continued favorable performance of certain of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant fair value appreciation in the equity investments in those portfolio companies.
As we look forward to the next few quarters, we remain excited about our expectations for our lower middle market portfolio companies and the opportunity for continued dividend income and additional fair value appreciation from this portfolio in the future.
Our lower middle market investment activity in the fourth quarter returned to levels consistent with our normal expectations with new investments of $92 million in the quarter, including investments totaling $68 million in two new portfolio companies and resulting in a net increase of $66 million after repayments and other investment activity.
Our private loan investment activities in the quarter included new investments of $160 million, which together with higher than expected repayment activity in the quarter resulted in a net decrease in our private loan investments of $113 million.
Dwayne Heshock: We've also continued to produce attractive results in our asset management business. The funds we advised through our external investment manager continued to experience favorable performance in the fourth quarter, resulting in significant incentive fee income for our asset management business for the fifth consecutive quarter and, together with our recurring base management fees, a significant contribution to our net investment income. We also benefited from significant fair value appreciation in the value of the External Investment Manager due to a combination of increased fee income, growth in asset center management, and broader market-based drivers.
We've also continued to produce attractive results our asset management business.
The funds, we advised through our external investment manager continued to experience favorable performance in the fourth quarter, resulting in significant incentive fee income for asset management business for the fifth consecutive quarter and together with our recurring base management fees, a significant contribution to our net investment income.
We also benefited from significant fair value appreciation and the value of the external investment manager due to a combination of increased fee income growth in assets under management and broader market based drivers.
Dwayne Heshock: We remain excited about our plans for the external funds that we manage as we execute 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 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 Main Street stakeholders. As part of this growth strategy, we're happy to update you on our continued progress with the fundraising activities for our second private loan fund, and we look forward to the continued growth of this new fund over the next few quarters and the related additional recurring base management fees and incentive fee opportunities.
We remain excited about our plans for the external funds that we manage as we execute 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 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 main street stakeholders.
As part of this growth strategy, we're happy to update because we've made continued progress with the fund raising activities on our second private loan fund and we look forward to the continued growth of this new fund over the next few quarters and the related additional recurring base management fees and incentive fee opportunities.
Dwayne Heshock: Based upon our results for the fourth quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, earlier this week, our board declared a supplemental dividend of $0.30 per share payable in March, representing our 10th consecutive and largest to date quarterly supplemental dividend. Our board also declared regular monthly dividends for the second quarter of 2024 of 24 cents per share, payable in each of April, May, and June, representing a 6.7% increase from the second quarter of 2023. The supplemental dividend for March is a result of our strong performance in the fourth quarter, which resulted in DNII per share, which exceeded our regular monthly dividends paid during the quarter by $0.42 per share, or 59%.
Based upon our results for the fourth quarter combined with our favorable outlook in each of our primary investment strategies and for our asset management business earlier. This week, our board declared a supplemental dividend of <unk> 30 per share payable in March representing our 10th consecutive and largest to date quarterly supplemental dividend.
Our board also declared regular monthly dividends for the second quarter of 2024 of 24 cents per share payable in each of April may and June representing a six 7% increase from the second quarter of 2023.
The supplemental dividend for March as a result of our strong performance in the fourth quarter, which resulted in D NII per share, which exceeded our regular monthly dividends paid during the quarter by 42 per share or 59%.
Dwayne Heshock: The March 2024 Supplemental Dividend will result in total Supplemental Dividends paid during the 12-month period of $1.075 per share, representing an additional 39% paid to our shareholders in excess of our regular monthly dividends and implying a current total yield to our shareholders of approximately 9%. After multiple increases to our monthly dividends during 2023 and a significant supplemental dividend paid in December, our DNII per share for the fourth quarter still exceeded our total dividends paid by 14 cents per share, or 14 percent. We are pleased to be able to deliver this significant additional value to our shareholders while still conservatively retaining a portion of our excess earnings to support our capital structure and investment portfolio against the risks associated with the current continued general economic uncertainty and to further enhance the growth of our NAV per share.
The March 2020 for supplemental dividend will result in a resulting total supplemental dividends paid during the trailing 12 month period of one dollar and seven five cents per share representing.
An additional 39% paid to our shareholders in excess of our regular monthly dividends and implying a current total yield to our shareholders of approximately 9%.
After multiple increases to our monthly dividends during 2023 and a significant supplemental dividend paid in December our D. NII per share for the fourth quarter still exceeded our total dividends paid by <unk> 14 per share or 14%.
We're pleased to be able to deliver the significant additional value to our shareholders, while still conservatively retaining a portion of our excess earnings to support our capital structure and investment portfolio against the risks associated with the current continued general economic uncertainty.
And to further enhance the growth of our NAV per share.
As we've previously mentioned, we currently expect to recommend that our board declared future supplemental dividends to the extent DNI significantly exceeded our regular monthly dividends paid in future quarters, and we maintain a stable to positive in <unk>.
Dwayne Heshock: As we've previously mentioned, we currently expect to recommend that our board declare future supplemental dividends to the extent D&II significantly exceeds our regular monthly dividends paid in future quarters, and we maintain a stable depositive NAV. Based upon our expectations for the continued favorable performance in the first quarter, we currently anticipate proposing an additional supplemental dividend payable in June 2024. 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 rural middle market strategy.
Based upon our expectations for the continued favorable performance in the first quarter. We currently anticipate proposing an additional supplemental dividend payable in June 2024.
Now turning to our current investment pipeline.
As of today, I'd 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.
David: Consistent with our experience in prior periods of broad economic uncertainty, we believe that the unique and flexible financing solutions that we can provide to our lower middle market companies and their owners and management, and which differentiate between long-term to permanent holding periods, should be an even more attractive solution in the current environment and should result in very attractive investment opportunities. We are excited about these new investment opportunities, and we expect that our current pipeline will be helpful as we work to maintain our positive momentum from 2023 into the future. We also continue to be very pleased with the performance of our private credit team and the results they have provided for our private loan portfolio and our asset management portfolio. And as of today, I would characterize our private loan investment pipeline as average. With that, I will turn the call over to David. Thanks, Duane, and good morning, everyone.
Consistent with our experience in prior periods of broad economic uncertainty, we believe that the unique and flexible financing solutions that we can provide to our lower middle market companies and their owners and management teams and our differentiated long term to permanent holding periods should be an even more attractive solution in the current environment and should result in very attractive investment opportunities.
We are excited about these new investment opportunities and we expect that our current pipeline will be helpful. As we work to maintain our positive momentum from 2023 into the future.
We also continue to be very pleased with the performance of our private credit team and the results. They are provided for our private loan portfolio and our asset management business.
And as of today I'd characterize our private loan investment pipeline as average.
With that I will turn the call over to David.
Thanks, Dwayne and good morning, everyone.
Each year and provides a good opportunity to look back at our history and highlight the results of our unique and diversified investment strategy and discuss how these strategies have enabled us to deliver attractive returns to our shareholders over an extended period of time.
David: Each year end provides a good opportunity to look back at our history and highlight the results of our unique and diversified investment strategy, and discuss how these strategies have enabled us to deliver attractive returns to our shareholders over an extended period of time. Since our IPO in 2007, we have increased our monthly dividends per share by 118 percent, and we have declared cumulative total dividends to our shareholders of $40.56 per share, or over 2.7 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 11 times the money invested. This compares very favorably to the 3.4 times money invested in the S&P 500 over the same period of time, and it's significantly higher when compared to other VDIs.
Since our IPO in 2007, we have increased our monthly dividends per share by 118% and we have declared cumulative total dividends to our shareholders of $40 56 per share or over two seven times, our IPO price of $15 per share.
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 11 times money invested.
This compares very favorably to the three four times money invested for the S&P 500 over the same period of time and a significantly higher when compared to other bdcs.
As we've previously discussed we believe that the primary drivers of our long term success has been and will continue to be our focus on making both debt and equity investments in the underserved lower middle market.
David: As we previously discussed, we believe that the primary drivers of our long-term success have been, and will continue to be, our focus on making both debt and equity investments in the underserved lower and middle markets, supporting our private credit activities for the benefit of our stakeholders and for the clients of our asset management business, which also benefits our stakeholders, our internally managed structure, which allows us to maintain an industry-leading cost structure, and a strong alignment of interest between our employees Most notably and uniquely, our lower middle market strategy provides attractive leverage points and income yields on our first lien debt investments while also creating a true partnership with the management teams and other equity owners of our portfolio companies through our flexible and highly aligned equity ownership structure.
Supporting our private credit activities for the benefit of our stakeholders and for the clients of our asset management business, which also benefits our stakeholders.
Our internally managed structure, which allows us to maintain an industry, leading cost structure and a strong alignment of interests between our employees and our shareholders as a result of our team's meaningful stock ownership.
Most notably and uniquely our lower middle market strategy provides attractive leverage points in income yields on our first lien debt investments, while also creating a true partnership with the management teams and other equity owners of our portfolio companies through our flexible and highly aligned equity ownership structures.
This approach provides significant downside protection through our first lien debt investments in preferred equity positions, while still providing the benefits of alignment and significant upside potential through these equity investments, which we make alongside our portfolio company management team partners.
David: This approach provides significant downside protection through our first-line debt investments and preferred equity while still providing the benefits of alignment and significant upside potential through these equity investments, which we make alongside our portfolio company management team partners. Main Street's long-term historical track record of investing in a lower-middle market, 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 primary area of investment focus for our business. Our ability to provide highly customized and differentiated capital solutions for the predominantly family-owned businesses that exist in the lower middle market has been and continues to be a strong differentiator for us. In 2023, Main Street invested $301 million in our lower middle market strategy.
Main street's long term historical track record of investing in our lower middle market, 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 and the primary area of investment focus for our business.
Our ability to provide highly customized and differentiated capital solutions for the predominantly family owned businesses that exist that exist in the lower middle market has been and continues to be a strong differentiator for us.
In 2023 main street invested $301 million in our lower middle market strategy.
$197 million as capital was deployed in six new lower middle market platform company, but the remaining 104 million predominantly representing follow on investments in existing seasoned and well performing lower middle market companies.
Consistent with our comments in prior quarters. These follow on investments were made to support the growth strategy and some of our highest performing portfolio of companies, which makes this aspect of our lower middle market investment activity very exciting for us.
David: $197 million of this capital was deployed in six new lower middle market platform companies, with the remaining $104 million predominantly representing follow-on investments in existing, seasoned, and well-performing 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 companies, which makes this aspect of our lower-middle market investment activity very exciting for us. Our follow-on investments are typically used to support multiple objectives, including acquisition, product or geographic expansion opportunities, and recapitalization transactions. Most importantly, these follow-on investments support proven management teams that we believe intrinsically pose less investment risk when compared to providing capital to new portfolio companies.
Our follow on investments are typically used to support multiple objectives, including acquisitions.
Alex or geographic expansion opportunities and recapitalization transactions.
Most importantly, these follow on investments support proven management teams that we believe intrinsically pose less investment risks 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 as our lower middle market portfolio companies perform overtime, they naturally deleverage with free cash flow generated from operations.
David: Since we are 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, as our lower-middle market portfolio companies perform over time, they naturally deleverage with free cash flow generated from operations. This allows us, along with our Lower Middle Market Portfolio Management Team partners, to benefit from a larger portion of the portfolio company's cash flow after-debt service, which can be available for distribution to the equity owner. Given the strength and quality of our lower middle market portfolio and the long-term holding period for many of our companies, we expect dividend income to continue to be a significant contributor to our results in 2020.
This allows us along with our lower middle market portfolio management team partners to benefit from a larger portion of the portfolio of companies' cash flow after debt service, which can be available for distributions to the equity owners.
Given the strength and quality of our lower middle market portfolio, and our long term holding period for many of our companies. We expect dividend income to continue to be a significant contributor to our results in 2024.
Additionally, this deleveraging coupled with the attractive overall strong underlying operating results of our lower middle market portfolio companies allowed us to achieve $72 million net fair value appreciation in 2023, lower middle market portfolio.
This benefit from our lower middle market equity investments is unique among bdcs with our fair value appreciation available to offset losses, which will naturally occur in our investment strategy. Given the fact that we are investing in non investment grade asset classes.
David: Additionally, this deleveraging coupled with the attractive overall strong underlying operating results of our lower middle market portfolio companies allowed us to achieve $72 million in net fair value appreciation in 2023 for the lower middle market portfolio. This benefit from our lower middle market equity investments is unique among BDCs, with our fair value appreciation available to offset losses which we will naturally incur in our investment strategies given the fact that we are investing in non-investment grade asset classes. Our unrealized equity appreciation also provides potential upside to Main Street's net asset value that the investment strategies of other BDCs simply do not have.
Our unrealized equity appreciation also provides potential upside to main street's net asset value that the investment strategies of other bdcs simply do not have.
The last important area I'd like to cover regarding our 2023 accomplishments at 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.
David: The last important area I'd like to cover regarding our 2023 accomplishments is the impressive contributions that our 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 de-emphasizing our middle market portfolio, which, as a reminder, includes investments in larger syndicated loans. Our purposeful and intentional strategic shift over the last six years to grow our private loan portfolio has been primarily driven by our belief that an attractive and growing direct lending environment exists and that private loan investments provide a very attractive risk-adjusted return profile for Main Street and for the clients of our asset managers. During 2023, Main Street invested $507 million in our private loan strategy while decreasing our middle market portfolio by 27% at cost. As a result of these investment activities during the year, our private loan portfolio represented 39% of our total investments at cost at year-end, and our middle market portfolio declined by 300 basis points to represent only 8% of our total investments at cost.
Which as a reminder includes investments in larger syndicated loans.
Our purposeful and intentional strategic shift over the last six years to grow our private loan portfolio is primarily driven by our belief that an attractive and growing direct lending environment exists and that the private loan investments provide a very attractive risk adjusted return profile for main street and for the clients of our asset management business.
During 2023 main street invested $507 million in our private loan strategy, while decreasing our middle market portfolio by 27% on a cost basis.
As a result of these investment activities during the year, our private loan portfolio represented 39% of our total investments at cost at year end and our middle market portfolio declined by 300 basis points to represent only 8% of our total investments at cost.
As Dwayne discussed earlier, our private loan capabilities also support our key strategic objective to continue to grow our asset management business.
As of December 31, we had investments in 190 companies spanning across more than 50 different industries.
A larger portfolio of companies, excluding the external investment manager represented only three 7% of our total investment income for the year and three 5% of our total investment portfolio fair value at year end.
David: As Duane discussed earlier, our private loan capabilities also support our key strategic objective to continue to grow our asset management. As of December 31st, we had investments in 190 companies spanning across more than 50 different industries. However, our largest portfolio companies, excluding the external investment manager, represented only 3.7% of our total investment income for the year and 3.5% 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.
Now turning to our investment activity in the fourth quarter, we made total investments in our lower middle market portfolio of $92 million, including investments of $68 million.
<unk>, new lower middle market portfolio companies, which after aggregate repayments on debt investments and return of invested equity capital.
The decrease in cost basis due to a realized loss resulted in net increase in our lower middle market portfolio of $66 million.
During the quarter, we also completed $160 million and total private loan investments, which after aggregate repayments and sales of debt investments and a decrease in cost basis due to a realized loss resulted in a net decrease in our private loan portfolio of $113 million.
David: The majority of our portfolio investments represented less than 1% of our income and our assets. Now turning to our investment activity in the fourth quarter, we made total investments in our lower middle market portfolio of $92 million, including investments of $68 million in two new lower middle market portfolio companies, which, after aggregate repayments on debt investments and return of invested equity capital and a decrease in cost cases due to a realized loss, resulted in a net increase in our lower middle market portfolio of $66 million. During the quarter, we also completed $160 million in total private loan investments, which, after aggregate repayments in sales of debt investments and a decrease in cost basis due to a realized loss, resulted in a net decrease in our private loan portfolio of $113 million.
Finally during the quarter, we had a net decrease in our middle market portfolio of $50 million as a result of our continued focus to deemphasize this strategy and portfolio.
At year end, our lower middle market portfolio included investments in 80 companies, representing $2 $3 billion of fair value, which is 27% above our related cost basis.
We had investments in 87 companies in our private loan portfolio, representing $1 $5 billion of fair value.
In our middle market portfolio, we had investments in 23 companies representing $244 million at fair value.
The total investment portfolio at fair value at year end was 15% above our related cost basis.
David: Finally, during the quarter, we had a net decrease in our middle market portfolio of $50 million as a result of our continued focus on de-emphasizing this strategy and portfolio. At year-end, our lower-middle market portfolio included investments in 80 companies, representing $2.3 billion of fair value, which is 27% above our related costs. We had investments in 87 companies in our private loan portfolio, representing $1.5 billion of fair value.
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 to Echo Duane and David's comments, we are pleased with the operating results for the fourth quarter, which included a number of quarterly records and capped a year in which main street achieved records for net investment income.
Distributable net investment income and net asset value each on a per share basis.
Jesse: In our middle market portfolio, we had investments in 23 companies representing $244 million in fair value. The total investment portfolio at fair value at year-end was 15% above our related costs. 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. Thank you, David.
Our total investment income for the fourth quarter was $129 3 million, increasing by $15 4 million or 13, 6% over the fourth quarter of 2022 and.
And by $6 1 million or four 9% from the third quarter of 2023.
The positive momentum we experienced during the first three quarters continued in the fourth quarter and culminated in a year with strong levels of interest dividend and fee income, which again demonstrated the continued strength of our differentiated investment and asset management strategies.
Jesse: To echo Dwayne's and David's comments, we are pleased with the operating results for the fourth quarter, which included a number of quarterly records and capped a year in which Main Street achieved records for net investment income, distributable net investment income, and net asset value, each on a per share basis. Our total investment income for the fourth quarter was $129.3 million, increasing by $15.4 million, or 13.6 percent, over the fourth quarter of 2022. And by $6.1 million, or 4.9 percent, from the third quarter of 2022. The positive momentum we experienced during the first three quarters continued in the fourth quarter and culminated in a year with strong levels of interest, dividend, and fee income, which again demonstrated the continued strength of our differentiated investment and asset management strategies.
The fourth quarter included elevated levels of certain income considered less consistent or nonrecurring in nature.
<unk> dividends from our equity investments.
An accelerated prepayment repricing another activity related to our debt investments.
In the aggregate these items totaled $5 3 million and were comparable to the average of the prior four quarters were $1 1 million higher than such items in the fourth quarter of 2022, and $4 7 million higher than the third quarter 2023.
Interest income increased by $14 4 million from a year ago, and $1 $3 million over the third quarter.
The increase over the prior year was driven primarily by increases in benchmark index rates net investment activity.
Jesse: The fourth quarter included elevated levels of certain income considered less consistent or non-recurring in nature, including dividends from our equity investments and accelerated prepayment, repricing, and other activity related to our debt investment. In the aggregate, these items totaled $5.3 million and were comparable to the average of the prior four quarters, or $1.1 million higher than such items in the fourth quarter of 2022. $4.7 million higher than the third quarter of 2020. Interest income increased by $14.4 million from a year ago and $1.3 million over the third quarter.
$2 3 million, an increase accelerated OID income.
The increase over the third quarter was primary driven by $3 1 million increase in accelerated OID income, partially offset by decreased levels of non interest bearing debt investments at quarter end as a result of elevated levels of repayments.
Setting new and follow on investments.
Dividend income increased by $1 4 million or six 1%.
Over a year ago, and cleaning a $1 2 million decrease in unusual or nonrecurring dividends and increased by $2 6 million or 12, 2% from the third quarter, including a zero point $5 million increase in unusual or non recurring dividends.
Jesse: The increase over the prior year was driven primarily by increases in benchmark index rates, net investment activity, and $2.3 million in increased accelerated OID income. The increase over the third quarter was primarily driven by a $3.1 million increase and Accelerated OID Income, partially offset by decreased levels of interest-bearing debt investments at quarter end as a result of elevated levels of repayments, offsetting new and follow-on investments. Dividend income increased by 1.4 million, or 6.1%, over a year ago, including a $1.2 million decrease in unused or non-recurring dividends, an increase by The increases in dividend income are a result of the continued underlying strength of our portfolio companies and the benefits of our asset management.
The increases in dividend income are a result of the continued underlying strength of our portfolio companies and the benefits from our asset management business.
Fee income was comparable to year ago, and increased by $2 2 million from the third quarter driven by closing fees, resulting from an increase in investment activity in our lower middle market investment strategy and increased prepayment fees driven by repayment activity in our private loan portfolio.
Prepayment and other fee income considered nonrecurring was comparable to year ago and increased by $1 2 million from the third quarter 2023.
Our operating expenses increased by $1 2 million over the fourth quarter of 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.
The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets was one 3% for both the quarter on an annualized basis and the year and continues to be amongst the lowest in our industry.
Jesse: P income was comparable to a year ago and increased by $2.2 million from the third quarter, driven by closing fees resulting from increased investment activity in our lower middle market investment strategy and increased prepayment fees driven by repayment activity in our private loan portfolio. Pre-payment and other fee income considered non-recurring was comparable to a year ago and increased by $1.2 million from the third quarter of 2023. Our operating expenses increased by $1.2 million in the fourth quarter of 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. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.3% for both the quarter on an annualized basis and the year and continues to be amongst the lowest in our industry.
Our external investment manager contributed $9 2 million to our net investment income during the fourth quarter.
An increase of $2 2 million from the same quarter a year ago.
Which resulted in a total of $33 4 million for the year, representing an increase of $11 1 million or 50% over the prior year.
A manager earn $3 8 million in incentive fees during the quarter and $13 4 million for the year, increasing by $1 4 million and $10 9 million respectively over the same periods in the prior year as a result of the positive performance of the assets under management.
The manager ended the quarter with total assets under management of $1 5 billion.
During the quarter, we recorded net fair value appreciation, including net realized losses and net unrealized appreciation on the investment portfolio of $48 2 million.
Jesse: Our external investment manager contributed $9.2 million to our net investment income during the fourth quarter, an increase of $2.2 million from the same quarter a year ago, which resulted in a total of $33.4 million for the year, representing an increase of $11.1 million, or 50% over the prior year. The manager earned $3.8 million in incentive fees during the quarter and $13.4 million for the year, increasing by $1.4 million and $10.9 million, respectively, over the same periods in the prior year as a result of the positive performance of the assets under management. The manager ended the quarter with total assets under management of $1.5 billion.
This increase was driven by net appreciation across each of our investment strategies largely driven by the continued positive performance of certain of our portfolio companies and the impact from changes in market spreads.
The increase in the fair value of our external investment manager was a result of a combination of increases in the fees generated by the external investment manager and the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation purposes.
We ended the fourth quarter with investments on nonaccrual status, comprising approximately 0.6% of the total investment portfolio at fair value and approximately two 3% of cost.
Jesse: During the quarter, we recorded net fair value appreciation, including net realized losses and net unrealized appreciation, on the investment portfolio of $48.2 million. This increase was driven by net appreciation across each of our investment strategies, largely driven by the continued positive performance of certain of our portfolio companies and the impact of changes in market conditions. The increase in the fair value of our external investment manager was a result of a combination of increased, and fees generated by the external investment manager and the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation. We ended the fourth quarter with investments on non-accrual status comprising approximately 0.6% of the total investment portfolio fair value and approximately 2.3% of cost. Net asset value, or NAB, increased by 87 cents per share over the third quarter and by $2.34, or 8.7%, when compared to a year ago, to a record NAB per share of $29.22 at year end.
Net asset value or NAV increased by 87 per share over the third quarter and by $2 34, SaaS or eight 7% when compared to a year ago to a record NAV per share of $29.22 at year end.
Our regulatory debt to equity leverage calculated as total debt, excluding our SPX debentures divided by net asset value was 0.59 and a regulatory asset cover coverage ratio was 269, both potentially more conservative than our long term target ranges of 0.82.
<unk> nine times and $2 one to 2.25 times.
During the fourth quarter, we expanded our total commitments or any of the SPV facility from 255 million to $430 million and raised $38 million from equity issuances under our aftermarket program.
In January of this year, we issued $350 million of unsecured notes with a coupon rate of 695% maturing in March 2029, and utilized the proceeds to repay outstanding borrowings under our credit facilities.
Jesse: Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures divided by net asset value, was 0.59, and our regulatory asset coverage ratio was 2.69, both intentionally more conservative than our long-term target ranges of 0.8 to 0.9 times and 2.1 to 2.25 times. During the fourth quarter, we expanded our total commitments under the SPV facility from $255 million to $430 million and raised $38 million from equity issuances under our At the Market program. In January of this year, we issued $350 million of unsecured notes with a coupon rate of 6.95% maturing in March 2029, and utilized the proceeds to repay outstanding borrowings under our credit facility.
We currently intend to fund the repayment of our May 2024 notes at maturity, primarily through borrowings under the credit facilities.
After giving effect to the capital activities in 2023.
The issuance of the March 2029 notes and the upcoming repayment of our May 2024 notes, we entered 2024 with strong liquidity, including cash and availability under our credit facilities in excess of $1 billion.
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 and allow us to continue to execute our investment strategy and growth of our investment portfolio.
With its current level of liquidity, we expect to fund our net new investment activity in 2024 through a greater proportion.
Jesse: We currently intend to fund a repayment of our May 2024 notes at maturity primarily through borrowings under the credit facility. After giving effect to the capital activities in 2023, the issuance of the March 2029 notes, and the upcoming repayment of our May 2024 notes, we entered 2024 with strong liquidity, including cash and availability under our credit facilities in excess of $1 billion. We continue to believe that our conservative leverage, strong liquidity, and continued access to capital are significant strengths that have us well-positioned for the future and allow us to continue to execute our investment strategy and growth of our investment portfolio. With this current level of liquidity, we expect to fund our net new investment activity in 2024 through a greater proportion of debt financing, and as such, we would expect leverage to increase during the course of the year.
Of that financing and as such we would expect leverage to increase during the course of the year.
However, we expect to continue to operate through the year, our leverage levels more conservative than our long term targets.
Coming back to our operating results as a result of our strong performance for the quarter and year. Our return on equity for the fourth quarter was 22, 9% on an annualized basis and 18, 8% for the year.
D NII per share for the quarter of $1 12.
Exceeded the DNI per share for the fourth quarter of last year by <unk>, <unk> or eight 7% and exceeded the DNI per share for the third quarter by <unk> <unk> or seven 7%.
The combined impact of certain investment income considered less consistent.
Nonrecurring in nature on a per share basis was comparable to the average of the last four quarters.
<unk> per share above the same quarter, a year ago, and <unk> <unk> per share above the third quarter for.
Jesse: However, we expect to continue to operate through the year at leverage levels more conservative than our long-term target. Coming back to our operating results, as a result of our strong performance for the quarter and year, our return on equity for the fourth quarter was 22.9% on an annualized basis, and 18.8% for the year. DNII per share for the quarter of $1.12 exceeded the DNII per share for the fourth quarter last year by 9 cents, or 8.7 percent, and it exceeded the DNII per share for the third quarter by 8 cents, or 7.7 percent.
For the year. These items were <unk> 15 per share above 2022 levels.
C&I per share for the quarter exceeded total regular monthly dividends per share paid to our shareholders in the fourth quarter by $41.05 per share or approximately 59%.
Total dividends paid for the year were $3 69 and half cents per share.
<unk> 95 per share in supplemental dividends, an increase of 25% over our total dividends paid during 2022.
Jesse: The combined impact of certain investment income considered less consistent or not recurring in nature on a per share basis was comparable to the average of the last four quarters. At $0.01 per share above the same quarter a year ago and $0.06 per share above the third quarter, for the year, these items were 15 cents per share above 2022 levels. D&I per share for the quarter exceeded total regular monthly dividends per share paid to our shareholders in the fourth quarter by forty one and a half cents per share, or approximately fifty nine percent. Total dividends paid for the year were $3.69 and a half cents per share, including $0.95 per share in supplemental dividends, an increase of 25% over our total dividends paid during 2020.
This week, our board approved a supplemental dividend of <unk> 30 per share payable in March 2024.
With a supplemental dividend total declared dividends for the first quarter 2024, or $1 <unk> per share representing a four 1% increase over the total dividends paid in the fourth quarter of 2023, and a 20% increase over the total dividends paid in the first quarter of last year.
As we look forward given the strength of our underlying portfolio. We expect another strong top line and earnings quarter in the first quarter of 2024.
With expected <unk> of at least $1 <unk> per share with a potential upside driven by the level of dividend income.
And portfolio investment activities during the quarter and we would also expect that we would recommend to our board that had declared another supplemental dividend in the second quarter.
Operator: This week, our board approved a supplemental dividend of 30 cents per share payable in March 2024. With the supplemental dividend, total declared dividends for the first quarter of 2024 were $1.02 per share, representing a 4.1% increase over the total dividends paid in the fourth quarter of 2023 and a 20% increase over the total dividends paid in the first quarter of last year. As we look forward, given the strength of our underlying portfolio, we expect another strong top line in earnings per share in the first quarter of 2024, with expected D&II of at least $1.06 per share with potential upside driven by the level of dividend income and Portfolio Investment activities during the quarter, and we would also expect that we would recommend to our board that it declare another supplemental dividend in the second 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.
<unk> 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.
All participants using speaker equipment and 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 the line of Robert Dodd with Raymond James. Please proceed with your question.
Hi, guys. Congratulations on the quarter first question on the asset management.
The largest contributor to that still MFC.
Can you give us any update on your thought process.
Gardening that.
Businesses and control it but.
How that might be.
Operator: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If you are using speaker equipment, it may be necessary to pick up your handset before pressing the start key.
Shareholders that might end up with liquidity.
The question I think you've discussed it before what are the possibilities of eventually could be a fee cut there in connection with other things do you think.
Thats a likely unlikely event during 2024 that these structural in that financial relationship that could change.
If anything happens then it's volatile.
Sure Robert Thanks for the question I would say on MSC income upon like you've heard US say before we are obviously the advisor there, but the board of MSE income fund will have a huge part in determining what the outcome is there. We are encouraged by some of the more recent activity here in 2024 with several funds.
Robert Dodd: One moment, please, while we poll for questions. Our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question. Hi guys, and congratulations on the quarter. First question on the asset management business, and I mean the largest contributor to that is still the MSC Income Fund. Can you give us any update on your thought process regarding that? Businesses, you don't control it, but you know, in terms of how that might be, shareholders there might end up with liquidity because the question there is, I think you've discussed it before, one of the possibilities eventually could be a fee cut there in connection with other things. Do you think that's a likely or unlikely event during 2024 that the fee structure and the financial relationship there could change Thanks for the question.
<unk> public through through new Ipos, obviously, that's that's an opportunity from a space or an industry standpoint that hasnt been there for the last couple of years. So it is very encouraging to see that activity and we will be having conversations with the MFC income fund board about that activity.
Our next board meeting to contemplate what it May mean for you may see income fund.
To your point on fees I do think that the market is.
Unidentified Speaker: I would say on MSD Income Fund, like you've heard us say before, we're obviously the advisor there, but the board of MSD Income Fund will have a huge part in determining what the outcome is there. We are encouraged by some of the more recent activity here in 2024 with several funds going public through new IPOs. Obviously, that's an opportunity from a space or an industry standpoint that hasn't been there for the last couple of years, so it's very encouraging to see that activity. We will be having conversations with the MSD Income Fund board about that activity at our next board meeting to contemplate what it may mean for MSD Income Fund. To your point on fees, I do think that the market, as evidenced by these more recent IPOs, has been requiring a lower base management fee than what we currently charge MSC Income Fund.
As evidenced by these more recent ipos has been <unk>.
Wiring, a lower base management fee than what we currently charge for charged to <unk> income fund I will remind you that.
The strategy for MSC income fund is consistent with main streets chicken.
It includes a combination of private credit private loan activities that is more consistent with what you see for most others in the BDC industry, but it also includes a healthy amount of lower middle market investment activity that we think is more of a can or more consistent within our private equity investment strategy that would warrant in the marketplace and a higher fee structure both of them.
Unidentified Speaker: I will remind you that the strategy for the MSC Income Fund is consistent with Main Street's. It includes a combination of private credit and private loan activities that is more consistent with what you see for most others in the BDC industry, but it also includes a healthy amount of lower middle market investment activity that we think is more akin to or more consistent with a private equity investment strategy that would warrant in the marketplace a higher fee structure both on the base annual fee as well as the incentive fees. I think the conclusion on the fee will be driven by our conversations with the MSC Income Fund Board, what the market would tell us if there was a desire to seek an IPO or another liquidity event, and then how we look at the overall composition of that portfolio today and what we think the composition would be going forward.
On the.
The base annual fee as well as the incentive fees and I think that yes.
The conclusion on the fee will be driven by our conversations with the MSC income on board what the market will tell us if there was.
A desire to seek an IPO or another liquidity event and then how we look at the overall composition of that portfolio today, and what we think the composition would be going forward. Those are the drivers of what we think happens long term with the fee structure.
Got it got it I appreciate that color. Thank you changing completely you mentioned the lower middle market pipeline as average.
It is an election year.
Unidentified Speaker: Those would be drivers of what we think happens long-term with the fee structure. Got it. Got it. I appreciate that, Calum.
Possible for White House.
Okay.
Good good.
Could flip.
Robert Dodd: Thank you. I'm changing tack completely. You mentioned the low middle market pipeline is average. It is an election year. It's possible the White House could flip.
That is all currently.
Hum.
25.
The them.
Lot of what you do that is consistent.
Unidentified Speaker: There are currently tax rules that will sunset in 2025. A lot of what you do there is assist in tax, quite often for people looking to transition. Do you think it being an election year and potential tax law changes, do you think that's going to have an effect on the lower middle market businesses demand and pipeline, and maybe in the second half of the year? Yeah, Robert, I'd say it's always hard to predict what impacts activities in Washington, whether it's an election or, you know, tax rate changes or other changes. It's really hard to predict what those activities will have on lower middle market activity. We can make arguments for those types of activities driving increased demand for individual owner operators, families or partners that own a business, could drive them to be more active or have a stronger desire for a transaction So they may be more compelled to wait until after an election or after any of those changes take place to see what the impact on the marketplace is.
Okay.
For people looking to transition.
Do you think.
Being an election year and potential tax law changes do you think that that has happened affect on the lower middle market businesses.
And pipeline and maybe in the second half of the year.
Yes, Robert I would say, it's always hard to predict what impacts activities in Washington, whether its an election or your tax rate changes or other changes, it's really hard to predict what those activities and what impact they will have on lower middle market activity. We can make arguments for those types of activities driving increased <unk>.
<unk> for individual owner operators and your families are partners that own a business.
Could drive them to be more active or.
Do you have a stronger desire for a transaction, but it can also.
<unk> is in more uncertainty in the marketplace and a view that if someone goes to market, they're not going to realize full valuation. So there may be more compelled to wait until after an election or after any of those changes take place to see what the impact on the marketplaces and as you've heard us say in the past, we do think that what we provide from a financing standpoint and a partner.
Unidentified Speaker: As you've heard us say in the past, we do think that what we provide from a financing standpoint and a partnership standpoint to our lower middle market companies is very, very different. We think the solution can and should be, and in the past has been, applicable to all types of markets, whether it's a very good, productive market or if it's a market that's got more uncertainty, whether that's economic uncertainty, tax rate change uncertainty, or political uncertainty. So we continue to be confident that our lower middle market strategy will be applicable in all those markets, but it's really hard to predict what happens in Washington and what impact that will have on overall deal flow activity and specifically deal flow activity in the lower middle market. Dave, I don't know.
Ship standpoint to our lower middle market companies is very very different we think the solution can and should be in in the past has been applicable to all types of markets, whether it's a very good productive market or if it's a market. That's got more uncertainty whether that's economic uncertainty the tax rate change and uncertainty of political uncertainty. So we continue to be confident that our lower middle market.
Strategy will be applicable in all those markets, but it's really hard to.
Predict what happens in Washington, and what impact that will have on overall deal flow activity and specifically deal flow activity in the lower middle market strategy, David I covered a lot I don't know if you would add anything to that.
All I'd add is that Robert when we think about the landscape. It yet the election has an impact on on outcomes as does last year, we had rising interest rates and concerns about visibility towards that so we always have some <unk>.
Unidentified Speaker: I covered a lot. I don't know if you would add anything to that. Yeah. All I'd add is that, Robert, when we think about the landscape, it's yes, the election has an impact on outcomes, as did last year. We had rising interest rates and concerns about visibility towards that. So we always have some, you know, various environmental issues that we're looking at at any one moment in time, but I'd say that interest rates stabilizing a bit as they have probably has a positive impact that might be, we're hoping will offset any concerns relative to the election. Thank you for the call. One more if I can stick one in.
The environmental issues that we're looking at any one moment in time, but I would say that interest rates stabilizing a bit as they have probably has a positive impact that might be we are hoping will offset any concerns relative to election year.
Got it thank you for the color on that one.
And to that point with stabilizing interest rate.
Our plan is to take up leverage somewhat this year I mean, you've been running at.
Essentially level.
Still producing.
Hi, Ted.
Robert Dodd: To that point with stabilizing interest rates, I mean, you indicated your plan is to take up leverage somewhat this year. I mean, you've been running it intentionally low, still producing, but is that an indication that you expect leverage to go up, is it an indication of comfort that you just feel better about the interest rate environment where the economy is, or is there some other factor that drove that decision to maybe increase leverage a little bit from the low-level currency? Sure, Robert.
This is the indication that you expect message.
Indication of that.
You just feel better about the interest rate environment, where the economy is or is there. Some other factor that drove that decision to maybe increase leverage a little bit.
The network currently.
Sure Robert.
As you've heard us say in the past week, we've always viewed our ability to produce shareholder returns is driven more based upon investment strategy and our approach to the marketplace and less on financial engineering through leverage. So we've always wanted to and have always consistently maintain a very conservative conservative leverage profile and our significant liquidity position than we were.
Unidentified Speaker: As you've heard us say in the past, we've always viewed our ability to produce shareholder returns as driven more by investment strategy and our approach to the marketplace and less by financial engineering through leverage. So we've always wanted to and have always consistently maintained a very conservative leverage profile and a significant liquidity position. And we don't expect that to change going forward, whether that's in 2024 or any time after that.
Don't expect that to change going forward, whether that's in 2024 anytime after that we have been intentionally more conservative for the last 12 months or so and that was really less driven by the overall economy or other.
Kind of portfolio related issues and more based upon the fact that we had in May of 2024 of May of 2020 for maturity and we wanted to create maximum flexibility to deal with that I am obviously, we've dealt with that here in the <unk>.
Unidentified Speaker: We have been intentionally more conservative for the last 12 months or so, and that was really less driven by the overall economy or other portfolio-related issues and more based upon the fact that we had a May of 2024 maturity. We wanted to create maximum flexibility to deal with that. Obviously, we've dealt with that here in the first part of 2024 with the new unsecured debt issuance. I'd say that pressure is a lot less than it would have been over the last 12 months. So that would really be the driver for us taking leverage up some but still being conservative and still likely ending the year below our leverage target. Got it.
First part of 2024 with a new unsecured debt issuance and I'd say that pressure is a lot less than it would have been over the last 12 months. So that would really be the driver for us taking leverage up some but still being conservative and skilled likely ending the year below our leverage targets.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line.
Bryce Rowe with B Riley Securities. Please proceed with your question.
Thanks, a bunch good morning, good morning.
Robert Dodd: Thank you. Thank you. Thank you.
Hey, Duane and just maybe a follow up to some of Robert's questioning around <unk>.
Operator: Our next question comes from the line of... Bryce Rowe with BeRiley Securities. Please proceed with your question. Thanks a bunch. Good morning.
External manager.
I know you all in the pretty recent past have have have run some tender.
Bryce Rowe: Hey, Duane, just maybe a follow-up to some of Robert's questioning around the external manager. You know, I know you all have run some tender processes to try to give those particular shareholders some liquidity. Have you continued to do that here at the end of 2023? Yeah, Bryce, to your point, we have introduced that over the last 12 months and continue to be active in providing liquidity options to the shareholders of MSC Income Fund. Those liquidity options are through the consistent quarterly redemption that is funded by the fund's drip proceeds.
Tender processes too.
Try to give those particular shareholders. Some some liquidity have yet have you.
We continue to do that here.
At the end of 2023.
Yeah, Brian to your point, we have introduced over the last 12 months and continue to be active in providing liquidity options to the shareholders of MFC income fund.
Those liquidity options have been through the consistent quarterly redemption that is funded by the funds drip proceeds and then we've added the Dutch auction that I think we're now on our we're executing our fourth.
Unidentified Speaker: And then we've added the Dutch auction, which I think we're now on our fourth iteration of that. So we think those activities have been productive. And we continue to think it's a good activity for us to try and provide additional liquidity options for those shareholders who have a heightened need or desire for liquidity. So that was the intent or the goal behind those activities.
Iteration of that so we think those those activities have been productive.
We continue to think it's a good good activity for us to try and provide additional liquidity options for those shareholders, who have a heightened need or desire for liquidity. So that was the that was the intent of the goal behind those activities and we think they've been successful or productive from from our perspective.
Unidentified Speaker: And we think they've been successful or productive from our perspective. Okay, that's helpful. And then, as we think about, you know, the valuation, obviously, you've seen a material increase in the external managers' valuation in 23 and even in the fourth quarter. And in your prepared remarks, you talked about kind of a breakdown of, you know, increased assets under management, increased fee income, and then a market-based approach to that valuation. Can you help us kind of think about what's driving the valuation, you know, of those three factors? What's the biggest, you know, most important factor, or is it fairly well split between the three?
Okay.
That's helpful and then.
As we think about the valuation obviously, you've seen a material increase in the external managers valuation in 'twenty, three and even in the fourth quarter.
And in your prepared remarks, you talked about kind of a breakdown of the.
Increased assets under management increased fee income and then market market based approach to that valuation can you help us kind of think about what what's driving the valuation of those three factors. What's what's the biggest biggest factor or is it or is it fairly well split between the three.
Unidentified Speaker: I would say all three of those drivers or factors contributed to the increase in Q4. But if you were to look at the publicly traded performance for asset managers, I would say that in the fourth quarter, there was a significant increase in those valuations, and that would have been a significant contributor to the increase in our valuation in the fourth quarter. Just as a reminder, we obviously don't use that as the only benchmark to drive our valuations. It's one of the inputs, but it is an input, so when you see those publicly traded peers increase significantly in value, we're going to see that come through in our valuation. I got it.
And I would say all three of those drivers or factors contributed to the increase in Q4, but if you were to go look at the publicly traded.
Our performance for asset managers I.
I would say that in the fourth quarter. There was a significant increase in those valuations and that would have been a significant contributor to the increase in our valuation in the fourth quarter. Just as a reminder, we obviously don't use that as the only benchmark to drive our valuations. It's one of the inputs, but it is it is an input. So when you see those publicly traded peers increased significant.
And value, we're going to we're going to see that come through our valuation got.
Got it okay.
Unidentified Speaker: Okay. You mentioned, you know, the continued kind of progress with private loan fund number two. Can you give us some numbers around that progress? Sure, so the numbers at year-end were about $80 million in total LP equity commitments, so still not a huge number, but relative to where we were at this point in time on PLF-1, it is a significant increase, and we continue to have what we think are very productive conversations with additional LPs. So our goal, just to remind everyone, is that we want that fund from an LP equity commitment standpoint to be somewhere between $100 and $300 million. As a reminder, PLF-1 is just over $100. We hope to be north of $150 or $200, with the max being $300, and our activities over the next couple of quarters, as we continue to execute the fundraising activities for that fund, will obviously dictate how large we end up being from a LP equity commitment standpoint.
You mentioned continued kind of progress with private loan fund number two can you give us some numbers around around that progress.
Sure. So the numbers at year end it was about $80 million of total.
LP equity commitments, so still not a huge number but relative to where we were at this point in time on Pls. One it is a significant increase and we continue to have what we think are very productive conversations with additional Lps. So our our goal just to remind everyone is that we want that that fund from an LP equity commitment standpoint to be.
Somewhere between 100 300 as a reminder, at 100 $300 million of LP equity as a reminder, <unk>. One is just over 100, we hope to be something north of 150 or 200 with the Max being 300, and our activities over the next couple of quarters as we continue to execute the fundraising activities for that.
Fund, they obviously would dictate how large we ended up.
From a from a MLP equity commitment standpoint, and then just kind of a reminder, we think the marketplace will continue to allow kind of a one to one debt to equity leverage level. So if we if we're successful at one.
Unidentified Speaker: And then, just as a reminder, we think the marketplace will continue to allow kind of a one-to-one debt-to-equity leverage level, so if we're successful at $150 million of equity, that's $300 million of assets. Obviously, if you go up to $300 million of equity, then it's $600 million of assets. But that's the goal and intent, and we'll continue to work on that as we move through the next couple of quarters. Got it. That's helpful. And then maybe the last one for me.
$150 million of equity that's 300 million of assets. Obviously, if you go up to $300 million of.
Equity than a $600 million of assets, but thats.
The goal and intent and we're continuing to work on that as we as we move through the next couple of quarters.
Got it.
And then maybe last one for me.
Bryce Rowe: You all called out non-accrual levels, you know, having come down quarter over quarter, and then also some of the realized exit activity in the lower middle market and private loan portfolios. Can you kind of, I assume those kind of marry up together with lower non-accruals, you know, being driven by some of that exit activity? If not, can you help me think about that?
You all called out.
Nonaccrual levels, having come down quarter over quarter, and then also some of the realized exit activity in the lower middle market and private loan portfolios.
Can you kind of I assume those kind of marry up together with lower non accruals being.
Being driven by some of that exit activity. If not can you help me think about that.
Sure. So maybe I'll give a couple of comments and if Nick who leads our private credit activities. If he wants to add on he can add on here.
Unidentified Speaker: Sure, so maybe I'll give a couple of comments, and if Nick, who leads our private credit activities, if he wants to add on, he can add on here. So I would say the non-accrual activity, obviously, it's an improvement when you look at a quarter of a quarter. I would say we're not super excited about it because it improved because of a realized loss in the quarter. So most of that movement was driven by, I think it was about a $15 million realized loss on an investment that we restructured, and it came off non-accrual in the quarter.
So I would say.
The nonaccrual activity, obviously, it's an improvement when you look at it quarter over quarter I would say, we're not super excited about it because it improved because of a realized loss in the quarter. So that most of that movement was driven by I think there's about a $15 million realized loss on an investment that we restructured and it came off nonaccrual in the quarter.
The repayment activity specifically on the private credit side as you've heard us say in the past we think we've got a very very attractive high quality portfolio and despite the continued uncertainty in the marketplace. We just saw a number of names some of which frankly, we haven't even been in that long 12 to 18 months a number of names that had performed really really well that either.
Unidentified Speaker: I think the repayment activity, specifically on the private credit side, as you've heard us say in the past, we think we've got a very, very attractive, high-quality portfolio. And despite the continued uncertainty in the marketplace, we just saw a number of names, some of which, frankly, we hadn't even been in for that long, 12 or 18 months, a number of names that had performed really, really well that either went through an M&A transaction or just went out and refinanced us with a significantly lower cost of capital from that replacement lender. So it's good and bad. It shows the very high quality of our portfolio, but obviously, you had elevated repayments, which is not good from an interest income standpoint when we look at the portfolio going forward. But, Nick, I don't know if you'd add anything to that.
Went through an M&A transaction or just went out and refinanced us with eight.
With a significantly lower cost of capital from that replacement lenders. So it's kind of a it's good and bad it shows that the very high quality of our portfolio, but obviously you had elevated repayments, which which is not good from a from an interest income standpoint, when we look at the portfolio going forward, but any account if you'd add anything to that yeah. Bryce the only thing I'd add there is.
So those repayments really came in late in the quarter.
From a from average perspective, we are where we wanted to be for the fourth quarter and I'd say those names are names, we had targeted to get repaid in 'twenty four.
Nick: Yeah, Bryce, the only thing I would add there is that most of those repayments really came in late in the quarter. And so, from an average perspective, we were where we wanted to be for the fourth quarter. And I'd say those names were names we had targeted to get repaid in 24. They moved into kind of late December, early December versus in the first or second quarter of 24.
This moved into kind of late December early December versus in the first or second quarter of 'twenty four.
I think from where we want to be like we just need to spend some money here in the first quarter will be back to where the balance sheet.
Got it I mean, I think we've heard on other BDC calls that the expectation is for increased activity from a prepayment perspective of repayment perspective in 'twenty four do you all share that sentiment.
Nick: And so from where we want to be, I think we just need to spend some money here in the first quarter, and we'll be back to where we were with balance. Got it. I mean, I think we've heard on other BDC calls that, you know, the expectation is for increased activity from a prepayment perspective or repayment perspective in 24. Do you all share that sentiment?
But we do I think if you look at our total repayments in the private loan.
The private loan side of the business for the first three quarters, we were I'd say well under average ROE you usually see the fourth quarter picked it up and so for the year, we probably hit our average repayment level, we've seen in the last decade.
Bryce Rowe: We do. I think if you look at our total repayments on the private loan side of the business for the first three quarters, we were, I'd say, well under average for what you'd usually see. The fourth quarter picked that up, and so for the year, we probably hit our average repayment level we've seen in the last decade. But we'd expect that to continue more on that average level, basically a one-third repayment rate on an annual basis. I got it.
But we would expect that to continue more of that average level of basically a one third repayment rate on an annual basis.
Got it okay. Thanks for taking the questions I appreciate it thanks Bryce.
Okay.
Thank you and just as a reminder, if anyone has any questions. You May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of Mark Hughes with <unk> Securities. Please proceed with your question.
Yes. Thank you good morning.
Mark.
Bryce Rowe: Okay. Thanks for taking the questions. I appreciate it. Thanks, Bryce.
On the private loan portfolio of the assets were.
Down in the quarter more repayments, we didn't talk to me about that what's your feeling about the early 2024 that can be back into the positive territory.
Operator: Thank you. And just as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question. Yes, thank you. Good morning.
Yeah. Appreciate the question Mark this is Nick.
Where we're at to date for the quarter, we'd be close to flat.
From the third quarter. So we're up for the first quarter and so we would expect that to continue to grow and really be back to a flat from third quarter to up from third quarter.
Mark Douglas Hughes: Morning, Mark. On the private loan portfolio, the assets were down in the quarter, more repayments. I think we've been talking about that. What's your feeling about early 2024?
Very good.
And then the follow on investment activity.
Are you seeing that trending is that.
Reasonable indicator of underlying economic health of that.
And.
Unidentified Speaker: Is that going to be back into the positive territory? You appreciate the question, Mark. This is Nick.
Im sure it varies.
In terms of rationale, but are you seeing any trends there that are worth, noting and does it imply anything about the broader picture and again follow on investment activity with you.
Nick: You know, I think where we're at to date, you know, for the quarter, we'd be close to flat from the third quarter. So we're up for the first quarter. And so we'd expect that to continue to grow and really be back to flat from the third quarter to up from the third quarter. Very good. And then the follow-on investment activity. How are you seeing that trending?
Good thing portfolio company.
Sure Mark when you look at our lower middle market portfolio, you've heard US say it is we have a number of companies in that portfolio than it had been and continue to perform very very.
You know very well when you look at some of those companies. They also have had an increased appetite to grow through acquisitions to supplement our compound their organic growth. So we had one portfolio company in the fourth quarter.
Unidentified Speaker: Is that a reasonable indicator of underlying economic health? Does that tend to, I'm sure it varies in terms of rationale, but are you seeing any trends there that are worth noting and does it imply anything about the broader picture? And again, this is a follow-on investment activity with your existing portfolio company. Sure, Mark.
There was a meaningful follow on probably.
80, or 90% of the total follow ons were in that one portfolio company that executed what we think is a highly attractive very strategic <unk>.
Unidentified Speaker: When you look at our lower middle market portfolio, you've heard us say this; we have a number of companies in that portfolio that have been and continue to perform very, very well. When you look at some of those companies, they also have had an increased appetite to grow through acquisitions, to supplement or compound their organic growth. So we had one portfolio company in the fourth quarter that was a meaningful follow-on. Probably 80 or 90% of the total follow-ons were in that one portfolio company that executed what we think is a highly attractive, very strategic acquisition. If you look at the pipeline today, one of the things that makes us feel good about that investment pipeline is that we have a number of companies, multiple companies, in the low and middle market portfolio, again, most of them being in the upper end of our portfolio from a performance standpoint that are actively executing on acquisition opportunities that would require additional debt financing from Main Street.
Acquisition, if you look at the pipeline today, one of the things that.
It makes us feel good about that investment pipeline is that we have a number of companies.
Multiple companies in the alumina market portfolio again, most of them being in the upper end of our portfolio from a performance standpoint.
<unk> executing on on acquisition opportunities that would require additional debt financing for main street, we expect those to close in the in the fourth quarter, but obviously theres a lot of pieces that have to come into place that we don't always control in order for that to happen, but we're encouraged by that activity and if we're successful there we think it will benefit.
Significantly in Q1, but even more importantly over the next 12 or 24 months as we really see the benefits.
Unidentified Speaker: We expect those to close in the fourth quarter, but obviously, there's a lot of pieces that have to come into place that we don't always control in order for that to happen, but we're encouraged by that activity. If we're successful there, we think it will benefit us significantly in Q1, but even more importantly over the next 12 or 24 months as we really see the benefits of those acquisitions flow through the portfolio company's results and our fair value changes, and hopefully, additional dividend income in the future.
Those acquisitions flowed through the portfolio companies' results in our fair value changes and hopefully additional dividend income in the future.
And then the external investment manager.
Assuming things go.
As they have been and Theres no material change.
You described the <unk>.
60% increase in the.
A positive impact on NII.
Yes.
What's the.
With what you have good line of sight.
Unidentified Speaker: And then the external investment manager, you know, assuming things go as they have been and there's no material change, you described a 50% increase in the positive impact on NII. What's the, with what you have in line of sight, can you give us some sense of what the marginal effect is gonna be here in 2024? Mark, I may not have fully understood your question. Can you kind of give me a little more detail on what you're looking for?
Can you give us some sense.
Marginal effect, it's going to be here in 2024.
Mark I may have.
On a fully followed your question can you kind of give me a little more detail once youre, what youre, what youre looking for yeah.
NII impact from the external investment manager I think you said it was up.
You know the.
You're going from 22 million to $33 million in 2023.
I heard that properly yeah I was just.
Trying to get some sense of how you think that's going to trend in 2020 for sure. Thanks, Thanks, Mark and I apologize I want to make sure I answered the question.
Mark Douglas Hughes: Yeah, yeah, just the NII impact from the external investment manager. I think you said it was up, you went from $22 million to $33 million in 2023, if I heard that correctly. I was just trying to get some sense of how you think that's going to trend in 2024. Sure. Thanks, Mark. And I apologize.
Correctly on our side. So if you look at 2023 as a whole and just give you kind of the highs and lows from a quarterly NII contribution standpoint, the low was just over $7 $5 million. The high was $9 $2 million, which that the high was in the was in the fourth quarter the variability.
In a quarter.
It was really driven by the incentive fees, probably not a big surprise the base management fees one of the reasons, we find the asset management business. So attractive as those base management fees, you don't really move much quarter to quarter, obviously as we as we grow.
Unidentified Speaker: I want to make sure I answered the question correctly on our side. So, if you look at 2023 as a whole and just give you kind of the highs and lows from a quarterly NII contribution standpoint, you know, the low was just over $7.5 million. The high was, you know, $9.2 million, which was the high in the fourth quarter. The variability quarter to quarter is really driven by incentive fees. Probably not a big surprise.
Additional clients and we grow additional AUM.
They will move over time, but quarter to quarter. They just don't move that much to the real driver or the real volatility is all driven by the incentive fees. So to the extent we continue to have favorable performance you heard Jesse's com.
Unidentified Speaker: The base management fees, you know, one of the reasons we find the asset management business so attractive is that those base management fees don't really move much quarter to quarter. Obviously, as we grow additional clients and we grow additional AUM, they will move over time, but quarter to quarter, they just don't move that much. So the real driver, the real volatility, is all driven by the incentive fees.
Comments about our expectations at main street for the for the first quarter.
Said earlier, there's a lot of overlap between our portfolio and MFC income fund's portfolio. It's not it's not one on 100%, which you can apply a little bit of a read through from our results and our expectations to MSC income funds.
Unidentified Speaker: So to the extent we continue to have, you know, favorable performance, you heard Jesse's comments about our expectations at Main Street for the first quarter. As I said earlier, there's a lot of overlap between our portfolio and MSC Income Fund's portfolio. It's not 100%, but you can apply a little bit of a read-through, you know, from our results and our expectations for MSC Income Funds. So, you know, given that, we expect MSC Income Funds to continue to perform well and continue to generate positive contributions to us from an incentive fee standpoint. But the real, you know, productivity or growth year over year versus that $33 million number that you referenced is really going to be more dictated by the incentive fee coming from the performance of not just the MSC Income Fund but also the private loan funds that we manage.
Given that we expect MSC income fund to continue to perform well and continued to generate positive contributions to us from an incentive fee standpoint, but the real productivity or growth year over year versus that $33 million number that you that you referenced is really going to be more dictated by the incentive fee coming off.
The performance of not just MSC income fund, but also the private loan funds that we manage our.
Our ability to continue to produce positive results. There is going to just going to really be the driver of that outcome.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Eric.
With all of the group to proceed with your question.
Good morning, everyone. Just one question for me.
Given that fact that both the fed and the futures market are projecting declines in short term interest rates at some point during 2024.
Unidentified Speaker: You know, our ability to continue to produce positive results there is going to really be the driver of that outcome. Great, thank you. Thank you. Thank you. Our next question comes from the line of Eric Zwick of the group. Please proceed with your question. Good morning, everyone. Given the fact that both the Fed and the futures market are projecting declines in short-term interest rates at some point during 2024, I have just one question for me this morning. Obviously, the timing and magnitude remain up for debate.
Obviously, the timing and magnitude remain up for debate.
I'm wondering if can you provide an update on your interest rate sensitivity, maybe in terms of the potential impact to <unk> per share for each 25 basis point reduction.
Sure Eric Thanks for the question and thanks for joining us this morning.
We like other I think all of the other bdcs.
Provide what we think is a pretty granular table, both on our SEC filings and in our Investor presentation, you'll see that.
Eric Zwick: I'm wondering, can you provide an update on your interest rate sensitivity, maybe in terms of the potential impact on D&I per share for each 25 basis point reduction? Sure, Eric, thanks for the question and thanks for joining us this morning. Like all the other BDCs, you'll provide what we think is a pretty granular table, both in our SEC filings and in our investor presentation.
When we when we posted all that later this morning, but in general we have historically and continue to view.
Our position to be a little less sensitive than other bdcs is purely attributable to the fact that our lower middle market strategy.
Is predominantly fixed rate as opposed to floating whereas most of the spaces. As you know it was 100% if not 100% close to 100% floating. So we do think we have a little bit less sensitivity. So we've not seen the same benefits that the space may have seen over the last 12 to 18 months, but.
Unidentified Speaker: So you'll see that when we post all that later this morning. But, in general, we have historically and continue to view our position to be a little less sensitive than other BDCs. That's purely attributable to the fact that our lower middle market strategy is predominantly fixed rate as opposed to floating, whereas most of the space is, as you know, 100%, if not 100%, close to 100% floating. So we do think we have a little bit less sensitivity. So we've not seen the same benefits that the space industry may have seen over the last 12 or 18 months.
If rates come down we should you should see less of an impact going forward, but for your benefit if you look at.
Our portfolio and our obligations as of 12 31, 2023, so as of as of year end at 25 basis point.
Change would be just over <unk> a year I think it's about four and a half since.
So if you look at that and annualize. It you kind of get to 818 since a year just remember that that assumption is a very very.
Unidentified Speaker: If rates come down, we should see less of an impact going forward. But for your benefit, if you look at our portfolio and our obligations as of 12-31-2023, so as of year-end, a 25 basis point change would be just over four cents a year. I think it's about four and a half cents. So if you look at that and annualize it, you kind of get to 18 cents a year. Just remember that that assumption is a very, very aggressive calculation because it assumes those rates change every day one of the year. Obviously, given the curve, as you know, that wouldn't happen. In practice, it also likely wouldn't happen.
Aggressive calculation because it assumes those rates change day, one of the year, obviously, given the curve as you know that wouldn't happen in practice. It also likely wouldn't happen it'll it'll happen you.
You're kind of on a current basis over the balance of the quarter and the year. So the impact will likely be lower than that but thats. The best way that we and I think the other bdcs have been able to deliver that interest rate sensitivity historically and continue to provide today.
Great. Thanks, Brian I appreciate the color that's all for me today.
Thank you I appreciate it.
That was the.
The last question here. So again, we appreciate everyone's participation I really appreciate the questions. We have responded to questions. So we appreciate the the.
Unidentified Speaker: It'll happen, you know, kind of on a curve basis over the balance of the quarter and the year, so the impact will likely be lower than that, but that's the best way that we and I think the other BDCs have been able to deliver that interest rate sensitivity historically and continue to provide it today. Thanks, Dwayne. I appreciate the call. That's all for me today. Thank you, Eric. I appreciate it. I think that was the last question there.
Individuals' they join and asked those questions and we'll look forward to talking to everyone again in <unk>.
After our first quarter 2024 results are released.
And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Unidentified Speaker: So again, we appreciate everyone's participation. Really appreciate the questions. We love responding to questions. So we appreciate the individuals that join and ask those questions. And we'll look forward to talking to everyone again in May after our first quarter 2024 results are released. And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day. R.T.O. Thank you for watching If you have any questions leave a comment dont waste your time Except when I make funny movies Like, comment and subscribe M, © BF-WATCH TV 2021, ?? ?? ?? ?? ?? ?? ?? ??
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