Q2 2024 Main Street Capital Corp Earnings Call
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Zach Long: Greetings, and welcome to the Main Street Capital second quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Long. Thank you.
Speaker Change: Greetings and welcome to the main Street capital second quarter earnings Conference call. At this time, all participants are in a listen only mode.
Speaker Change: You didn't answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Cathy: It is now my pleasure to introduce your host exactly.
Cathy: Thank you Zach you may begin.
Zach Long: Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2024 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; and Jesse Morris, Chief Financial Officer and Chief Operating Officer.
Zach: Thank you operator, and good morning, everyone. Thank you for joining us for main Street capital Corporation's second quarter 2024 earnings Conference call.
Zach: Joining me today with prepared comments are Duane Hughes, our Chief Executive Officer.
Speaker Change: David My Golf, President and Chief Investment Officer, and Jeff Jesse Morris, Chief Financial Officer, and Chief operating Officer.
Operator: Also participating in the Q&A portion of the call is Nick Meserve, Managing Director and Head of Main Street's Private Credit Investment Group. Main Street issued a press release yesterday afternoon that details the company's second quarter financial and operating results. 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 August 16th. Information on how to access the replay was included in yesterday's release.
Speaker Change: Also participating for the Q&A portion of the call as Nick Reserve, managing director and head of main Street's private credit investment groups.
Speaker Change: Main Street issued a press release yesterday afternoon that details the company's second quarter financial and operating results.
Speaker Change: Document is available on the Investor Relations section of the company's website.
Speaker Change: S T capital Dot com.
Speaker Change: A replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 16th.
Speaker Change: Information on how to access the replay was included in yesterday's release.
Zach Long: 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 applies only as of today, August 9, 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.
Speaker Change: We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage.
Speaker Change: Please note that information reported on this call speaks only as of today August nine 2024, and therefore, you're advised that time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
Speaker Change: Today's call will contain forward looking statements. Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intends will should may or similar expressions. These statements are based on management's estimates assumptions and projections as of the date of this call and there are no guarantees of future performance.
Zach Long: 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.
Speaker Change: Laurence.
Speaker Change: 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.
Speaker Change: <unk> Dot Gov.
Speaker Change: <unk> assumes no obligation to update any of these statements unless required by law.
Zach Long: During today's call, management will discuss non-GAAP financial measures, including Distributable Net Investment Income, or D-N-I-I. D-N-I-I is Net Investment Income, or N-I-I, as determined in accordance with the U.S. Generally Accepted Accounting Principles, or GAAP, excluding the impact of non-cash compensation expenses. Management believes that presenting D&II and the related per share amount is 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 on Main Street upon settlement.
Speaker Change: During today's call management will discuss non-GAAP financial measures, including distributable net investment income for D. M D.
Speaker Change: The NII net investment income NII as determined in accordance with U S generally accepted accounting principles or GAAP.
Speaker Change: Excluding the impact of noncash compensation expenses.
Speaker Change: Management believes that presenting D NII and the related per share amount are useful and appropriate supplemental disclosures for analyzing main streets financial performance since noncash compensation expenses did not result in net cash impact to make sure. It upon settlement. Please.
Speaker Change: Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
Speaker Change: Two additional key performance indicators that management will be discussing on this call our net asset value or NAV.
Speaker Change: And return on equity for Aro <unk> and <unk>.
Speaker Change: A N a V is defined as total assets minus total liabilities.
Speaker Change: Also reported on a per share basis.
Speaker Change: It defines our ROE is the net increase in net assets, resulting from operations to heightened by the average quarterly total net assets.
Dwayne Hock: 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 shock.
Zach Long: 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 ROE. NAV is defined as total assets minus total liabilities and is also reported on a per-share basis. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net assets.
Dwayne Hock: Thanks Jack.
Dwayne Hock: Everyone and thank you for joining US we appreciate your participation on this morning's call and we hope that everyone's doing well.
Zach Long: 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. Now, I'll turn the call over to Main Street CEO Dwayne Hyzak.
Dwayne Hyzak: Good morning everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone's doing well. On today's call, I will provide my usual updates regarding our performance in the quarter, while also providing 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. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure, and leverage, and our expectations for the third quarter of 2024, after which we'll be happy to take your questions.
Dwayne Hock: On today's call I will provide my usual updates regarding our performance in the quarter also providing updates on our asset management activities. Our recent dividend declarations are expectations for dividends going forward, our recent investment activities and current investment pipeline.
Dwayne Hock: Several other noteworthy updates.
Speaker Change: Following my comments, David and Jesse provide additional comments regarding our investment strategy investment portfolio.
Speaker Change: Actual results capital structure, and leverage and our expectations for the third quarter of 2024.
Speaker Change: After which we'll be happy to take your questions.
Dwayne Hyzak: We are pleased with our second quarter results, which were highlighted by an annualized return on equity of 16.1%, DNII per share that continues to exceed the dividends paid to our shareholders, and a new record for NAV per share for the eighth consecutive quarter.
Speaker Change: We are pleased with our second quarter results, which were highlighted by an annualized return on equity of 16, 1%.
Speaker Change: D NII per share they continue to exceed the dividends paid to our shareholders and a new record for NAV per share for the eighth consecutive quarter.
Dwayne Hyzak: We believe that these continued strong results demonstrate the 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 also pleased that we generated significant growth in both our rural middle market and private loan investment portfolios and ended the quarter with attractive investment pipelines in both investment strategies, which we expect will be beneficial in the future.
Speaker Change: We believe these continued strong results demonstrate the sustainable strength of our overall platform.
Speaker Change: The benefits of our differentiated and diversified investment strategies unique contributions of our asset management business and the continued underlying strength and quality of our portfolio companies.
Speaker Change: We're also pleased that we generated significant growth in both our lower middle market and private loan investment portfolios and ended the quarter with attracting investment pipelines in both investment strategies, which we expect will be beneficial in the future.
Dwayne Hyzak: We remain encouraged by the continued favorable performance of our diversified lower middle market and private loan investment strategies and 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. Additionally, with the continued support of our long-term lender relationships, as evidenced by our recent extension and expansion of our corporate facility and the benefits of our second investment-grade debt offering of the year in June, we continue to maintain strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment, and we remain excited about the current opportunities in both our aluminum market and private loan investment strategies.
Speaker Change: We remain encouraged by the continued favorable performance of our diversified lower middle market and private loan investment strategies.
Speaker Change: The main 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.
Speaker Change: Additionally, with the continued support of our long term lender relationships as evidenced by our recent extension and expansion of our corporate facility and the benefits of our second investment grade debt offering of the year in June we continue to maintain strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment.
Speaker Change: We remain excited about the current opportunities in both our aluminum market and private loan investment strategies.
Dwayne Hyzak: These positive results for the second quarter, combined with our favorable outlook for the third 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 primarily due to the impact of net fair value increases in our investment portfolio and the accretive impact of our equity issuances, which Jesse will discuss in more detail.
Speaker Change: These positive results for the second quarter.
Speaker Change: And with a favorable outlook for the third quarter, resulting in a recommendation to our board of directors for our most recent dividend announcements, which I will discuss in more detail later.
Speaker Change: Our NAV per share increase in the quarter, primarily due to the impact of net fair value increases in our investment portfolio and the accretive impact of our equity issuances, which Jesse will discuss in more detail.
Dwayne Hyzak: The continued favorable performance of the majority of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant net fair value appreciation in the equity investments in the lower middle market portfolio. We're also excited about the following investments we made to finance strategic acquisitions by two of our high-performing, lower-middle market portfolio companies, each of which were funded by follow-on debt investments by Main Street for a total of over $36 million of incremental debt investments in these portfolio companies.
Jesse: The continued favorable performance of the majority of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant net fair value appreciation in the equity investments in the lower middle market portfolio.
Jesse: We're also excited about the follow on investments, we made to finance strategic acquisitions by two of our high performing lower middle market portfolio companies.
Speaker Change: Each of which were funded by follow on debt investments by main street for a total of over $36 million of incremental debt investments in these portfolio companies.
Dwayne Hyzak: We expect that these follow-on investments will help drive additional fair value appreciation in these portfolio companies in future quarters, in addition to the highly attractive interest income provided by these incremental debt investments. In the second quarter, we were also pleased to have recognized a meaningful realized gain upon the combination of one of our low and middle market portfolio companies with a strategic acquirer, which resulted in the full exit of our debt investments and a partial exit of our equity investment in the company, while retaining an equity investment in the combined company and the related future upside from the strategic combination.
Speaker Change: We expect that these follow on investments will help drive additional fair value appreciation in these portfolio companies in future quarters.
Dishing to the highly attractive interest income provided by these incremental debt investments.
Speaker Change: In the second quarter. We were also pleased to have recognized a meaningful realized gain upon the combination of one of our lower middle market portfolio companies with a strategic acquirer, which resulted in the full exit of our debt investments and a partial exit of our equity investment in the company, while retaining an equity investment in the combined company and the related future upside.
Speaker Change: From the strategic combination.
Dwayne Hyzak: We are excited that we continue to see increased interest from potential buyers in several of our lower-middle market portfolio companies that could lead to favorable realizations over the next few quarters and which we believe highlights the strength and quality of our portfolio companies. We were very pleased with our investment activity in the second quarter. This activity included total lower middle market investments of $155 million, including new investments totaling $88 million, resulting in a net increase in our lower middle market investments of $69 million after repayments and other investment activities.
Speaker Change: We're excited that we continue to see increased interest from potential buyers in several of our lower middle market portfolio companies that could lead to favorable realizations over the next few quarters, and which we believe highlights the strength and quality of our portfolio companies.
Speaker Change: We were very pleased with our investment activity in the second quarter.
Speaker Change: This activity included total floor them in our marketing investments of $155 million.
Speaker Change: New investments totaling $88 million, resulting in a net increase in the alumina market investments of $69 million after repayments and other investment activity.
Dwayne Hyzak: Our private loan investment activities in the quarter included new investments of $324 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $225 million. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio over the next few quarters. We've also continued to produce positive results in our asset management business. The funds we advised through our external investment manager continued to experience favorable performance in the second quarter, resulting in significant incentive fee income for our asset management business for the seventh consecutive quarter and, together with our recurring base management fees, a significant contribution to our net investment income.
Speaker Change: Our private loan investment activities in the quarter included new investments of $324 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $225 million.
Speaker Change: Given our conservative capital structure and strong liquidity position we.
Speaker Change: We remain very well positioned to continue the growth of our investment portfolio over the next few quarters.
Speaker Change: We've also continued to produce positive results of our asset management business.
Speaker Change: The funds, we advised through our external investment manager continued to experience favorable performance in the second quarter, resulting in significant incentive fee income for asset management business for the seventh consecutive quarter and together with our recurring base management fees, a significant contribution to our net investment income.
Dwayne Hyzak: We remain excited about our plans for the external funds that we manage as we execute our investment strategies and other strategic initiatives. We are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund. We remain optimistic about our strategy for growing our asset management business within our internally managed structure and are actively working to increase the contributions from this unique benefit to our Main Street stakeholders.
Speaker Change: We remain excited about our plans for the extra funds that we manage as we execute our investment strategies and other strategic initiatives. We are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund.
Speaker Change: We remain optimistic about our strategy for growing our asset management business within our internally managed structure.
Speaker Change: Actively working to increase the contributions from this unique benefit to our mainstream stakeholders.
Dwayne Hyzak: As a result of these continued efforts, a few weeks ago, MSC Income Fund, a non-listed BDC that is advised by our external investment manager, filed a preliminary proxy statement that contains certain proposals intended to position the fund to list shares on a national securities exchange. The preliminary proxy statement also details additional activities and changes at MSC Income Fund, including a transition of the fund's investment strategy to be solely focused on its private loan investment strategy and a potential amendment to the investment advisory agreement between the external investment advisor and the fund, both of which would become effective upon the listing of the fund's shares.
Speaker Change: As a result of these continued efforts a few weeks ago MFC income fund a non listed BDC that has advised by our external investment manager.
Speaker Change: Preliminary proxy statement that contains certain proposals intended to position to find a list of shares on a national Securities exchange.
Speaker Change: The preliminary proxy statement also details additional activities and changes at MSC income fund, including a transition of the fund's investment strategy to be solely focused on its private loan investment strategy and a potential amendment to the investment advisory agreement between the external investment advisor and to fund both of which will become effective upon a listing of the fund.
Speaker Change: Shares.
Dwayne Hyzak: We're very excited about these potential changes at MSC Income Fund, which we believe represent significant catalysts for the future growth of the fund and the opportunity for significant future benefits to both the MSC Income Fund shareholders and our asset management business. Based upon our results for the second 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 30 cents per share payable in September, representing our 12th consecutive quarterly supplemental dividend to go with the eight increases to our regular monthly dividends since the fourth quarter of 2021.
Speaker Change: We're very excited about these potential changes at MSC income fund, which we believe represent significant catalyst to the future growth of the fund and the opportunity for significant future benefits to both the NSE income fund shareholders and our asset management business.
Dwayne Hyzak: Our board also declared regular monthly dividends for the fourth quarter of 2024 of 24.5 cents per share, payable in each of October, November, and December, representing a 4% increase from the regular monthly dividends paid in the fourth quarter of 2023. The supplemental dividend for September is a result of our strong performance in the second quarter and will result in total supplemental dividends paid during the trailing 12-month period of $1.175 per share, representing an additional 41 percent paid to our shareholders in excess of our regular monthly dividends, and total dividends for the trailing 12-month period of over $4 per share and a current total yield we are providing to our shareholders of over 8 percent.
Speaker Change: Based upon our results for the second quarter combined with a 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 on September representing our 12th consecutive quarterly supplemental dividend to go with the eight increases to our regular monthly dividends since.
Speaker Change: The fourth quarter of 2021.
Speaker Change: Our board also declared regular monthly dividends for the fourth quarter of 2024 of 24 and a half cents per share payable in each of October November and December representing a 4% increase from the regular monthly dividends paid in the fourth quarter of 2023.
Speaker Change: The supplemental dividend for September as a result of our strong performance in the second quarter and will result in total supplemental dividends paid during the trailing 12 month period of $1 17, and a half cents per share representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the.
Speaker Change: Trailing 12 month period of over $4 per share and our current total yield we're providing to our shareholders of over 8%.
Dwayne Hyzak: We currently expect to recommend that our board continue to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters and we maintain a stable to positive NAV. Based upon our expectations for the continued favorable performance in the third quarter, we currently anticipate proposing an additional supplemental dividend payable in December 2021.
Speaker Change: We currently expect to recommend that our board continue to declare future supplemental dividends to the extent D. NII significantly exceeded our regular monthly dividends paid in future quarters, and we maintain a stable to positive.
Speaker Change: Based upon our expectations for continued favorable performance in the third quarter. We currently anticipate proposing an additional supplemental dividend payable in December 2024.
Dwayne Hyzak: Now turning to our current investment pipeline, as of today, I'd characterize our low and middle market investment pipeline as well above average. We believe that the unique and flexible financing solutions that we can provide to lower-middle market companies and their owners and management teams through our differentiated long-term to permanent holding periods represent an attractive solution to the needs of many lower-middle market companies, and we are confident in our expectations for strong new lower-middle market investment activity over the next few months.
Speaker Change: Now turning to our current investment pipeline as of today I characterize our aluminum market investment pipeline as well above average.
Speaker Change: We believe that the unique and flexible financing solutions that we can provide to lower middle market companies and their owners and management teams and our differentiated long term to permanent holding periods represented an attractive solution to the needs of many lower middle market companies and we are confident in our expectations for strong new lower middle market investment.
Speaker Change: Investment activity over the next few months.
Dwayne Hyzak: We also continue to be very pleased with the performance of our private credit team and the significant growth that they have 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.
Speaker Change: We also continue to be very pleased with the performance of our private credit team and the significant growth that they have provided for our private loan portfolio and our asset management business.
Speaker Change: As of today I'd characterize our private loan investment pipeline as average.
David Magdol: My last update relates to our activities to expand and improve our finance, accounting, and treasury functions to match the growth and best-in-class performance of our investment teams, investment portfolio, and asset management business. As part of these activities, yesterday, we announced several promotions and changes in these areas, including a change in Main Street's CFO position. We are excited about these changes and what they will mean for our company and for these specific individuals in the future.
Speaker Change: My last update relates to our activities to expand and improve our finance accounting and treasury functions to match the growth in best in class performance of our investment teams and investment portfolio and asset management business.
David Magdol: In conjunction with these changes, personally and on behalf of our executive management team and our board of directors, I want to thank Jesse for his significant contributions over the last few years as our CFO while also serving as our Chief Operating Officer and managing a lower middle market investment portfolio. We are very excited to have his focus back solely on our investment and operations activities, where we know that he will continue to add significant value to our firm, and we appreciate his significant contributions over the last few years as our CFO. With that, I will turn the call over to David.
Speaker Change: As part of these activities yesterday, we announced several promotions and changes in these areas, including a change of main street's CFO position.
Speaker Change: We're excited about these changes and what they mean for our company and for these specific individuals in the future.
Speaker Change: In conjunction with these changes personally and on behalf of our executive management team and our board of directors I want to thank Jesse for his significant contributions over the last few years as our CFO will also serving as our chief operating officer, and managing our lower middle market investment portfolio.
Speaker Change: We are very excited to have his focus back solely on our investment and operations activities well, we know that he will continue to add significant value to our firm and we appreciate his significant contributions over the last few years as our CFO.
Speaker Change: With that I will turn the call over to David.
David Magdol: Thanks Dwayne, and good morning everyone. As Dwayne highlighted in his remarks, we believe our strong second quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach, and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continued to be positive, which contributed to our attractive second quarter financial results. However, we did experience some continued softness in certain portfolio companies with consumer discretionary-focused products or services, which we have been monitoring for several quarters.
David: Thanks, Dwayne and good morning, everyone.
David: Wayne highlighted in his remarks, we believe our strong second quarter financial results continue to demonstrate the strength of main street's platform, our differentiated investment approach and our unique operating model.
David: We're pleased to report that the overall operating performance for most of our portfolio of companies continue to be positive, which contributed to our attractive second quarter financial results. However, we did experience continued softness in certain portfolio companies with consumer discretionary focused products or services, which we have been monitoring for several quarters.
David Magdol: We are actively working to maximize our recoveries on those specific investments. As we've discussed in the past, the largest portion of our investment portfolio and the primary driver of our long-term success has been and continues to be our focus on the underserved lower-middle market, and specifically our strategy of investing in both debt and equity in lower-middle market companies. Our view on the relative attractiveness of investing in the lower middle market remains unchanged, and we expect that this will continue to be our primary area of focus in the future.
David: We are actively working to maximize our recoveries on those specific investments.
David: As we've discussed in the past the largest portion of our investment portfolio and the primary driver of our long term success has been and continues to be our focus on the underserved lower middle market and specifically our strategy of investing in both the debt and equity and lower middle market companies.
David: Our view on the relative attractiveness of investing in the lower middle market remains unchanged and we expect that this will continue to be our primary area of focus in the future and as Duane noted we are excited about our current lower middle market investment pipeline.
David Magdol: And, as Dwayne noted, we are excited about our current lower middle market investment pipeline. Each quarter, we try to highlight key aspects of our investment strategy and differentiated approach. For today's call, I'm going to spend some time discussing our private loan investment strategy, which is the second largest part of our investment portfolio and is the primary driver of our asset management. We have grown our private loan strategy significantly over the last several years, both on Main Street's balance sheet and for the third-party client funds that we manage through our external investment manager.
Duane Hughes: Each quarter, we try to highlight key aspects of our investment strategy differentiated approach.
Duane Hughes: For today's call I'm going to spend some time discussing our private loan investment strategy, which is the second largest part of our investment portfolio and is the primary driver of our asset management business.
Duane Hughes: We have grown our private loan strategy significantly over the last several years, both on main street balance sheet and for the third party client funds that we manage through the external investment manager.
David Magdol: As a reminder, our private loan strategy principally represents investments in the senior secured debt of private equity-sponsored businesses. These investments are primarily originated by our internal investment professionals through strategic relationships they cultivate and maintain with a select group of private equity firms and their capital market intermediaries. Our private loan investments are typically first lien debt investments with attractive yield profiles and favorable terms. As of quarter end, 99% of our private loan secured debt investments were first lien loans, and 97% had floating rate interest rates, which had an attractive weighted average yield of 12.8%.
Duane Hughes: As a reminder, our private loan strategy chip.
Duane Hughes: Principally represents investment in the senior secured debt of private equity sponsored businesses.
Duane Hughes: These investments are primarily primarily originated by our internal investment professionals through strategic relationships, they cultivate and maintain with a select group of private equity firms and their capital market intermediaries.
Duane Hughes: Our private loan investments are typically first lien debt investments with attractive yield profiles and favorable terms.
As of quarter end, 99% of our private loan secured debt investments were first lien loans and 97% had floating rate interest rates, which had an attractive weighted average yield of 12, 8%.
David Magdol: Over seven years ago, we announced our strategic decision to dedicate significant resources to growing our private loan strategy by de-emphasizing our middle market strategy. Our desire to make this significant shift was driven by our intention to focus on investing in companies that were smaller than those typically accessing the traditional syndicated loan market.
Duane Hughes: Over seven years ago, we announced our strategic decision to dedicate significant resources towards growing our private loan strategy by deemphasizing, our middle market strategy.
Duane Hughes: Our desire to make this significant shift was driven by our intention to focus on investing in companies that were smaller than those typically accessing the traditional syndicated loan market.
David Magdol: We believe that the opportunity existed to lead or co-lead the vast majority of our private loan investments, whereby we were able to directly manage the due diligence, the loan documentation, and the post-investment process. We believe this approach allows us to maximize our net returns on capital invested in private loans for Main Street and the investment portfolios we manage in our asset management. While the overall market competition for private credit products has increased over the last few years, we believe our niche focus on the smaller end of the market is less competitive and allows us to earn more attractive risk-adjusted returns for Main Street's investors and the investors in the funds we manage.
Duane Hughes: We believe that the opportunity existed to lead or co lead the vast majority of our private loan investments whereby we were able to directly manage the due diligence the loan documentation and the post investment process.
Duane Hughes: We believe this approach allows us to maximize our net returns on our capital invested in private loans for main street and the investment portfolios, we manage in our asset management business.
Duane Hughes: While the overall market competition for private credit profit products has increased over the last few years, we believe our niche focus on the smaller end of the market is less competitive and allows us to earn more attractive risk adjusted returns for main streets investors and the investors in the funds we manage.
David Magdol: During the time of our intentional and purposeful repositioning in the market from 2016 year-end through the second quarter of this year, we increased the total fair value of our private loan portfolio at Main Street from 17% of our total portfolio at fair value to 37%. Based on the capabilities and relationships of our private credit team, the overall growth of our private loan platform, and the strength of our investment pipeline, Main Street has also benefited from our ability to utilize our private loan investment strategy to grow our asset management business.
Duane Hughes: During the time of our intentional intentional and purposeful repositioning in the market from 2016 year end through the second quarter of this year, we increased the total fair value of our private loan portfolio of main street from 17% of our total portfolio at fair value to 37%.
Duane Hughes: Based on the capabilities and relationships of our private credit team. The overall growth of our private loan platform and the strength of our investment pipeline main Street has also benefited from our ability to utilize our private loan investment strategy to grow our asset management business.
David Magdol: Through our external investment manager, our private loan strategy effectively allows Main Street to leverage its investment professionals' time and our platform to benefit from the attractive fee-based income we receive from third-party clients, while at the same time providing highly attractive investment opportunities and returns for those clients. We look forward to the continued benefits of our overall platform as we pursue additional ways to grow our private loan platform and third-party asset management business in the future.
Duane Hughes: Through our external investment manager or a private loan strategy effectively allows mainstreet to leverage our investment professionals time, and our platform to benefit from the attractive fee based income we received from third party clients. While at the same time, providing highly attractive investment opportunities and returns for those clients.
Duane Hughes: We look forward to the continued future benefits to our overall platform as we pursue additional ways to grow our private loan platform and third party asset management business in the future.
David Magdol: Now turning to the overall composition and operating results of our investment portfolio, as of June 30th, we continue to maintain a highly diversified portfolio with investments in 194 companies spanning across numerous industries and end markets. Our largest portfolio company, excluding our external investment manager, represented only 3.7% of our total investment income for the trailing 12-month period and 3.3% of our total investment portfolio fair value at quarter end. The majority of our portfolio investments represented less than 1% of our income and our assets.
Duane Hughes: Now turning to the overall composition and operating results from our investment portfolio as of June 30th we continue to maintain a highly diversified portfolio with investments in 194 companies spanning across numerous industries and end market.
Duane Hughes: Our largest portfolio company, excluding our external investment manager represented only three 7% of our total investment income for the trailing 12 month period, and three 3% of our total investment portfolio fair value at quarter end.
Duane Hughes: The majority of our portfolio investments represented less than 1% of our income and our assets.
David Magdol: Our investment activity in the second quarter included total investments in our lower middle market portfolio of $155 million, which after aggregate repayments on debt investments, return of invested equity capital, and realized losses resulted in a net increase in our lower middle market portfolio of $69 million. We completed $324 million in total private loan investments, which after aggregate repayments of debt investments resulted in a net increase in our private loan portfolio of $225 million.
Duane Hughes: Our investment activity in the second quarter included total investments in our lower middle market portfolio of $155 million, which after aggregate repayments on debt investments return of invested equity capital and realized losses resulted in a net increase in our lower middle market portfolio of $69 million.
Duane Hughes: We completed $324 million in price in total private loan investments, which after aggregate repayments of debt investments resulted in a net increase in our private loan portfolio of $225 million.
David Magdol: Finally, during the quarter, we had a net decrease in our middle market portfolio of $66 million as we continue to de-emphasize this strategy, resulting in a remaining middle market investment portfolio of less than 4% of the total fair value of our investment portfolio. At the end of the first quarter, our lower middle market portfolio included investments in 83 companies representing over $2.4 billion of fair value, which is over 27% above our cost base.
Duane Hughes: Finally during the quarter, we had a net decrease in our middle market portfolio of $66 million as we continue to deemphasize. This strategy, resulting in a remaining middle market investment portfolio of less than 4% of the total fair value of our investment portfolio.
Duane Hughes: At the end of the first quarter, our lower middle market portfolio included investments in 83 companies representing over $2 $4 billion of fair value, which is over 27% above our cost basis.
David Magdol: We had investments in 92 companies in our private loan portfolio, representing $1.7 billion of fair value. In our middle market portfolio, we had investments in 19 companies, representing $184 million of fair value. The total investment portfolio at fair value at quarter end was 115% of the related cost base. In summary, Main Street's investment portfolio continues to perform at a high level and deliver on our long-term results and goals. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday. With that, I will turn the call over to Jesse to discuss our financial results, capital structure, and liquidity position.
Duane Hughes: We had investments in 92 companies in our private loan portfolio, representing $1 $7 billion of fair value.
Duane Hughes: Market portfolio, we had investments of 19 companies representing $184 million at fair value.
Duane Hughes: Total investment portfolio at fair value at quarter end was 115% of the related cost basis.
Duane Hughes: In summary main streets investment portfolio continues to perform at a high level and deliver on our long term results and goals additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday.
Duane Hughes: With that I will turn the call over to Jesse to cover our financial results capital structure and liquidity position.
Jesse Morris: Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the second quarter. Our total investment income for the second quarter was $132.2 million, increasing by $4.6 million, or 3.6%, over the second quarter of 2023 and by $0.5 million, or 0.4%, from the first quarter of 2024. Our results for the second quarter of 2024 included strong performance across our lower middle market and private loan investment portfolios, and our asset management business resulting in strong levels of investment income, which, as Dwayne and David touched on, demonstrates the continued strength of our differentiated investment and asset management strategies.
Jesse: Thank you David.
Jesse: Duane and David's comments, we are pleased with our operating results for the second quarter.
Jesse Morris: Interest income increased by $2.8 million from a year ago and was comparable to the first quarter. The increase over the prior year was driven primarily by the impact of increased net investment activity over the last year and increases in benchmark index rates, partially offset by the impact of an increase in investments on nonaccruals. When compared to the first quarter, the second quarter benefited from the increased net investment activity during the first and second quarters, offset by an increase in investments on non-accrual. Dividend income increased by $1.1 million, or 4.3 percent, when compared to a year ago.
Jesse: Our total investment income for the second quarter was $132 2 million, increasing by $4 6 million or three 6% over the second quarter of 2023 and.
Jesse: And by zero point $5 million or 0.4% from the first quarter of 2024.
Jesse: Our results for the second quarter 2024 included strong performance across our lower middle market and private loan investment portfolios in our asset management business, resulting in strong levels of investment income.
Speaker Change: Which is Duane and David touched on demonstrates the continued strength of our differentiated investment.
Speaker Change: Thats It management strategies.
Speaker Change: Interest income increased by $2 8 million from a year ago. It was comparable to the first quarter.
Speaker Change: The increase over the prior year was driven primarily by the impact of increased investment activity over the last year.
Speaker Change: And increases in benchmark index rates, partially offset by the impact of an increase in investments on non accrual.
Speaker Change: When compared to the first quarter the second quarter benefited from the increased net investment activity during the first and second quarter.
Speaker Change: Offset by an increase in investments on nonaccrual.
Speaker Change: Dividend income increased by $1 1 million or four 3% when compared to a year ago with this increase after the impact of a $1 6 million decrease in unusual or nonrecurring dividends and increased by $3 9 million or 17, 1% from the first quarter, including a comparable level of unused.
Jesse Morris: Would this increase after the impact of a $1.6 million decrease in unusual or nonrecurrent dividends and increase by $3.9 million, or 17.1 percent from the first quarter, including a comparable level of unusual or nonrecurrent dividends between the quarters? The continued underlying strength of the majority of our lower middle market portfolio companies, together with the unique benefits of our asset management business, drove the strong level of dividend income in the quarter. Fee income increased by $0.7 million from a year ago and decreased by $3.3 million from the first quarter. The first quarter of this year included elevated levels of refinancing and prepayment fees considered non-recurring.
Speaker Change: Nonrecurring dividends between the quarters.
Speaker Change: The continued underlying strength of the majority of our lower middle market portfolio companies together, where the unique benefits of our asset management business drove the strong level of dividend income in the quarter.
Speaker Change: The income increased by 0.7 million from a year ago and decreased by $3 3 million from the first quarter.
Speaker Change: The first quarter of this year included elevated levels of refinancing and prepayment fees considered nonrecurring.
Jesse Morris: The aggregate amount of these items for the second quarter decreased by $2.7 million from the first quarter and was comparable to the prior year. For the second quarter, the impact of certain income considered less consistent or nonrecurring in nature, including dividends from our equity investments and accelerated prepayment, repricing, and other activity related to our debt investments, as I mentioned earlier, totaled $5.1 million. In the aggregate, these items were consistent with the average of the prior four quarters and $1.6 million lower than the prior year and $2.5 million lower than the first quarter. Our operating expenses increased by $3 million from a year ago, largely driven by increases in interest expense, share-based compensation expense, and general and administrative-related expenses.
Speaker Change: The aggregate amount of these items for the second quarter decreased by $2 7 million from the first quarter.
Speaker Change: And were comparable to the prior year.
Speaker Change: For the second quarter the impact of certain income considered less consists are nonrecurring in nature.
Speaker Change: Dividends from our equity investments and accelerated prepayment repricing and other activity related to our debt investments as I mentioned earlier totaled $5 1 million.
Speaker Change: In the aggregate these items were consistent with the average of the prior four quarters and $1 6 million lower than the prior year and $2 5 million lower than the first quarter.
Speaker Change: Our operating expenses increased by 3 million from a year ago, largely driven by increases in interest expense share based compensation expense and general and administrative related expenses.
Jesse Morris: The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.3% for the quarter on an annualized basis 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 second quarter, an increase of $0.7 million from a year ago and $0.6 million from the first quarter. The manager earned $4.1 million in incentive fees during the quarter, increasing by $0.5 million from the prior year and $0.3 million from the first quarter, primarily as a result of the positive performance of the assets under management. The manager ended the quarter with total assets under management of $1.6 billion.
Speaker Change: The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets was one 3% for the quarter on an annualized basis.
Speaker Change: It continues to be amongst the lowest in our industry.
Speaker Change: Our external investment manager contributed $9 2 million to our net investment income during the second quarter and.
Speaker Change: An increase of <unk> 7 million from a year ago.
Speaker Change: 0.6 million from the first quarter.
Speaker Change: The manager earned $4 1 million in incentive fees during the quarter, increasing by 0.59 from the prior year.
Is there a point 3 million from the first quarter, primarily as a result of the positive performance of the assets under management.
Speaker Change: The manager ended the quarter with total assets under management of $1 6 billion.
Jesse Morris: During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized appreciation, on the investment portfolio of $26.5 million. We recorded net fair value appreciation in our lower middle market portfolio, our other portfolio, our middle market portfolio, and in our external investment manager, partially offset by net fair value appreciation in our private loan portfolio. The net fair value appreciation in a lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies.
Speaker Change: During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized appreciation on the investment portfolio of $26 5 million.
Jesse Morris: The net fair value appreciation in our other portfolio was driven by positive performance in certain investments. The net fair value appreciation in our middle market portfolio was driven by the exit of a portfolio company at a favorable value compared to its fair value at the end of the first quarter. The fair value appreciation of our external investment manager was a result of an increase in the fees generated by the external investment manager, driven by the continued strong performance of our asset management business, partially offset by a decrease in the valuation multiples of public-traded peers, which we use as one of the benchmarks for valuation purposes. The net fair value depreciation in our private loan portfolio was driven by the net impact of specific portfolio company underperformance, partially offset by the impact of decreases in market spreads.
Speaker Change: We recorded net fair value appreciation in our lower middle market portfolio or other portfolio, our middle market portfolio and in our external investment manager, partially offset by net fair value appreciation and all.
Speaker Change: Our private loan portfolio.
Speaker Change: The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies.
Speaker Change: The net fair value appreciation on our other portfolio was driven by positive performance in certain investments.
Speaker Change: The net fair value appreciation in our middle market portfolio was driven by the exit of a portfolio company at a favorable valley competitor its fair value at the end of the first quarter.
Speaker Change: The fair value appreciation of our external investment manager was a result of an increase in the fees generated by the external investment manager driven.
Speaker Change: Driven by the continued strong performance of our asset management business.
Speaker Change: Partially offset by a decrease in the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation purposes.
Speaker Change: The net fair value depreciation in our private loan portfolio was driven by the net impact of specific portfolio company on their performance, partially offset by the impact of decreases in market spreads.
Jesse Morris: We ended the second quarter with investments on nonaccrual comprising approximately 1.2% of the total investment portfolio at fair value and approximately 3.6% at cost. As David indicated, the new investments on nonaccrual for the second quarter largely relate to underperforming companies with significant exposure to consumer end markets. Net asset value, or NAV, increased by 26 cents per share over the first quarter and $2.11, or 7.6%, when compared to a year ago to a record NAV per share of $29.80 at the end of the second quarter.
Speaker Change: We ended the second quarter when investments on nonaccrual comprising approximately one 2% of the total investment portfolio at fair value.
Speaker Change: And approximately three 6% of cost.
Speaker Change: As David indicated the neat new investments on non accrual for the second quarter largely related to underperforming companies with significant exposure to consumer end markets.
David: Net asset value or NAV increased.
David: Increased by 26 cents per share over the first quarter and $2 or 11 cents or seven 6% when compared to a year ago to a record <unk> per share of $29.80 at the end of the second quarter.
Jesse Morris: Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures divided by net asset value, was 0.74, and our regulatory asset coverage ratio was 2.33. And these ratios continue to be slightly more conservative than our long-term target ranges, 0.8 to 0.9 times and 2.1 to 2.25 times, respectively.
Speaker Change: Our regulatory debt to equity leverage calculated as total debt, excluding our SBA debentures divided by net asset value was 0.74, and our regulatory asset coverage ratio was 233 and these ratios continue to be slightly more conservative than our long term target ranges.
Speaker Change: <unk> eight to <unk> nine times and $2, one to 2.25 times respectively.
Jesse Morris: We continue to be active this quarter in capital activities aided by our strong relationships. In May, we repaid the $450 million due on our May 2024 notes at maturity. In June, we issued $300 million of unsecured notes maturing in June 2027 with a coupon rate of 6.5%. We also amended our corporate credit facility in June, increasing commitments by $115 million to $1.1 billion with a diversified group of 19 lenders and extended the maturity to June 2029 for $1.035 billion of the commitment.
Speaker Change: We continue to be active this quarter on capital activities aided by our strong relationships.
Speaker Change: In May we repaid the 450 million due on our May 2024 notes at maturity.
Speaker Change: In June we issued 300 million of unsecured notes maturing in June 2027, with a coupon rate of six 5%.
Speaker Change: We also amended our corporate credit facility in June increasing commitments by 115 million to $1 1 billion with a diversified group of 19 lenders and extended the maturity to June 2029 for 1.035 billion of the commitments.
Jesse Morris: We were also active in our at-the-market, or ATM, program, raising net proceeds of $42.2 million during the quarter. After giving effect to the investment and capital activities in the first and second quarters of this year, we continue to maintain strong liquidity, including cash-in availability under our credit facilities and one of our SPSC funds of approximately $1 billion. We continue to believe that our conservative leverage, strong liquidity, and continued access to capital are significant strengths that have proven to benefit us historically and have us well positioned for the future, allowing us to continue to execute our attractive investment strategy.
Speaker Change: We were also active in our aftermarket or ATM program, raising net proceeds of $42 2 million during the quarter.
Speaker Change: After giving effect to the investments and capital activities in the first and second quarter of this year, we continue to maintain strong liquidity, including cash and availability under our credit facilities and one of our Sps He funds of approximately 1 billion.
Speaker Change: We continue to believe that our conservative leverage strong liquidity and continued access to capital our significant strengths have proven to benefit us historically and have us well positioned for the future allow us to continue to execute our attractive investment strategy.
Jesse Morris: As we discussed last quarter, with this current level of liquidity, we currently 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 continue to increase during the course of the year to be more in line with our long-term stated targets.
As we discussed last quarter with this current level of liquidity. We currently expect to fund our new investment activity in 2024.
Speaker Change: Through a greater proportionate debt financing and as such we would expect leverage to continue to increase during the course of the year to be more in line with our long term stated targets.
Jesse Morris: Coming back to our operating results, as a result of our strong performance for the quarter, our return on equity for the second quarter and the first six months of the year was 16.1% and 16.6% on an annualized basis, respectively. D&I per share for the quarter of $1.07 was $0.05 or 4.5% lower than the record D&I per share for the second quarter last year and was $0.04 or 3.6% lower than the D&I per share for the first quarter. The combined impact of certain investment income considered less consistent or non-recurring in nature on a per share basis was in line with the average of the last four quarters.
Speaker Change: Coming back to our operating results as a result of our strong performance for the quarter. Our return on equity for the second quarter and the first six months of the year was 16, 1% and 16, 6% on an annualized basis respectively.
Speaker Change: DNI share per share for the quarter of $1.07 was five or four 5% lower than the record D. NII per share for the second quarter last year and was four cents or three 6% lower than the DNI per share for the first quarter.
Speaker Change: The combined impact of certain investment income considered less consistent or nonrecurring in nature on a per share basis was in line with the average of the last four quarters.
Jesse Morris: $0.02 per share lower than the same quarter a year ago and $0.03 per share lower than the first quarter, accounting for most of the declines in D&I. Total dividends paid in the second quarter were $1.02 per share, including a supplemental dividend of $0.30 per share and an increase of 13% over our total dividends paid during the same period in the prior year. Given the strength of our operating results and the outlook for the rest of the year, our board approved a supplemental dividend of $0.30 per share payable in September 2024.
Speaker Change: <unk> per share lower than the same quarter a year ago.
Speaker Change: And <unk> <unk> per share lower than the first quarter accounting for most of the declines in DNI.
Speaker Change: Total dividends paid in the in the second quarter were $1 <unk> per share, including a supplemental dividend of <unk> 30 per share an increase of 13% over our total dividends paid during the same period in the prior year.
Speaker Change: Given the strength of our operating results in the outlet for the rest of the year. Our board approved a supplemental dividend of <unk> 30 per share payable in September 2024.
Jesse Morris: With the supplemental dividend, total declared dividends for the third quarter of 2024 are $1.035 per share, representing a 7.3% increase over the total dividends paid in the third quarter of last year. Our board also approved recurring monthly dividends of $0.245 per share for a total of $0.735 per share for the fourth quarter of 2024. Looking forward, given the strength of our underlying portfolio, we expect another strong top line in earnings per share in the third quarter with expected D&I of at least $1.07 per share, with the potential for upside driven by the actual level of dividend income and portfolio investment activities during the quarter. With that, I will now turn the call back over to the operator so we can take any questions.
Speaker Change: But the supplemental dividend total declared dividends for the third quarter of 2024.
Speaker Change: Our $1 three and a half cent per share representing a seven 3% increase over the total dividends paid in the third quarter of last year.
Speaker Change: Our board also approved recurring monthly dividends of 24, and a half cents per share for a total of 73 and a half cents per share for the fourth quarter 2024.
Speaker Change: Looking forward given the strength of our underlying portfolio, we expect another strong topline and earnings quarter in the third quarter with expected DNI of at least $1 seven per share with the potential for upside driven by the actual level of dividend income and portfolio investment activities during the quarter.
Speaker Change: With that I will now turn the call back over to the operator so.
Speaker Change: So we can take any questions.
Operator: 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 key. A confirmation tone will indicate your line is in the questioning queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 2. Our first question comes from the line of Robert Dodd with Raymond James.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Speaker Change: May press Star two if you would like to remove your question from.
Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing sorry.
Speaker Change: Our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Robert Dodd: Hi, guys.
Speaker Change: Gratulation so the quota.
The question is about the pipeline.
Speaker Change: I'm trying to cool the last time, you you'd characterize lower middle market is well above average.
Speaker Change: That sounds.
Robert Dodd: I'm trying to go call you. The last time you characterized the lower middle market as well above average, that sounds... Can you give us any additional insight on what that is? Because it seems like the lower middle market pipeline keeps getting stronger. Are there any common characteristics in there? Obviously, every deal is unique, but I mean anything that's... that's really driving the incremental activity of business owners kind of coming to the table.
Speaker Change: Quite positive.
Speaker Change: Can you give us any.
Speaker Change: What that is because that seems like that the lower middle market pipeline keeps keeps getting stronger. So are there any common characteristics and that obviously every deal is unique but I mean anything that's that's really driving the incremental activity of.
Speaker Change: So I'm just kind of.
Speaker Change: Coming to the table.
Dwayne Hyzak: Good morning, Robert. Thanks for the question. I don't know if I'd point to anything specific that's driving owners to come to the table. I think our teams here internally at Main Street are doing a better job of proposing what we think is unique to the intermediaries that we deal with and then eventually to the business owners, and I think we're having a lot of success there. We are trying to give you guidance that the lower middle market pipeline is very, very strong.
Speaker Change: Good morning, Robert Thanks for the question I don't know if I'd point to anything specific that's driving owners, who come to the table I think our teams here internally at main street Youre doing a better job of.
Robert Dodd: Posing what we think is unique to the to the intermediaries that we deal with and then eventually to the business owners and I think we're having a lot of success there.
Speaker Change: We are trying to give you guidance that the alumina market pipeline is very very strong we expect to have good originations this quarter some of it may.
Dwayne Hyzak: We expect to have good originations this quarter. Some of it may end up moving into the fourth quarter, but we feel really good about the pipeline, which is why we gave the guidance. As you've heard us say in the past, we always have to get through due diligence and legal documentation, so things can always change. The economy can also change, but right now, we feel really, really good about The Pipeline, and we expect to have robust, lower levels of market originations over the next couple of months, the next couple of quarters.
Dwayne Hyzak: I'll let David add any additional commas that he might have on his side. David, take two.
Speaker Change: And that moving into the fourth quarter, but we feel really good about the pipeline, which is why we gave the guidance as you've heard us say in the past, we always have to get through due diligence and legal documentation. So things can always change and the economy can also change, but right now we feel really really good about that.
David: The pipeline and we expect to have robust lower middle market originations over the next couple of next couple of months next couple of quarters I'll, let David add any additional comments that he might have on his side I think dwayne hit on it we're just resonating quite well with our referral network. The only other observation I'd make is our incoming deal volume is up and it's in part.
David Magdol: I think Dwayne hit on it, we're just resonating quite well with our referral network. The only other observation I'd make is our incoming deal volume is up, and it's in part as a result of interest rates, you know, having more visibility and not having a rising interest rate kind of outlook like we had a year ago, quite as unclear, and that's led intermediaries to advise their clients it's a good time to go to market, whereas we think there were some that were hitting pause a year ago and the like.
David: As a result of interest rates, you know, having more visibility and not having a rising interest rate kind of outlook like we had a year ago quite is unclear and that's let intermediaries to advise their clients. It's a good time to go to market, where we think there were some that were hitting pause a year ago.
David: And the like.
Robert Dodd: Got it, got it. Thank you for that. On the private loan side, I mean, average... All in the program, is it that you're seeing...
Speaker Change: Got it got it. Thank you for that one on the private loan side I mean average.
Average.
Speaker Change: All of the programs.
Speaker Change: Seating.
Robert Dodd: Thank you very much.
Speaker Change: Or did you see maybe.
Speaker Change: Maybe a bed with an ambition of a deal.
Speaker Change: Right.
Speaker Change: I've seen lots of talk from.
Speaker Change: Hum.
Speaker Change: Good question et cetera.
Speaker Change: Bdcs, who would you like it.
Speaker Change: Shifting deals because the pricing is too tight so is that something that's having any impact on private loan what was the pricing considerations that come in late 2000, and then pipeline tied to it okay what sticks.
Dwayne Hyzak: Yes, sir, Robert, I'll give you a few comments and I'll let Nick Meserve add any additional commentary he has on his side, but just to be clear on our guidance, the well above average was on the lower middle market side, you know, the guidance for private loan was average, and we did have a U.A. release.
Robert Dodd: Yeah, So Robert I'll give you a few comments and I'll, let Nick Missouri add any additional commentary has on his side, but just to be clear our guidance well above average was on the lower middle market side. The guidance for private loan was average we did have.
Robert Dodd: Sorry, that's what I meant. I mean, the fact that the private loan is only average, is that because of pricing or inflow versus the lower middle market, which was well above average? Sorry if I didn't characterize that. That's okay. No problem.
Robert Dodd: Got it.
Robert Dodd: Sorry, that's what I meant I mean, the fact that probably that alone is only athlete shoes that because of pricing or inflow versus the lower middle market, which was well above average sorry, if I didn't characterize that that's okay no.
Dwayne Hyzak: I just want to make sure we kind of got the question right. As you'll see, as you saw in our press release, you'll see in our 10-Q, the second quarter was a very, very robust quarter for us on the private loan side. So we had a lot of success, both on the front end of the pipeline, but more importantly, on the back end, working through the process, diligence, legal documentation, et cetera, and getting to a closing.
Speaker Change: No problem I wanted to make sure where we are we kind of got the question right.
Speaker Change: As you'll see as you saw in our press release Youll see in our 10-Q, the second quarter was a very very robust quarter for us on the private loan side. So we had a lot of success.
Speaker Change: Both on the front end of the pipeline, but more importantly on the backend working through the process diligence legal documentation et cetera, and getting to a closing so part of the reason that we think the pipeline is average today is it the second quarter was so robust I do think that there.
Dwayne Hyzak: So part of the reason that we think the pipeline is average today is that the second quarter was so robust. I do think that the broader market, I don't think we see this as much on the lower middle market side, but the broader market, just from a seasonal standpoint, you typically see a slowdown in August and September. People are on vacation.
Speaker Change: The broader market I don't think we see this as much on the lower middle market side, but the broader market just from a seasonal standpoint, you typically see a slowdown in August September people are on vacation, they're doing other things other than focusing on transactions and I think you see some of that seasonality. We continue to view, our part of the market, which again as you've heard us say in the past just to make sure we clarify.
Dwayne Hyzak: They're doing other things other than focusing on transactions, and I think you see some of that seasonality. We continue to view our part of the market, which, again, as you've heard us say in the past, just to make sure we clarify, it's a different part of the market than what you see most other BDCs participate in. These are the smaller part of the private equity world or a kind of private credit world.
Speaker Change: It's a different part of the market and what you see most other bdcs participate in these are the smaller part of the private equity world or the kind of the private credit World. We continue to see what we think are very attractive opportunities both from a underwriting risk standpoint leverage standpoint, and a pricing standpoint, but I'll, let nic give any additional comments or color that he thinks is.
Dwayne Hyzak: We continue to see what we think are very attractive opportunities, both from an underwriting risk standpoint, a leverage standpoint, and a pricing standpoint, but I'll let Nick give any additional comments or color that he thinks is helpful.
Speaker Change: Paul.
Nicholas Meserve: Yeah, I think that pretty much covers it. I think the big one for 2Q was obviously a large quarter for us. Part of that was pulling through some third quarter transactions. They closed right at the end of the quarter for 2Q. They could have moved into 3Q.
Nic: Yeah, I think that pretty much covers it I think the big one for <unk> was obviously, a large quarter for us.
Nic: That was pulling through some third quarter transactions that closed right at the end of the quarter for <unk> that could have moved into <unk>.
Nicholas Meserve: But overall, I think that the portfolio feels good. I think it's not a spread necessarily a question of whether it's average or above average. You know, spreads have condensed a little bit. As Dwayne said, not as much on the smaller parts of the market that we play in.
But overall the portfolio feels good I think it's not a spread that's really a question on whether it's average or above average.
Speaker Change: Spreads have condensed a little bit like you said not as much on the smaller of the market that we believe.
Robert Dodd: Got it, got it. Thank you. One more if I can.
Speaker Change: Got it got it thank you and one more if I can.
Speaker Change: You talked about obviously, you've seen some headwinds on the consumer facing side for a while have been talking about it a while.
Robert Dodd: You talked about, obviously, you've seen some headwinds on the consumer-facing side for a while. I've been talking about it for a while. You know, are there any new segments of the economy or where there are any emerging signs of credit concern that are maybe not consumer-direct? Yeah, Robert, I think, to your point, we've been talking about construction.
Speaker Change: Are there any.
Speaker Change: You.
Speaker Change: All of the economy or portfolio with <unk>.
Speaker Change: Any emerging signs of.
Speaker Change: Credit concern that there may be no consumer direct.
Dwayne Hyzak: Yeah, Robert, I think to your point, we've been talking about consumer risk or concerns for a while, not just a couple quarters, but for longer than that. We've been risk-off from a new investment standpoint in that area for a very specific reason.
Speaker Change: Yes, Robert I think to your point, we've been talking about consumer.
Speaker Change: Risks or concerns for a while is not just a couple of quarters, but for longer than that we've been risk off from a new investment standpoint in that area for a very specific reason I think we had been wrong for a while but I think you're seeing it not just in our portfolio, but I think broader across the U S economy Youre seeing that.
Dwayne Hyzak: Same feedback everywhere in that those headwinds from an overall industry standpoint with the challenges that some of these companies already had internally, it just got to the point in this quarter where we had an increase in non-accruals, but hopefully for you and others, it shouldn't have been a surprise because we've been trying to communicate that for the last couple of quarters. When you look at the broader parts of the economy, we feel good about it.
At the same feedback everywhere and that those headwinds from an overall industry standpoint with the challenges in some of these companies already had internally you just got to the point in this quarter, where we had an increase in the non accruals, but hopefully.
Speaker Change: For you and others it shouldn't have been a surprise because we've been trying to communicate that to the last couple of quarters. When you look at the broader parts of the economy, we feel good about it the rest of the portfolio by and large is doing well you see that in our dividend income from the lower middle market you see that in the fair value changes. So we feel good about it.
Dwayne Hyzak: The rest of the portfolio, by and large, is doing well. You see that in our dividend income from the lower middle market. You see that in the fair value changes. So we feel good about it. We continue to say if a portfolio company is struggling, it's probably more of a portfolio company specific issue than it is something more broad-based from an economic or an industry standpoint outside of that consumer segment.
Speaker Change: We continue to say have a portfolio of companies struggling it's probably more of a portfolio company specific issue.
Speaker Change: And it is something more more broad based on the economic or an industry standpoint outside of that that consumer segment.
Speaker Change: Got it. Thank you. Thank you Robert.
Bryce Rowe: Thank you. Our next question comes from the line of Bryce Rowe with B Riley Security. Please proceed with your question.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Bryce Rowe with B Riley Securities. Please proceed with your question.
Bryce Rowe: Thanks a bunch. Maybe a couple follow-ups to Robert's questioning are here. Dwayne, in terms of the lower middle market pipeline, I agree. But I don't know if I've heard you guys describe it as well above average before. Maybe you have, but it's certainly been a long time. Now, can you talk about the mix within that pipeline in terms of kind of add-ons versus new? You know, incumbent type relationships versus new?
Speaker Change: Thanks, So much maybe a couple of follow ups to Robert questioning there.
Speaker Change: Hey, Duane in terms of the lower middle market pipeline.
Speaker Change: I agree I don't know if ive heard you guys describe it is well above average before maybe you have but it's certainly been a long time.
Speaker Change: Can you talk about the mix within that within that pipeline in terms of kind of add ons versus new.
Duane Hughes: So incumbent type relationships versus versus new.
Dwayne Hyzak: Yeah, Bryce, so just to reiterate some of the second quarter, we did have two really nice add-ons from an investment standpoint into existing portfolio companies to help finance what we think are very, very attractive strategic acquisitions for two of our high-performing portfolio companies. As we look forward to the current pipeline, I would say it's much more weighted towards new platforms. There might be one or two potential add-ons that are in the earlier stages, but we're not really counting those in the pipeline guidance today.
Yes, so just to reiterate some of the second quarter. We did have two really nice add ons from an investment standpoint into existing portfolio companies to help finance. What we think are very very attractive strategic acquisitions for two of our high performing portfolio companies as we look forward to the current pipeline I would say.
Duane Hughes: It's much more weighted towards new platforms that might be one or two potential add ons that are in the earlier stages, but we're not really counting that in the pipeline guidance today.
Dwayne Hyzak: This pipeline guidance is more new platforms. The good news from our perspective is that these platforms, when you look at your type of transaction, mix of debt and equity, leverage valuation, pricing, everything else that you would take into consideration, it's all consistent with what we've done consistently on a long-term basis, which is what gets us so excited about the pipeline being as favorable as it is today.
Duane Hughes: Pipeline guidance as more new platforms. The good news from our perspective as these platforms. When you look at the type of transaction makes a debt equity leverage valuation kind of pricing everything else that you would take into consideration. It's all consistent with what we've done consistently on a long term basis, which is what gets us so excited about the pipeline being as.
Duane Hughes: Is as favorable as it is today.
Bryce Rowe: Okay, that's helpful. And then, you know, maybe one more on the private loan activity. Any sense for kind of where maybe leverage attachment points are within the private loan? Just curious if it's consistent with what you've done in the past.
Speaker Change: Okay. That's helpful.
Speaker Change: And then.
Speaker Change: Maybe one more on the on the private loan activity.
Speaker Change: Any any sense for kind of where maybe leverage attachment points are within private loan. Just you just curious if it's if it's consistent with what you've got what you've done in the past.
Dwayne Hyzak: Yeah, Bryce, you know, it hasn't really changed from where we were in the last few years. So we're still kind of in that 3.5 to 4.5 times the range, usually in that 3.5 to 4.
Speaker Change: Yes it.
Speaker Change: It Hasnt really changed from where we've been in the last few years. So we're still kind of three five to four five times range usually in the three five to four.
Speaker Change: Okay.
Bryce Rowe: Good deal. Let's see, on non-accruals. You know, I'm certainly not as surprised to hear you guys talk about some weakness in consumer discretionary. You certainly have talked about it for quite some time.
Speaker Change: Good deal.
Speaker Change: Let's see on non accruals.
Speaker Change: Certainly not surprised to hear you guys talk about some weakness in consumer discretionary you certainly have talked about it for quite some time.
Bryce Rowe: If we look at maybe the non-accrual bucket just in general and maybe some of the newer inflows, are they coming from, you know, the lower middle market, private loan, middle market? What portion of the investment portfolio is creating the non-accrual inflows? Erik D. David Magdol, David Magdol,
Speaker Change: If we look at maybe the non accrual bucket just in general and maybe some of the newer inflows are they are they coming from.
Speaker Change: Our lower middle market private loan and middle market, just what portion of the investment portfolio.
Speaker Change: Our creating the.
Speaker Change: The non accrual inflows.
David Magdol: Yeah, these are mostly on the lower middle market side.
Speaker Change: And these are mostly on the lower middle market side.
Speaker Change: Okay.
Bryce Rowe: Okay. In terms of the middle market, you know, clearly a de-emphasis again in the second quarter. Is that more of a kind of proactive approach or reactive approach just given a lot of the refinance activity we saw in the second quarter?
Speaker Change: Okay.
Speaker Change: In terms of the middle market.
Speaker Change: Clearly.
The emphasis the emphasis again here in the second quarter.
Speaker Change: Is that is that more of a kind of proactive.
Speaker Change: Approach a reactive approach just given given a lot of the refinance activity we saw.
Speaker Change: And in the second quarter.
Dwayne Hyzak: I'd say, Bryce, you heard us talk about the middle market being an area that we've been de-emphasizing for a while. I think when you look at the quarter-to-quarter change, we're down to less than 20 names. I forget if it's 18 or 19 individual portfolio companies. The movement of that portfolio is just going to be lumpy, and it's really going to come down to either a maturity date or refinancing opportunity. I think we were happy with what happened in the second quarter, but it's going to be lumpy quarter-to-quarter just based on what's going on.
Speaker Change: I'd say, you're right. So you've heard us talk about the middle market would be in an area that we've been deemphasizing for a while I think when you look at quarter to quarter change, we're down to less than 20 names I forget if it's 18 or 19.
Speaker Change: Individual portfolio companies.
Speaker Change: Movement of that portfolio is just going to be lumpy and it's really going to come down to either a maturity date or refinancing opportunity and I think we were happy with what happened in the second quarter, but it is going to be lumpy quarter to quarter just based upon what's going on how do you think the current environment you should be constructive are conducive to continued repayments, which will will welcome those opportunities as we continue to.
Dwayne Hyzak: I think the current environment should be constructive or conducive to continued repayments, and we'll welcome those opportunities as we continue to shrink that portfolio and move those assets or capital into the lower-middle market and private loan strategies. Okay, okay.
Speaker Change: To shrink that portfolio move those those kind of assets our capital into the lower middle market and private loan strategies.
Speaker Change: Okay. Okay.
Bryce Rowe: And then maybe, you know, last one for me. Dwayne, you talked about the, you know, as part of the possible take public of the MSC income fund, converting to a simply private loan strategy. Can you talk about why just go straight to private loans and kind of lose the lower middle market piece of that?
Speaker Change: And then maybe maybe.
Duane Hughes: Last last one for me I do Duane you talked about the.
Duane Hughes: As part of the possible take public of the MSC income fund.
Duane Hughes: Converting to <unk>.
Duane Hughes: It's simply private loan strategy can.
Duane Hughes: Can you talk about.
Speaker Change: Why why just go straight to private loan.
Robert Dodd: Hi guys, congratulations on the quarter. I mean, a conflict question is about a tight fight.
Speaker Change: And kind of lose the lower middle market piece of that.
Dwayne Hyzak: Here, Bryce, as you've heard us say in the past, we've been working with the MSC Income Fund Board for a while to try to determine what we collectively thought was the right long-term answer for the fund, so we've come up with something that we think is a really attractive opportunity, you know, both for Main Street and also for the shareholders of MSC Income Fund. And when you look at our ability to produce what we think are really, really attractive returns in our private loan strategy and couple that with what we think will be a best-in-class, you know, kind of fee structure, both from a base management fee and an incentive fee structure going forward for the shareholders of MSC Income Fund, you know, that was, from our perspective, the best way to deliver a really good long-term outcome.
Speaker Change: Sure, Brian So as you've heard us say in the past we've been working with the MSC income Fund board for a while.
Speaker Change: To trying to determine what we collectively thought was the right long term answer for the fun. So we've come up with something that we think is a.
Speaker Change: A really attractive opportunity both from main street, but also for the shareholders of MFC income fund and when you look at our ability to produce what we think are really really attractive returns in our private loan strategy and couple that with what we think will be a best in class.
Speaker Change: Kind of fee structure, both from a base management fee and incentive fee structure going forward for the shareholders of MFC income fund that was from our perspective, the best way to deliver a really good long term outcome when I say long term not one or two years, but you had 510 years plus a really good outcome for the shareholders of MFC income fund will again at the same time, providing.
Dwayne Hyzak: When I say long-term, not, you know, one or two years, but, you know, five, ten years plus, a really good outcome for the shareholders of MSC Income Fund while, again, at the same time, providing what we think is a really, really attractive outcome for Main Street. So we just think it's the right answer. We think it'll be something that's going to be very different than what you see from other publicly traded BDCs, given the areas that Nick and Sammy and our private credit team focus on. And to be able to deliver that different asset class with a best-in-class fee structure, we think that's going to be a positive outcome. Got it. Okay.
Speaker Change: What we think is a really really attractive outcome for main street.
Speaker Change: We just think it's the right answer we think it'll be something that is going to be very different than what you see from other publicly traded bdcs given the areas that that Nick and Sami and our private credit team focus on and to be able to deliver that different asset class with best in class fee structure, we think that's going to be a positive outcome got.
Bryce Rowe: Okay, that's all for me. I appreciate the time.
Speaker Change: Got it Okay. That's all for me appreciate the time.
Speaker Change: Thanks, Brian.
Mark Hughes: Thank you. And as a reminder, if anyone has any questions, you may press star one on your telephone keypad. Doing so will join you into the question and answer queue where you can ask a question. Our next question comes from the line of Mark Hughes with TruSecurities. Please proceed with your question.
Speaker Change: Thank you and as a reminder, if anyone has any question you May press star one on your telephone keypad doing so will join you into the question and execute well you can ask the question.
Speaker Change: Our next question comes from the line of Mark Hughes with <unk> Securities. Please proceed with your question.
Mark Hughes: Yeah, thank you. Good morning. What will be the impact of the listing of the external advisor on the... The income? Is there going to be any kind of near-term volatility, you know, maybe some increased expenses or reduced fees that may have some flow-through impact, presumably in the short term, but I hear what you're saying, that it will be very profitable in the long term.
Mark Hughes: Yes. Thank you good morning.
Speaker Change: Mark.
Mark Hughes: What will be the impact of the lifting of the external advisor on the.
Mark Hughes: The income.
Speaker Change: Is there going to be any kind of.
Speaker Change: Near term volatility and maybe some increased expenses are reduced.
Speaker Change: Fees that may have some flow through impact presumably in the short term, but I.
Speaker Change: Here, what youre, saying that it will be a very profitable in the long term.
Dwayne Hyzak: Sure, Mark. So just to try and give some color to the fees, we are proposing a decrease in the base management fee from 1.75 to 1.5 percent, so there will be a little bit of an impact there. Obviously, long term, if we're in a position between what we're doing here at Main Street and what we do at MSC Income Fund, if we're in a position to grow the assets, you should have a catalyst that goes in the other direction.
Speaker Change: Sure Mark So just to try and give some color to the fees. We are proposing a decrease in the base management fee from 175 to one 5% so there'll be a little bit of.
And impact there obviously long term if we're in position between what we're doing here at main street and what we do at MSC income fun. If we're in a position to grow the assets you should have a catalyst that goes the other direction. If we continue to have really good performance. You also get the benefit of the incentive fee. So we think there is potentially a little bit of a drag day, one just with the.
Dwayne Hyzak: If we continue to have really good performance, you also get the benefit of the incentive fee. Obviously, there's potentially a little bit of a drag day one just with the fee going from 1.75 to 1.5, but we think it's a minimal change, and we think it's the right answer for the long term when you look at what we think the outcome can be several years down the road with the growth of assets and growth of capital, access to debt capital markets, et cetera, the positives that should come out of the listing of the fund and the subsequent growth.
Speaker Change: The fee going from $1 75 to 1.5, but we think it's at a.
Speaker Change: A minimal change and we think it's the right answer for the long term when you look at what we think the outcome can be several years down the road with the growth of assets and grow the capital access to debt capital markets et cetera that the positive that should come out of the listing of defined in the subsequent growth.
Mark Hughes: Yeah, thank you. And then the markdowns related to the exposure to consumers, and you might have just addressed this a couple minutes ago, but if there's a broader rebound, if the economy gets on a better footing, would you see the investment mark? rebound there, or is it company specific?
Speaker Change: Yeah. Thank you and then the.
Speaker Change: Markdowns related to the exposure to consumer than you might've, just address a couple of minutes ago, but.
Speaker Change: If the if there is a broader rebound as the economy gets on a better footing would you see the investment marks.
Speaker Change: Rebound there or is it a company specific and I'm, sorry, I'm sorry, if you addressed this.
Dwayne Hyzak: Yeah, no, Mark, it's a good question. I think it's both. I mean, you know, these companies have faced headwinds from an industry standpoint, clearly, that's what we've been communicating for the last couple of quarters. So, that has not been positive, but these companies also have, you know, company-specific issues or challenges that they've been working through, at least, you know, several of them have. So, I think it's a combination of the two.
Dwayne Hyzak: I'm sorry if you address that. Yeah, no, Mark, it's a good question. I think it's both. I mean, you know, these companies.
Mark It's a good question I think it's both I mean these companies are faced some headwinds from an industry standpoint, clearly that's what we've been communicating for the last couple of quarters and so that has not been a positive but these companies also have company specific issues or challenges as they've been working through at least several of them do so I think it's a it's a combination of the two when we.
Dwayne Hyzak: When we look at, you know, the fair value marks going forward, you should not expect those fair value marks to rebound significantly next quarter. This will be a long-term process of us working with the portfolio companies and their management teams to figure out what the right long-term path is. And, you know, it's just going to take a while for that to play out, and it'll take a while before you see a significant improvement or recovery of fair value on those specific names.
Speaker Change: Look at the fair value marks going forward.
Speaker Change: Should not expect those fair value marks to rebound significantly next quarter. This will be a long term.
Speaker Change: Path of us working with the portfolio companies and their management teams to figure out what the right long term.
Speaker Change: Is that.
Speaker Change: That's just going to take a while for that to play out and it'll take a while before you see a significant improvement of recovery of our fair value on those specific names.
Thank you very much thank.
Thank you Mark.
Speaker Change: Thank you.
Operator: And this now concludes our question and answer session. I would like to turn the floor back over to management for closing comments.
Speaker Change: And this now concludes our question and answer session I would like to turn the floor back over to management for closing comments.
Dwayne Hyzak: We just want to say thank you again, everyone, for joining us this morning, and we'll look forward to talking to you again after our third quarter earnings release in early November. Thank you.
Speaker Change: I just want to say thank you again, everyone for joining us this morning, and we'll look forward to talking to you again after our third quarter earnings release in early November. Thank you.
Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines and have a wonderful day. [music]
Ladies and gentlemen, thank you for your participation. This does concludes today's teleconference. You may disconnect your lines and have a wonderful day.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Hum.
Dwayne Hyzak: I think we have been wrong for a while, but I think you're seeing it not just in our portfolio but, I think, broader across the US economy. You're seeing that. You're seeing that. You're seeing that.
Operator: Zach Vaughan, Mark Hughes, Robert Dodd, Erik Zwick, Dwayne Hyzak, and David Magdol