Q3 2024 Main Street Capital Corp Earnings Call
Speaker Change: Greetings and welcome to the Main Street Capital Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.
Speaker Change: A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan. Thank you. You may begin.
Zach Vaughan: Thank you, Operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's 3rd Quarter 2024 Earnings Conference Call.
Zach Vaughan: Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer, David Magdol, President and Chief Investment Officer, and Ryan Nelson, Chief Financial Officer.
Zach Vaughan: Also participating in the Q&A portion of the call is Nick Mazur, Managing Director and Head of Main Street's Private Credit Investment Group.
Zach Vaughan: Make sure you issued a press release yesterday afternoon that details the company's third quarter financial and operating results.
Zach Vaughan: This document is available on the investor relations section of the company's website at MainSTCapital.com
Zach Vaughan: A replay of today's call will be available beginning an hour after the completion of the call, and will remain available until November 15.
Zach Vaughan: Information on how to access the replay was included in yesterday's release.
Zach Vaughan: We also advise you that this conference call is being broadcast live through the internet and can be accessed on the company's home page.
Zach Vaughan: Please note that information reported on this call speaks only as of today, November 8, 2024, and therefore, your revised and time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
Today's call will contain four looking statements.
Zach Vaughan: 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.
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These statements are based on management's estimates.
Zach Vaughan: 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.
Zach Vaughan: 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.
Zach Vaughan: Main Street assumes no obligation to update any of these statements unless required by law.
Zach Vaughan: During today's call, management will discuss non-GAAP financial measures, including distributable net investment income, or DNII. DNII is net investment income, or NII, as determined in accordance with the U.S. Generally Accepted Accounting Principles.
or GAAP, excluding the impact of non-cash compensation expenses.
Zach Vaughan: Management believes that presenting D&II and the related per share amount are useful and appropriate supplemental disclosures for analyzing Main Street's financial performance since non-cash compensation expenses do not result in net cash impairment to Main Street upon settlement.
Zach Vaughan: Please refer to yesterday's press release for reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
Zach Vaughan: 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.
Zach Vaughan: NAV is defined as total assets minus total liabilities and is also reported on a per share basis.
Zach Vaughan: Mainstreet defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net assets.
Speaker Change: 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 Hyzak.
Dwayne Hyzak: Thanks, Zach. 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.
Dwayne Hyzak: On today's call, I will provide my usual update regarding our performance in the quarter. We'll also provide an update on our asset management activities, our recent dividend declarations.
Dwayne Hyzak: Our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates.
Dwayne Hyzak: Following my comments, David and Ryan will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, and our expectations for the fourth quarter, after which we'll be happy to take your questions.
Speaker Change: We're pleased with our performance in the third quarter, which resulted in an annualized return on equity of 18.8%.
Speaker Change: DNII per share that continues to exceed the dividends paid to our shareholders and a new record for NAV per share for the ninth consecutive quarter.
Speaker Change: 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.
Speaker Change: We are also pleased that we further enhanced our strong capital structure and liquidity position during the quarter, which Ryan will discuss in more detail, and we continue to maintain very strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment.
Speaker Change: We maintain attractive investment pipelines in both our lower middle market and private loan investment strategies, and we remain excited about the opportunities in our lower middle market and private loan investment portfolios and in our asset management business, each of which has us well positioned for the future and provide us a continued favorable outlook for the fourth quarter.
Speaker Change: We remain confident that these strategies, together with our cost efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future.
Speaker Change: Our positive results for the third quarter, combined with our favorable outlook for the fourth quarter, resulted in our recommendations to our board of directors for our most recent dividend announcements, which I'll discuss in more detail later.
Speaker Change: Our NAV per share increased in the quarter, primarily due to the impact of net fair value increases in our investment portfolio and our asset management business, and the accretive impact of our equity issuances, which Ryan will discuss in more detail.
Speaker Change: The continued favorable performance of the majority of our rural middle market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in the equity investments in our rural middle market portfolio.
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Speaker Change: We are also excited to have several portfolio companies in the advanced stages of completing strategic acquisitions, which if successful will provide the opportunity for additional future fair value appreciation in addition to providing as highly attractive incremental debt investments in these high-performing portfolio companies.
Speaker Change: We also 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 further highlights the strength and quality of our portfolio companies.
Speaker Change: Our lower middle market investment activity in the third quarter included total investments of $52 million, which after repayments and other investment activity, resulted in a net increase in lower middle market investments of $2 million.
Speaker Change: Although this investment activity was lower than our expectations for the quarter, we're pleased to have completed two new lower middle market platform company investments shortly after quarter end, which David will cover in more detail. And we expect to have additional lower middle market investment activity before year end.
Speaker Change: We're very pleased with our private loan investment activity in the quarter.
Speaker Change: This activity included total private loan investments of $309 million, which after repayments and other investment activity, resulted in a net increase in our private loan investments of $163 million.
Speaker Change: 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.
Speaker Change: We've also continued to produce positive results in our asset management business.
Speaker Change: The funds we advised through our external investment manager continue to experience favorable performance in the third quarter, resulting in significant incentive fee income for our asset management business for the eighth consecutive quarter, and together with our recurring base management fee.
a significant contribution to our net investment income.
Speaker Change: We also benefited from significant fair value appreciation and the value of our external investment manager due to a combination of the continued increase in income, growth in assets under management, and broader market-based drivers.
Speaker Change: 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, and about our strategy of growing our asset management business within our internally managed structure.
Speaker Change: As part of these efforts, we are very pleased with our progress in exploring a potential listing of the shares of MSC Income Fund, a non-listed BDC advised by our external investment manager.
Speaker Change: As detailed in MSG Income Fund's recent Definitive Proxy Statement, upon the approval of the fund's shareholders, and effective upon a listing of the fund's shares, the fund would transition its investment strategy to be solely focused on its private loan investment strategy.
accompanied by an amendment to its investment advisory agreement.
Speaker Change: to, among other things, align its fee structure with the Go Forward investment strategy.
Speaker Change: The Fund plans to hold a special meeting of its shareholders in early December to consider and vote on the proposals set forth in the Fund's Definitive Proxy Statement.
Speaker Change: each of which is intended to position the fund to listed shares.
Speaker Change: We are very excited about these potential activities and changes, which we believe represent significant catalysts to the future growth of the fund and the opportunity for significant future benefits to both the fund's shareholders and our asset management business.
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Speaker Change: Based upon our results for the third quarter combined with our favorable outlook in each of our primary investment strategies and for our asset management business.
Speaker Change: Earlier this week, our board declared a supplemental dividend of $0.30 per share, payable in December, representing our 13th consecutive quarterly supplemental dividend and an increase to our regular monthly dividends for the fourth quarter of 2025 to $0.25 per share.
Speaker Change: The first quarter regular monthly dividends are payable in each of January, February, and March, and represent a 4% increase from the regular monthly dividends paid in the first quarter of 2024.
Speaker Change: The supplemental dividend for December is a result of our strong performance in the third quarter.
Speaker Change: and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share.
Speaker Change: representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the trailing 12 months of over $4 per share and a current total yield we are providing to our shareholders of approximately 8%.
Speaker Change: We currently expect to recommend that our board continue to declare future supplementary dividends to the extent D&II significantly exceeds our monthly dividends paid in future quarters and we maintain a stable to positive NAB.
Speaker Change: Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional supplemental dividend table in March 2025.
Speaker Change: Concerning to our current investment pipeline, as of today, I would characterize our Goldman and Watson investment pipeline as above average.
Speaker Change: We believe that the unique and flexible financial 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, represent an attractive solution to the needs of many lower middle market companies.
Speaker Change: We are confident in our expectations for favorable lower middle market investment activity over the next few months.
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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 will characterize our private loan investment pipeline as average.
With that, I will turn the call over to David.
Thanks, Dwayne. Good morning, everyone.
David Magdol: As Dwayne highlighted in his remarks, we believe our strong third quarter financial results continue to demonstrate the strength of MainStreet's platform, our differentiated investment approach, and our unique operating model.
David Magdol: 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 third quarter financial results.
David Magdol: We did, however, experience continued softness in certain portfolio companies with consumer discretionary focused products or services which we have been monitoring for several quarters and we are actively working to maximize our recoveries on these specific investments.
David Magdol: 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 the equity of lower middle market companies.
David Magdol: In our view on the relative attractiveness of investing in the lower middle market remains unchanged, and we expect this will continue to be our primary area of focus in the future.
David Magdol: Each quarter we try to highlight key aspects of our investment strategy and differentiated approach.
David Magdol: For today's call, we thought it would be useful to spend some time discussing the support we provide to our lower middle market portfolio companies.
David Magdol: In addition to our ongoing investment management activities and the managerial assistance we offer to our lower middle market portfolio companies, we specifically want to highlight an annual event we host for the leaders of our lower middle market portfolio companies.
and Mark.
8th Annual Main Street President's Meeting
David Magdol: For those of you who are not familiar with our President's Meeting, it's an annual event Main Street hosts for our Lower Middle Market Portfolio Company leaders to network, build relationships, share best practices, learn from each other, and benefit from being part of Main Street's portfolio.
David Magdol: Based on post-event feedback we received from our lower middle market portfolio company executives, the event is highly valued by the participants and the event improves each year as we refine our agenda based on the feedback we received.
David Magdol: Topics covered in the most recent meeting included an M&A panel with several portfolio company CEOs,
Considerations for Effectively Utilizing Artificial Intelligence
Q&A on today's political landscape.
An Economic Update in Cybersecurity Best Practices.
David Magdol: As a result of this annual event, our portfolio companies have done business together, referred business to each other, utilized each other as operational resources, and made long-term friendships that are invaluable.
David Magdol: To provide more context, one panel we received very positive feedback on this year was focused on M&A best practices for add-on acquisitions.
David Magdol: The panel is comprised of a peer group of our lower middle market portfolio company leaders who led a discussion on the benefits of pursuing an add-on acquisition strategy, developing and executing a successful integration plan, and lessons learned while executing an external growth strategy.
David Magdol: We are highly confident the lessons learned that were shared by the panelists will be very helpful examples for other portfolio company executives to consider as they execute acquisition strategies in the future.
David Magdol: Another valuable topic we cover was best practices for a CEO considering using artificial intelligence in their business.
David Magdol: This session was led by an experienced industry expert who presented the benefits and potential pitfalls of AI.
David Magdol: The discussion explored various use cases, technical implications, and takeaways to evaluate how AI can be used to potentially accelerate and improve various business processes and sales and marketing strategies.
David Magdol: The engagement from the audience for both sessions was robust and led to several post-event discussions, including the sharing of key third-party resources and best practices that we believe will ultimately improve the financial results and operating performance for our portfolio companies in the future.
David Magdol: Given our focus on our lower middle market strategy and the unique benefits it can provide, we are excited to bring together the key leadership from our lower middle market portfolio companies at this highly effective Annual Presidents Meeting event.
David Magdol: We always leave the event very excited about the quality of the individuals leading our lower middle market portfolio companies and the future value creation that we expect they and their teams can generate for our mutual benefit in the future.
We left this year's event more excited than ever.
David Magdol: Now turning to the overall composition and results from our investment portfolio as of September 30th, we continue to maintain a highly diversified portfolio with investments in 193 companies spanning across numerous industries and then markets.
David Magdol: Our largest portfolio companies, excluding our external investment manager, represented only 3.6% of our total investment income for the trailing 12-month period, and 3.2% of our total investment portfolio fair value a quarter end.
David Magdol: The majority of our portfolio investments represented less than 1% of our income and our assets.
David Magdol: Our investment activity in third quarter included total investments in our lower middle market portfolio of $52 million, which after aggregate repayments on debt investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of $2 million.
Speaker Change: As Dwayne mentioned in his remarks, post-quarter end in the first half of October, we closed two additional lower middle market platform investments, representing an additional $116 million of invested capital.
Speaker Change: Driven by the capabilities and relationships of our private credit team, we also completed $309 million.
and Total Private Loan Investments.
Speaker Change: which after aggregate repayments and sales of several private loan portfolio debt investments and return of invested capital from a private loan portfolio company equity investment result in a net increase in our private loan portfolio of $163 million.
Speaker Change: Our private loan investment activity also included significant benefits of a $26 million realized gain on an equity investment that resulted in an impressive 5.6 times multiple of invested capital.
Speaker Change: At the end of the third quarter, our lower middle market portfolio included investments in 84 companies representing 2.5 billion dollars of fair value, which is over 28% above our cost basis.
Speaker Change: The total investment portfolio at fair value of quarter end was 115% of the related cost cases.
Speaker Change: 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 quarter end are included in the press release that we issued yesterday.
Speaker Change: With that, I'll turn the call over to Ryan to cover financial results, capital structure, and liquidity.
Ryan Nelson: Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the third quarter.
Ryan Nelson: Our total investment income for the third quarter was $136.8 million, increasing by $13.6 million, or 11% over the third quarter of 2023.
Ryan Nelson: and by $4.7 million or 3.5% for the second quarter of 2024.
Ryan Nelson: Our results for the third quarter of 2024 included strong levels of investment income, which as Dwayne and David touched on, demonstrates the continued strength of our differentiated investment and asset management strategies.
Ryan Nelson: Interest income increased by $11.2 million from a year ago and by $10.5 million when compared to the second quarter.
Ryan Nelson: The increase over the prior year was driven primarily by the impact of increased net investment activity
Ryan Nelson: over the last year, partially offset by the impact of an increase in investments on non-accrual status and a decrease in interest rates on our floating rate debt investments, primarily resulting from decreases in benchmark index rates.
Ryan Nelson: The increase over the prior quarter was driven primarily by the impact of increased net investment activity.
Ryan Nelson: Dividend income increased by $2 million, or 9.7%, when compared to a year ago, including a $3.5 million dividend.
Ryan Nelson: $300,000 increase in unusual or non-recurring dividends and decreased by $3.4 million or 12.9% from the second quarter after the impact of a $1.9 million decrease in unusual or non-recurring dividends.
Ryan Nelson: 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 third quarter.
Ryan Nelson: B income increased by $.4 million from a year ago and decreased by $2.4 million from the second quarter.
Ryan Nelson: The decrease in fee income over the prior quarter was primarily driven by lower closing fees on new and Fall 1 investments during the third quarter.
Ryan Nelson: Fee income related to refinancing and prepayment fees, considered non-recurring, decreased by $0.4 million compared to a year ago and decreased by $1 million compared to the second quarter.
Ryan Nelson: For the third quarter, the impact of certain income considered less consistent or non-recurring in nature, including dividends from our equity investments and accelerated prepayment, repricing, and other activity related to our debt investments, totaled $2.2 million.
Ryan Nelson: In the aggregate, these items were $2.4 million, or $0.03 per share, lower than the average of the prior four quarters, and $2.9 million, or $0.03 per share, lower than the second quarter, and $1.6 million, or $0.02 per share, higher than the third quarter of last year.
Ryan Nelson: Our operating expenses increased by $8.2 million from a year ago, largely driven by increases in interest expense, share-based compensation expense, and deferred compensation expense.
Thank you. Thank you.
Ryan Nelson: The increase in interest expense from a year ago was primarily driven by an increase in weighted average rate on our debt obligations and an increase in average borrowings to fund a portion of the growth of our investment portfolio.
Ryan Nelson: 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 among the lowest in our industry.
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Ryan Nelson: Our external investment manager contributed $7.9 million to our net investment income during the third quarter, representing an increase of $1.3 million from a year ago and a decrease of $1.3 million from the second quarter.
Ryan Nelson: The manager earns 2.4 million dollars in incentive fees during the quarter Decreasing by 0.2 million dollars from the prior year and 1.7 million dollars from the second quarter
Ryan Nelson: The manager ended the quarter with total assets under management of 1.6 billion dollars.
Ryan Nelson: During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized appreciation, on the investment portfolio of $48.1 million.
Ryan Nelson: We recorded net fair value appreciation of our external investment manager, our lower middle market portfolio, and our other portfolio partially offset by net fair value depreciation in our private loan portfolio and our legacy middle market portfolio.
Ryan Nelson: And an increase in the fees generated by the external investment manager driven by the continued strong performance of our asset management system.
Thank you for joining us.
Speaker Change: The net fair value appreciation in our lower middle market was largely driven by the continued positive performance of certain of our portfolio companies.
And that's Fair Value Appreciation, and...
Speaker Change: Our private loan portfolio was driven by the net impact of increases in market spreads and specific portfolio company underperformance.
Speaker Change: partially offset by the net fair value appreciation related to favorable exit of a portfolio company at a 25.5 million dollar realized gain in a quarter as David discussed.
Speaker Change: We ended the third quarter with investments on nonaccrual status comprising approximately 1.4 percent of the total investment portfolio at fair value and approximately 3.9 percent at cost.
Net Asset Value or NAV
Speaker Change: Our regulatory debt-to-equity leverage calculated as total debt excluding our SBIC debentures
Speaker Change: divided by net asset value was 0.69 times and our regulatory asset coverage ratio was 2.44 times. And these ratios continue to be more conservative than our long-term targets of 0.8, 0.9 times and 2.1 to 2.25 times respectively.
Speaker Change: We continue to be active in the quarter on capital activities. In September of this year, we issued an additional $100 million of unsecured notes maturing in June 2027, resulting in a yield to maturity of approximately 5.6% on such issuance.
Speaker Change: The additional issuance increased the total amount of our June 2027 notes to $400 million and we borrowed an additional $63.8 million from SBIC to Ventures, increasing our total outstanding amount to a $350 million regulatory limit.
Speaker Change: We also amended our SPV facility in September, increasing commitments by $170 million to $600 million, decreasing the interest rate by 25 basis points, and extending maturity to September 2029.
Speaker Change: We were also active in our At-The-Market, or ATM, program, raising net proceeds of $65.6 million during the quarter.
Speaker Change: After the investment in capital activities in the third quarter, we continue to maintain very strong liquidity, including cash and availability under our credit facilities in excess of $1.3 billion.
Speaker Change: 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 strategies.
Speaker Change: As we discussed last quarter, with the current level of liquidity, we currently expect to fund our new investment activity for the next few quarters through a greater portion of debt financing.
Speaker Change: As such, we would expect leverage to continue to increase during this time period to be closer to our long-term stated targets.
Speaker Change: Coming back to our operating results, as a result of strong performance for the quarter, our return on equity for the third quarter and the first nine months of the year was 18.8% and 17.4% on an annualized basis, respectively.
Speaker Change: DNII per share for the quarter of $1.06 was 2 cents or 1.9% higher than DNII per share for the third quarter of last year. It was 1 cent or 0.9% lower than the DNII per share for the second quarter.
Speaker Change: These results are the impact of certain investment income considered less consistent or non-recurring in nature, as I discussed earlier, which was $0.03 per share below the second quarter, $0.03 below the average of the last four quarters, and $0.02 below per share above the same quarter a year ago.
Speaker Change: Looking forward, given the strength of our underlying portfolio, we expect another strong top line in earnings order in the fourth quarter, with expected DNII of at least $1.08 per share.
Speaker Change: The potential for upside is 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 operators so we can take any questions.
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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we pull for questions.
Speaker Change: The first question is from Bryce Rowe from B. Reilly Securities. Please go ahead.
Thanks, good morning all.
from Brighsore.
Hey, I wanted to, um...
Dwayne, maybe start on your commentary around...
Speaker Change: Here to the to the fourth quarter. Just just wanted to make sure I'm kind of reading into that
Speaker Change: the right way, and then, you know, any commentary around, you know, the move from well above to above for lower middle market, and then within the private loan book going from well above to average.
Speaker Change: Sure, Bryce. Thanks for the question. I'll get some initial comments. I'll let David
Speaker Change: add on any additional comments he has. I think when you look at the lower middle market pipeline guidance, I'd say there's a couple of things. One is what we touched on in the script, we had a couple of investments that we were expecting or hoping would close in the third quarter that just slipped into the first.
Speaker Change: week or two of October, so that was about $115 million of
Speaker Change: The movement or underperformance relative to our expectations on lower middle market investment activity in the third quarter.
Speaker Change: Well, we've also had a number of transactions or investments that we were
Speaker Change: He was the owner-operator of the company, rethinking what he and they were doing and deciding to hold off on doing a transaction. So we had at least three transactions off the top of my head that, you know...
Speaker Change: Because of one of those two reasons, it did not end up closing in the third quarter and it won't close in the fourth quarter.
Despite that, we continue to feel good about the pipeline.
Speaker Change: We do have a number of transactions in the Louisville market.
Speaker Change: focus area or strategy that we expect to close between now and year-end, and if we achieve that, we think we'll be in good shape, you know, both for Q4 and heading into end of 2025.
Speaker Change: On the private loan side, I'd say the team there has been very active. If you look back, not just at the third quarter, but also the second quarter, we had a significant amount of investment activity. And I would say that the pipeline for that group as they executed those activities, you know, has just cooled off a little bit. So it's not a negative pipeline, but I'd say it's returned.
Thank you.
Speaker Change: Good deal. And Dwayne, you noted a pretty active third quarter for private loan.
Speaker Change: Can you talk a little bit about kind of what you're seeing from a pricing and terms perspective, especially in light of
Speaker Change: All the talk of spreads compressing and then obviously lower base rates that we're starting to see flow through portfolios. Any commentary around competitive levels within the private loan market around both pricing and terms?
Speaker Change: I'll give a couple of initial comments and I'll let Nick, our Managing Director that leads our private credit team, I'll let him add on anything.
that he has.
Speaker Change: I would say we obviously can't control the base rate, the market component, so that is what it is.
Speaker Change: Some pressure we continue to have the view based upon what we hear from other BDC's that are focused on the larger companies kind of the upper middle market that we're seeing less pressure than they are but we are seeing some pressure there and We we wish that pressure wasn't there, but we still find the spread levels
Speaker Change: and the quality of the investment opportunities to feel good for our strategy and investments that we think we can still do really well on.
Speaker Change: You'll respond to your question, but I'm happy to let Nick add any additional color.
Dwayne Hyzak: Dwayne, I think you nailed it there. I think we've really just seen a consistent tightening of 75 to 100 basis points over the year. I think we'll see a little bit more. We've probably seen 25 basis points since quarter end.
Speaker Change: We're seeing a few new competitors step in that might need to spend for the year, get their budget, and they're willing to come down on pricing to win some deals.
Speaker Change: That's helpful. Brian, just one other comment. I'd say that the significant activity we had in Q2 and Q3, we feel really good about it given some of that spread compression.
Speaker Change: Last one for me, you guys have certainly made the comment about maybe leaning into the available debt capital to fund, and just kind of curious, in the third quarter we saw net balance sheet leverage
Speaker Change: go down? Was that just your conservative nature, not knowing what might come here in the fourth quarter, just kind of...
Speaker Change: Curious why you didn't lean on that debt capital a little bit more in the third quarter. Relative to the comments about future quarters here, you'll likely use debt capital to fund new investments.
Speaker Change: Yeah, some of it was just our continued conservative nature, but I'd say the biggest factor was
Speaker Change: We had a really, really large lower middle market pipeline. Some of that pipeline did not come to fruition, so we were probably more active under the ATM program in the quarter than we would have otherwise been if we had known what the actual lower middle market activity was going to be.
Speaker Change: significant other than the expectations for that well-above-average lower middle market investment pipeline, you're not coming to fruition in the third quarter.
All right, I'll jump back in queue. Thanks, guys.
Thank you, Bryce.
Speaker Change: The next question is from Robert Dodd from Raymond James. Please go ahead.
Speaker Change: Hi guys, thank you. Just an immediate follow-on to that one from Bryce, first on, so the ATM usage obviously in Q3, you just explained why.
Speaker Change: Those deals have closed, well, some of them, at least, are closing in Q4. But, so should we expect lower ATM usage in Q4 because you essentially pre-funded, in a sense, the deals?
Speaker Change: with the ATM in Q3 that have been closed in Q4, or can you give us any color on like, you know, what the trends are going to be near term there without giving too much away?
Thank you.
Speaker Change: Yeah, Robert, I think that is the right conclusion. In the absence of the low amount of market pipeline, you're really building significantly from here. You should expect us to have less activity under the ATM and QPOR.
Speaker Change: Non-recurring dividend income was lower than normal average. I mean, it's not recurring, but it's typically happens This is so but it didn't happen as much this quarter. So was there any
Speaker Change: Any theme there? Was it, you know, were people holding on to maybe a little bit of incremental capital ahead of an election or something like that? Do you think that might catch on?
but any any thoughts there?
Speaker Change: I'll give a couple of comments and then again David can add on anything else he has, but I'd say the lower middle market portfolio continues to perform really well across the board.
Speaker Change: specifically for the companies that are the key contributors to dividend income, they continue to perform really, really well. So we're not seeing anything that is a concern. But as you've always heard us say,
Speaker Change: We have high levels of predictability and visibility to interest income.
Speaker Change: We don't have as much visibility or predictability on the dividend income, and it's not just the performance of the companies, but it's
Speaker Change: what they decide to do with their capital. I think we've mentioned that for a couple of quarters, we have several companies that are pursuing acquisition growth strategies, but if they're executing those strategies, they're likely going to be less focused on paying dividends. So, I think you see just some...
Speaker Change: some impact of that, but the other is just the quarterly, monthly variability from one quarter to the next that drives that. So nothing that's concerning on our side. It's just the normal variability. I will point out, you probably saw this in the results, or if you didn't, you'll see it when you get the 10-Q. But one part of the
Speaker Change: The dividend income movement quarter to quarter was on the asset management business, so you saw less incentive fees come through and that has a direct impact on dividend income, so just make sure you've caught that when you look at the quarter over quarter fluctuation.
Thank you, I did catch that. Sorry, go ahead.
Speaker Change: All I was going to say is to echo Dwayne's comments, there's nothing...
Speaker Change: thematically in the portfolio that's being called back. You just have various contributors that are not only pursuing acquisition strategies, but also reinvesting in their own platform by way of assets and new product innovation and such. So it just ebbs and flows quarter by quarter. There's nothing thematic there.
Speaker Change: Got it, thank you. And one more, you mentioned a realized gain, I think in the private loan portfolio, I think a $26 million realized gain.
Speaker Change: on that side, was that after quarter end or was that in, I haven't gone through it yet, but can you give me, what was the source of that and was it after quarter end? And if it was, was that asset also held?
Speaker Change: And is it going to affect the incentive fee income from the asset manager if it was in Q4? I'm just trying to figure out when that actually happens.
Speaker Change: It was in Q3, Robert. It will not impact the incentive base.
Got it. Thank you.
Thank you.
Speaker Change: As a reminder, to ask a question, please press star 1.
Speaker Change: The next question is from Mark Hughes from Truist Securities. Please go ahead.
Yeah, thank you. Good morning.
One more?
Speaker Change: Just out of curiosity, was the lower middle market activity influenced by the election?
For more information visit www.FEMA.gov
Speaker Change: Now, I don't think we would say it was influenced by the election at all.
Speaker Change: Like I said in the earlier response to Bryce, it was in two situations, you know, when you get into due diligence, you're expecting certain things. If those things aren't there, we're going to be very consistent and we may want to still move forward, but at different terms. And when you have that happen, the other side has to agree to that. I'd say in at least two of those situations, it was...
Speaker Change: Dwayne Hyzak, David Magdol, Dwayne Hyzak, David Magdol, Dwayne Hyzak, David Magdol, Dwayne
Yeah.
Speaker Change: And on non-accruals, just a slight uptick. I think you'd mentioned the consumer discretionary. You're continuing to work through that. Any sense on timing or kind of what end markets that might be in where you could potentially see improvement?
Speaker Change: Yeah, that new diner crewle was also in a business focused on the...
Speaker Change: The consumer so it's kind of a consistent or continued your trend there. I do think that
We expect to see significant progress on that specific
Speaker Change: name over the next couple of months, you know, whether it happens in Q4 or early Q1 remains to be seen, but we do expect to see progress there. But in each of these situations that we have, it's a consumer-focused business. Yeah, I think we expect it to be a longer-term road to recovery as opposed to something that's going to happen quickly.
Yeah, we didn't you know
Speaker Change: as a whole continues to perform well. I do think if you looked at it...
Speaker Change: and kind of put it into three buckets, you know, companies over-performing.
Speaker Change: On one end, companies underperforming on the other, and then a bunch of companies kind of in the middle. The companies on the right end of that, the overperforming side, are really, really, you know, continue to perform exceptionally well. You know, the groups in the middle, I'd say, you know, probably flat to maybe just slightly down a little bit. Nothing concerning, but, you know, definitely, you know, a portfolio where the really good performers are just performing exceptionally well.
Speaker Change: Yeah, then you talked about the premade prepayment activity or repayment activity that
Maybe some banks.
Regional banks getting involved selectively.
Speaker Change: How far through that process would you say you are? Is there much more to go in your portfolio or is that stabilized?
Speaker Change: You know, I'd say, Mark, that the regional banks or local banks we come across is usually more idiosyncratic, where
They've banked the company in the past.
and as before, privately sponsor POPDOM.
Speaker Change: They didn't take part in the buyout, and then they come back a year or two, two years into it after it's performed well, and step in and refinance us at a much cheaper rate.
Obviously, we're not going to battle it that way.
Speaker Change: and it was a local band that had been playing that song.
Speaker Change: The local bank had financed that company for, you know, a decade plus before we got involved.
Speaker Change: yeah yeah so no particular trend they're just idiosyncratic as you say
Speaker Change: Exactly. It's not, I'd say it's much, you know, much more localized banks than a regional bank.
Thank you.
Thanks, Mark.
Speaker Change: This concludes the question and answer session. I would like to turn the floor back over to management for closing comments.
Speaker Change: We just want to say thank you again everyone for joining us this morning. We appreciate your long-term interest and support of Main Street. We'll look forward to talking to you again in late February after our year-end earnings release.