Q4 2024 Main Street Capital Corp Earnings Call
Thank you for watching!
Speaker Change: Joining me today with prepared comments are Duane <unk>, Chief Executive Officer, David <unk>, President and Chief Investment Officer, and Ryan Nelson Chief Financial Officer.
Speaker Change: Also participating in the Q&A portion of the call are Jesse Morris, Chief operating Officer, and Nick, Missouri, Managing director and head of main Street's private credit investment group.
Speaker Change: Main Street issued a press release yesterday afternoon that details the company's fourth quarter and full year financial and operating results.
This document is available on the Investor Relations section of the company's website at Maine S T capital Dot com.
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 March seven.
Speaker Change: Information on how to access the replay was included in yesterday's release.
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 February 28, 20 and.
Thank you.
Speaker Change: You are advised the 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.
Speaker Change: 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.
Speaker Change: Actual results may differ materially from the results expressed or implied.
Speaker Change: 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.
Speaker Change: Main Street assumes no obligation to update any of these statements unless required by law.
Speaker Change: During today's call management will discuss non-GAAP financial measures, including distributable net investment income or DNI.
Speaker Change: The NII or net investment income or.
Speaker Change: NII as determined in accordance with U S generally accepted accounting principles or GAAP.
Speaker Change: Excluding the impact of noncash compensation expenses.
Management believes that presenting the NII and the related per share amount are useful and appropriate supplemental disclosures for analyzing main streets financial performance.
Speaker Change: Noncash compensation expenses did not result in a net cash impact to mainstreet upon settlement.
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.
Two additional key performance indicators that management will be discussing on this call our net asset value or an Eva and return on equity Roe.
Speaker Change: <unk> is defined as total assets minus total liabilities and Theres also reported on a per share basis.
Speaker Change: Make sure you find the ROE is the net increase and net assets, resulting from operations divided by the average quarterly total net assets.
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.
Speaker Change: And now I'll turn the call over to main Street's CEO Dwayne <unk>.
Speaker Change: Thanks Zack.
Speaker Change: Good morning, everyone and thank you for joining US. We appreciate your participation on this morning's call. We hope that everyone is doing well.
On today's call I'll provide my usual updates regarding our performance in the fourth quarter, while also providing a few updates on our performance for the full year.
Speaker Change: I'll also provide updates on our asset management activities. Our recent dividend declarations are expectations for dividends going forward, our recent investment activities and current investment pipeline and several other noteworthy updates.
Speaker Change: Following my comments, David and Ryan will provide additional comments regarding our investment strategy.
Speaker Change: My portfolio financial results.
Speaker Change: Capital structure and liquidity.
Speaker Change: Expectations for the first quarter of 2025, after which we'll be happy to take your questions.
Speaker Change: We are extremely pleased with our fourth quarter results, which closed another great year for main street as highlighted by our record annualized return on equity of 25, 4% for the quarter.
Speaker Change: Our positive performance in all four quarters for the year, resulting in a return on equity of 19 four.
Speaker Change: 4% for the full year strong levels of NII per share in DNI per share to fund our record level of annual shareholder dividends and a new record for NAV per share for the 10th consecutive quarter.
Speaker Change: We believe that these continued strong results demonstrate sustainable strength of our overall platform the benefits of our differentiated and diversified investment strategies.
Speaker Change: The unique contributions of our asset management business and the continued underlying overall strength and quality of our portfolio companies.
Speaker Change: Our continued positive performance allowed us to increase our total dividends paid to our shareholders in the fourth quarter by 6% over the prior year, resulting in an 11% increase for the full year.
Speaker Change: This allowed us to continue our trend of increasing the dividends paid to our shareholders over the last few years, while also continuing to generate D NII per share, which exceeds the total dividends paid to our shareholders.
Speaker Change: We continue to be encouraged by the favorable overall performance of the companies in our diversified lower middle market and private loan investment portfolios and remain confident that these strategies together with the benefits of our asset management business.
Speaker Change: Our significant available liquidity and.
Speaker Change: And our cost efficient operating structure will allow us to continue to deliver superior results for our shareholders in the future.
Speaker Change: These positive results combined with our favorable outlook for the first quarter resulted in our recommendations to our board of directors for our most recent dividend announcements, which I 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.
Speaker Change: Including the benefit in the quarter from the largest realized gain in our firms history and continued benefits from our asset management business.
Speaker Change: Ryan will discuss our NAV per share increase in more detail.
Speaker Change: The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of strong dividend income contributions and speaking again.
Speaker Change: Net fair value appreciation in our lower middle market equity investments.
Speaker Change: The realized gains that I referenced was a $54 million realized gain on the exit of our equity investment in Pearl Meyer, which we believe is a great example of the unique benefits of our lower middle market investment strategy, and which resulted in significant benefits for main street and our Pearl Meyer management team partners.
Speaker Change: The benefits from Mainstreet included significant dividend income.
Speaker Change: Depreciation and unrealized gain resulting in best in class returns on our equity investment. In addition to the attractive interest income provided by our debt investments.
Speaker Change: As highly attractive investment also has one of the biggest benefits we provide to our portfolio of companies through our lower middle market investment strategy, which is the ability of our portfolio companies to execute significant growth through acquisitions with the acquisitions funded 100% by debt financing from main street, thereby allowing the management team to execute significant value creation.
Speaker Change: Without experienced dilution of their existing ownership percentage.
Speaker Change: We continue these types of value, creating activities in the fourth quarter and are excited.
Speaker Change: At about the follow on investments, we made to finance strategic acquisitions by three 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.
Speaker Change: We expect that these follow on investments will provide the opportunity for additional future fair value appreciation. In addition to providing us the highly attractive incremental debt investments in these high performing portfolio of companies.
Speaker Change: Consistent with my comments over the last few quarters. We also continued to see increased interest from potential buyers in certain portfolio companies that could lead to favorable realizations over the next few quarters further highlighting the strength and quality of our portfolio companies alumina market investment activity in the fourth quarter included total investments of $168 million.
Speaker Change: Including investments totaling $116 million in two new portfolio companies, which together with the elevated repayment activity in the quarter, primarily due to the Pearl Meyer exit resulted in a net increase in our lower middle market investments of $11 million.
Speaker Change: Our private loan investment activities in the quarter included total investments of $108 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $7 million.
Speaker Change: We've also continued to produce favorable results in our asset management business.
Speaker Change: The funds, we advised through our external investment manager continued to experience favorable performance in the fourth quarter, resulting in significant incentive fee income.
Our asset management business for the ninth consecutive quarter and together with our recurring management fees, a significant contribution to our net investment income.
Speaker Change: We also benefited from significant fair value appreciation in the value of our external investment manager due to a combination of the continued increase in fee income.
Speaker Change: 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 explore other strategic initiatives and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund and about our strategy for growing our asset management business within our internally managed structure.
Speaker Change: As part of our efforts to grow our asset management business. We are very pleased that in late January <unk> income fund a BDC advised by our external investment manager and our largest asset management business initiative.
Speaker Change: Essentially completed our listing on the New York stock exchange and a public equity offering in which the fund raised net equity proceeds of $91 million.
Speaker Change: We were very pleased that the listing an equity offering which resulted in the fund being able to accelerate the timing and increase the size of the offering.
Speaker Change: We're very excited about our future plans for Missy income fund and believe that the funds listing an equity offering along with the transition of its investment strategy and investment portfolio to be solely focus on calling besting with main street and our private loan investment strategy provides <unk> the ability to continue to provide its shareholders with a very attractive source of recurring dividend.
Speaker Change: Income and attractive total shareholder returns and also provides significant future benefits to main street through the opportunity to grow the asset management fees that our external investment manager receives from the fund as it executes its growth plans.
Speaker Change: Based upon our results for the fourth quarter combined with our favorable outlook in each of our primary investment strategies and for our asset management business earlier. This week, our board declared a supplemental dividend of <unk> 30 per share payable on March representing our 14th consecutive quarterly supplemental dividend.
Speaker Change: And regular monthly dividends for the second quarter of 2025 of 25 per share payable in each of April may and June representing a 4% increase from the second quarter of 2024.
Speaker Change: The supplemental dividend for March as a result of our strong performance in the fourth quarter and will result in total supplemental dividends paid during the trailing 12 month period of $1 20 per share representing an additional 41% paid to our shareholders in excess of our regular monthly dividends.
Speaker Change: We currently expect to recommend that our board continue to declare future supplemental dividends to the extent D. NII significantly exceeds 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 first quarter. We currently anticipate proposing an additional supplemental dividend payable in June 2025.
Speaker Change: Now turning to our current investment pipeline.
Speaker Change: As of today, I would characterize our lower middle market investment pipeline as average with several new investments scheduled to close before quarter end.
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 represent an attractive solution to the needs of many lower middle market companies and despite the current broad economic uncertainty we are confident in our expectations for favorable.
Speaker Change: Lower middle market investment activity over the next few months.
Speaker Change: We also continue to be very pleased with the performance of our private credit team and a significant growth they have provided for our private loan portfolio.
Speaker Change: And our asset management business and as of today.
Speaker Change: Also characterize our private loan investment pipeline as average.
David: With that I will turn the call over to David.
David: Thanks, Dwayne and good morning, everyone.
David: Each year and provides a good opportunity to look back at our history and highlight the result of our unique and diversified investment messaging strategies and discuss how these strategies have enabled us to deliver highly attractive returns to our shareholders over an extended period of time.
David: Since our IPO in 2007, we have increased our monthly dividend per share by 127%. We have declared cumulative total dividends to our shareholders of almost $45 per share or approximately three times, our IPO price of $15 per share.
David: Our total return to shareholders since our IPO calculated using our stock price as of yesterday's close and assuming reinvestment of all dividends received since our IPO with 16 times money invested.
David: This compares favorably to the $4 four times money invested for the S&P 500 over the same period of time and a significantly higher when compared to other bdcs.
David: As we've previously discussed we believe that the primary drivers of our long term success has been and will continue to be our focus on making both debt and equity investments in the underserved lower middle market.
David: Our private credit investment activities for the benefit of our stakeholders and to the clients of our asset management business.
David: Our internally managed structure, which allows us to maintain an industry, leading cost structure and a strong alignment of interest between our employees and our shareholders as a result of our team's meaningful stock ownership.
Most notably and uniquely our lower middle market strategy provides attractive leverage points, an income yield on our first lien debt investments, while also creating a true partnership with the management teams and other equity owners of our portfolio of companies through our flexible and highly aligned equity ownership structures.
David: This approach provides us significant downside protection through our first lien debt investments and preferred equity position, while still providing the benefits of significant upside potential through our equity investments.
David: Main street's long term historical track record of investing in the lower middle market, coupled with our view that this market continues to be underserved gives us confidence that we will be able to continue to find attractive new investment opportunities and the primary area of investment focus for our business.
David: Our ability to provide highly customized and differentiated capital solutions for the predominantly family owned businesses that exist in the lower middle market has been and continues to be a strong differentiator for us.
David: In 2024 main street invested $466 million in our lower middle market strategy.
David: $228 million of this capital is deployed seven new lower middle market platform companies with the remaining $238 million predominantly representing follow on investments in existing.
David: And well performing lower middle market companies.
David: Consistent with our comments in prior quarters. The majority of these follow on investments were made to support growth strategies in some of our highest performing portfolio of companies, which makes this aspect of our lower middle market investment activity very exciting for us.
David: Our follow on investments are typically used to support multi decade, including acquisitions.
David: <unk> geographic expansion opportunities and recapitalization transactions.
David: Most importantly, these follow on investments are made in support of proven management teams that we believe.
David: Ah represents significantly less investment risk when compared to providing capital to new investments portfolio company.
David: Since we are a significant equity owners in our lower middle market companies. We also benefit from participating alongside the prudent manager in these businesses as they strive to achieve meaningful equity value creation.
David: As we have stated in the past as our lower middle market portfolio companies perform over time that naturally deleverage of free cash flow generated from operations.
David: This allows us along with our lower middle market portfolio management team partners to benefit from a larger portion of the portfolio of companies' cash flow after debt service, which can be available for distribution to the equity owners.
David: Given the strength and quality of our lower middle market portfolio, and our long term holding period for many of our companies. We expect dividend income to continue to be a significant contributor to our results in 2025 and in the future.
David: Additionally, this deleveraging coupled with the attractive overall strong operating results from our lower middle market portfolio companies allowed us to achieve a $120 million and net fair value increases in 2024 for our lower middle market portfolio, including the largest realized gain in our firm's history.
David: The benefit from realized gains on our lower middle market equity investments is unique to us among our BDC peers and provides the opportunity to offset losses, which will naturally incur when investing in non investment grade asset classes.
David: As our lower middle market equity investments perform they also provide us the opportunity for unrealized depreciation which allows us to continue to grow our <unk>, which is an opportunity that the investment strategies of other bdcs simply do not have.
Speaker Change: A great example of our lower middle market equity investment that highlights the benefits of our unique investment strategy with the exit from our portfolio company Pearl Meyer that Dwayne mentioned in his remarks.
Speaker Change: We completed the exit in our investment in Pearl Meyer in the fourth quarter, which resulted in a realized gain of $54 million.
Speaker Change: In addition to the realized gain achieved upon exit from our also distributed total dividends to us at $32 million over the lifetime of our investment.
Speaker Change: As a result on a cumulative basis since our initial investment in April 2020, and taking the realized gain and dividends into consideration we realized an annual internal rate of return of 69% and seven seven times money invested return on our equity investment.
Speaker Change: Including all debt and equity investments in Pearl Meyer Mainstreet realized an IRR of 33%.
Speaker Change: The last important area I'd like to cover regarding our 2020 for accomplishment of the impressive contributions that are private credit team delivered during the year.
Speaker Change: Our private credit team continued to execute on our strategy to dedicate significant resources towards growing the private loan segment of our business, which we believe provides a very attractive risk adjusted return profile for us and for the clients of our asset management business.
Speaker Change: During 2024, we completed growth investments of approximately $900 million in our private loan strategy and grew the cost bases of our private loan investment portfolio by $449 million.
Speaker Change: As a result of these investment activities, our private loan portfolio represented 46% of our total investment at cost at year end and our middle market portfolio declined to represent less than 5% of our total investments at cost.
Speaker Change: As Dwayne discussed earlier, our private loan capabilities are also the primary driver of our strategic objective to continue to grow our asset management business.
Speaker Change: As of December 31, we had investments in 190 portfolio companies spanning across numerous industries and end markets are.
Speaker Change: Our largest portfolio of company, excluding the external investment manager represented only three 3% of our total investment income for the year and only three 8% of our total investment portfolio fair value at year end.
Speaker Change: The majority of our portfolio investments represented less than 1% of our income and our assets.
Speaker Change: Now turning to our investment activity in the fourth quarter, we made total investments in our lower middle market portfolio of $168 million, including investments of $116 million in two new lower middle market portfolio companies.
Speaker Change: Which after aggregate repayments on debt investments return of invested equity capital from several equity investments and a decrease in the cost basis due to realized losses on certain portfolio investments resulted in a net increase in our lower middle market portfolio of $11 million.
Speaker Change: During the quarter, we also completed $108 million in total private loan investments, which after aggregate repayments of debt investments and a decrease in cost basis due to a realized unrealized losses on several portfolio investment resulted in a net increase in our private loan portfolio of $7 million.
Speaker Change: At year end, our lower middle market portfolio included investments in 84 companies, representing $2 5 billion of fair value, which is 29% above our related cost basis.
Speaker Change: We had investments in 91 companies in our private loan portfolio, representing $1 9 billion at fair value.
Speaker Change: The total investment portfolio at fair value at year end was 16% above our related cost basis.
Speaker Change: Additional details on our investment portfolio at year 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 our financial results capital structure and liquidity position.
Ryan: Thank you David.
Ryan: Dwayne and David comments, we are pleased with our operating results for the fourth quarter, which included a number of quarterly records and capped the year in which main street achieved records for net investment income and distributable net investment income and net assets.
Ryan: Net asset value per share.
Ryan: Our total investment income for the fourth quarter was $140 4 million incur.
Ryan: Increasing by $11 1 million or eight 6% over the fourth quarter of 2023 and by $3 6 million or two 6% from the third quarter of 2024.
The positive momentum we experienced during the first three quarters continued into the fourth quarter and culminated in a year with strong levels of interest dividend and fee income, which again demonstrated the continued strength of our differentiated investment and asset management strategies.
Ryan: Interest income increased by $9 3 million from a year ago and decreased.
Ryan: Zero point $6 million when compared to the third quarter the.
Ryan: The increase over the prior year was driven primarily by the impact of increased net investment activity over last year, partially offset by the impact of an increase in investments on nonaccrual status and a decrease in interest rates on our floating rate debt investments, primarily resulting from decreases in benchmark index rates.
Ryan: The decrease from the third quarter was primarily driven by the impact of decreases in interest rates on our floating rate debt investments, partially offset by an increase in net investment activity.
Ryan: Dividend income increased by <unk> 7 million or three 1% when compared to a year ago, including a zero point $2 million increase in unusual or nonrecurring dividends and increased by $1 $3 million or five 5% from the third quarter, including a zero point $3 million increase in.
Ryan: Unusual or non recurring dividends.
Ryan: The increases in dividend income are result of the continued underlying strength of our portfolio companies.
Ryan: Fee income increased by $1 1 million or 23, 3% from a year ago and increased by $2 9 million or <unk> 96, 6% from the third quarter of 2024.
Ryan: The increase in fee income from the prior year was primarily driven by higher closing fees on new and follow on investments, partially offset by a decrease from accelerated amortization and an exit prepayment and amendment fees driven by investment activity.
Ryan: The increase in fee income over the third quarter, primarily driven by higher closing fees on new and follow on investments during the fourth quarter and increased prepayment and amendment fees driven by investment activity.
Ryan: Prepayment and other fee income considered nonrecurring decreased by <unk> 2 million compared to a year ago and increased by $1.
Ryan: Compared to the third quarter of 2024.
Ryan: The fourth quarter included reduced levels of income considered less consistent or nonrecurring in nature in comparison to the fourth quarter of 2023 and elevated levels of income considered less consistent or nonrecurring in nature in comparison to the third quarter of 2024, including dividends from our equity investments and accelerated prepayment and repricing and other.
Ryan: Activity related to our debt investments.
Ryan: In the aggregate these items totaled $3 $7 million and were $1 3 million or <unk> <unk> per share lower compared to the average of the prior four quarters.
Ryan: $6 million or <unk> <unk> per share lower than such items in the fourth quarter of 2023, and $1 5 million or <unk> <unk> per share higher than the third quarter of 2024.
Ryan: Our operating expenses increased by $10 $9 million over the fourth quarter of 2023, largely driven by increases in interest rate expense and compensation related expenses, partially offset by an increase in expenses allocated to the external investment.
Ryan: The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund a portion of the growth of our investment portfolio and an increase in the weighted average rate on our debt obligations.
Ryan: The ratio of our total operating expenses, excluding interest expense as a percentage of our total of our average total assets was 1% for the quarter on an annualized basis and for the year and continues to be among the lowest in our industry.
Our external investment manager contributed $8 $7 million to our net investment income during the fourth quarter, representing a decrease of <unk> $5 million from the same quarter, a year ago, which resulted in a total of $34 $3 million for the year, representing an increase of $1 million or 3% over the prior year.
Ryan: The manager earned $3 $4 million incentive fees during the quarter and $13 $7 million for the year, representing a decrease of <unk> 5 million and an increase of <unk> $3 million, respectively over the same period in the prior year.
Ryan: The manager ended the quarter with total assets under management of $1 6 billion.
Ryan: During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized appreciation on the investment portfolio of $88 million.
Ryan: This increase was driven by net fair value appreciation in our lower middle market portfolio, and our external investment manager, partially offset by net fair value depreciation in our private loan portfolio and certain of our other portfolio investments.
Ryan: 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.
Ryan: The net fair value depreciation in our private loan portfolio was driven by the impact of specific portfolio company underperformance, partially offset by decreases in market spreads.
Ryan: The fair value appreciation of our external investment manager with a result of a combination of increases in the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation purposes, and an increase in the fee income generated by the external investment manager.
Ryan: We ended the fourth quarter with investments on nonaccrual status comprising approximately.
Ryan: 9% of the total investment portfolio at fair value and approximately three 5% at cost.
Ryan: Net asset value or NAV increased by $1 <unk> per share over the third quarter and by $2 45, or eight 4% when compared to a year ago.
Ryan: To a record <unk> NAV per share of $31 65 at year end.
Ryan: Our regulatory debt to equity leverage calculated as total debt, excluding our <unk> debentures.
Ryan: <unk> net asset value was six four times and our regulatory asset coverage was 256 times and these ratios continued to be more conservative than our long term target ranges of eight to nine times and $2. One two to two five times respectively.
Ryan: Given our current liquidity position, we were less active during the fourth quarter and our at the market or ATM program, raising net proceeds of $8 $9 million from equity issuances.
Ryan: After giving effect to the capital activities in 2024, we entered 2025 with strong liquidity, including cash and availability under our credit facilities in excess of $1 4 billion with one near term debt maturity of $150 million in December of 2025.
Ryan: We continue to believe that our conservative leverage strong liquidity and continued access to capital our significant strengths that are proven to benefit as historically and have us well positioned for the future allow us to continue to execute our attractive investment strategies.
Ryan: As discussed last quarter with this current level of liquidity. We currently expect to fund our new net investment activity in 2025% to a greater portion of debt financing and as such we would expect leverage to continue to increase during this time to.
Ryan: To be closer to our long term stated targets.
Ryan: Okay.
Ryan: However, we expect to continue to operate throughout the year at leverage levels more conservative than our long term targets.
Coming back to our operating results as a result of our strong performance for the quarter and year. Our return on equity for the fourth quarter was 25, 4% on an annual annualized basis and 19, 4% for the year.
Ryan: <unk> D NII per share for the quarter of $1 eight decrease from D. NII per share for the fourth quarter of last year by <unk> four.
Ryan: Or three 6% and exceeded the NII per share for the third quarter by <unk> <unk> per share or one 9%.
Ryan: The combined impact of certain investment income considered less consistent or nonrecurring in nature on a per share per share basis was <unk> <unk> per share below the average of the last four quarters <unk> <unk> per share below the same quarter, a year ago, and <unk> <unk> per share above the third quarter for the year. These items were <unk> <unk> per share below 2012.
Ryan: Three levels.
Ryan: Looking forward, we expect headwinds on top line earnings related to the decrease in floating market index rates, but given the strength of our underlying portfolio. We expect another strong earnings quarter in the first quarter of 2025 with expected Eni of at least $1 <unk> per share with potential for upside driven by portfolio investment activities during the quarter.
Ryan: But we would also expect that we would recommend to our board declared another supplemental dividend in the second quarter with that I'll now turn the call back over to the operator, so we can take any questions.
Ryan: 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.
Ryan: Confirmation tone will indicate your line is in the question queue.
Ryan: You May press Star two 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.
Ryan: Please for your first question.
Speaker Change: Our first questions come from the line of Robert Dodd with Raymond James. Please proceed with your questions.
Speaker Change: Hey, Robert can you check if yourself muted please.
Speaker Change: I am southmead it I apologize.
Speaker Change: On the quarter in coal mining in particular.
Speaker Change: No.
Speaker Change: Segue in for Matt.
Speaker Change: Can you give us any color on.
Speaker Change: Exposure in the portfolio.
Speaker Change: Potential tariff issues or government efficiency initiatives.
Speaker Change: It's not that first rodeo with tariffs.
Speaker Change: Or is that pretty well before but could you just give us any thoughts on that given.
Speaker Change: The economic environment works.
Speaker Change: What's coming out of D C at the moment.
Speaker Change: Sure Robert we're happy to do that so good morning, and thanks for the for the question I would say on the tariff topic I clearly we're in some very interesting down here.
And I think our view is that if the tariffs are implemented and maintain the way that they are being discussed right now that theres, many businesses and industries in the U S and theyre going to have some issues or some exposure just given the global nature of the business world today.
Speaker Change: I'd say when you look at our portfolio as it were we're no different there are certain companies in our portfolio that will definitely have an impact, but as you probably heard us say in the past we do have a very very diverse portfolio. We think that's a benefit and all periods. We think it would also be a benefit.
Speaker Change: When you look at the potential impact of tariffs going forward. We also look at the.
Speaker Change: The companies that we have.
Speaker Change: <unk> heard us say in the past, particularly in the lower middle market. These are largely U S domestic focused businesses, both customers and vendors.
Speaker Change: Are you going to be more focused from a U S. Domestic standpoint, so while we will be impacted if we compare our expected impacts to the broader U S. Economy, we do think that our impacts will be less so not that we won't be impacted but we think it will be a favorable comparison.
Speaker Change: Our relative to other parts of the U S economy, but despite that view is I think you'd probably expect I'd say, we have been and we are actively working with our portfolio companies to make sure that they are being diligent in looking at their plans or playbooks to deal with the issues that could come about as you just add in your comments they dealt with this kind of thing.
Speaker Change: For both with COVID-19 supply chain issues, and then tariffs historically and then more recently the kind of high inflation period. So we think that our companies and their management teams have dealt with these types of issues in the past and when we look at our performance since.
Speaker Change: Since Covid, we think they've done a really good job of dealing with the uncertainty that has existed in a number of different fronts and we would.
Speaker Change: Hopefully that they can continue to navigate things in a positive manner, but we are clearly focused on it spending time on it we will continue to focus on that.
Speaker Change: With our management teams and our companies you've heard US also say this before but one of the things we've always loved about the lower middle market is that we do think we have best in class management teams I think we've proven that over the last five to 10 years with the performance in the lower middle market. So these are great operators that are also very very much aligned with us much more focused on their equity ownership position.
Speaker Change: As opposed to just a paycheck or a bonus so we think that they manage their businesses in a very productive manner and because of the size of the companies when they execute a plan that plan can actually have an impact very very quickly. So we think those are all positive. So I think it'll be interesting to see how this plays out not just for us but for the.
Speaker Change: More broad U S economy, but I think we feel that we're in good shape relative to others and are confident in the abilities of our teams to manage it on your second question or topic about <unk>.
Speaker Change: The impacts from our government efficiency standpoint, I'd say, we have some limited exposure there. There's a couple of a couple of companies that we can think of that have significant exposure and obviously, we're just like we are on the on the tariff topic, we're talking to those companies and those management teams frequently to stay up to date on what's going on but also you do what we can to help them plan and.
Speaker Change: One of those companies I would say has a lot more impact.
Speaker Change: The one I think is actually continues to do exceptionally well and we think despite what's going on from a federal efficiency standpoint, we expect they'll continue to do well, but we think we have a limited exposure on that front. When you look at the portfolio we have.
Speaker Change: Got it.
Speaker Change: That's kind of if I can.
Speaker Change: One more still tied to D C.
Speaker Change: That's obviously in the past.
Speaker Change: Yeah.
Speaker Change: Okay can you hear me.
Speaker Change: Yes, we can hear you.
Speaker Change: Can you hear me.
Speaker Change: Yes, Robert can you hear us.
Speaker Change: Hi.
Speaker Change: Just.
Speaker Change: Right.
Tim I can hear you yes.
Speaker Change: That's.
Potential.
Speaker Change: Capital gains taxes come down maybe this year, maybe next year who knows.
Speaker Change: Are you hearing anything from on the front of new platform acquisitions as well.
Speaker Change: Is there any slow down and.
Speaker Change: Expecting that activity as people are like waiting for clarity on taxes, because obviously a lot of these put us that essentially.
Speaker Change: It is significant.
Speaker Change: Tax exposure it takes till that business, depending on variety of factors, but is that entering anybody's minds at the moment or is that just not a big ticket.
Speaker Change: Yeah, Robert I'll give my views and I'll, let David add on if he has any additional comments, but I would say is we.
Speaker Change: We look at the first quarter I think you've probably heard this from other bdcs are management teams that you've talked to I think activity, both lower middle market and private loan or private credit has been a lot slower than we expected it to be but I don't think it's related to any potential changes from a capital gains rate standpoint, I think there is.
Speaker Change: Your reluctance or caution just given everything thats going on in the U S economy with the topics that you touched on earlier. So I do think that that is probably kind of dampen some of the expectations from an M&A standpoint, but I don't think I've heard people talking about the capital gains Stefan David kind of shaking his head here, saying that he hasn't either so we have not seen that I'm not seeing that.
Pop up obviously, if there was a positive change there that could be a positive catalyst, but we just havent. We havent heard that entered the discussions of the companies we've been talking to.
Speaker Change: Got it got it thank you.
Speaker Change: Thank you Robert.
Speaker Change: Thank you our next questions come from the line of Kenneth Lee with RBC capital markets. Please proceed with your questions.
Kenneth Lee: Good morning, and thanks for taking my question just one on leverage.
Kenneth Lee: So still below target ranges and it sounds like the expectation is.
Kenneth Lee: A little bit of conservatism for this year, just wanted to dig into that a little bit more is this based on any kind of macro factors and.
Kenneth Lee: Do you see there being enough origination activity to be able to bring up the leverage meaningfully over the near term. Thanks.
Kenneth Lee: Yeah, Ken Good morning, Thanks for the question I would say that we.
We used were given on leverage are really.
Kenneth Lee: We entered the year in a pretty significantly under Levered position I would say that given driven by a couple of different things one is less than expected investment activity, both on the lower middle market and private loan side of our business as we exited the fourth quarter and that's continued to be the case as I said a few minutes ago.
Kenneth Lee: As we look at the first couple of months of the year.
Kenneth Lee: But I think Ryan you will cover this in his prepared comments, but we do expect and are focused on trying to get our leverage up and the way we're going to do that that will be driven by two things. One is just actual investment activity on our net investment activity basis, that's going to be the biggest driver of where we end the year from a leverage standpoint, and then the other side of that is.
Kenneth Lee: Just given where we're at today from a leverage position, we expect to be less active under the ATM. So as we do.
Kenneth Lee: Our investment portfolio and grow our capital structure alongside that you should expect it to be much more heavily weighted towards the debt capital side of the capital structure and Ron if there's anything else you'd add on feel free to add on there I think that about covers that mean, one thing I would mention.
Kenneth Lee: It was called out in the prepared remarks was the exit of promo ever happened at the very end of December and that was a sizable check that was written which is great for us, but obviously had an impact on those leverage ratios.
Kenneth Lee: As we hit year end. So that's also has a little bit of a little bit of interplay there.
Kenneth Lee: Got you very helpful. There.
Kenneth Lee: And then what.
Kenneth Lee: Within the lower mid market.
Kenneth Lee: And I think you mentioned in the prepared remarks.
Kenneth Lee: Increasing interest in.
Kenneth Lee: There could be some potential realization to at some point I Wonder if you can just go a little bit more details around that what's sort of like the nature of these kind of discussions.
Kenneth Lee: Is the level of interest increasing based on macro factors regulatory outlook or any other specific factors there. Thanks.
Kenneth Lee: Yes, Ken just like we always are we're going to be a little.
Kenneth Lee: Limited in what we say there obviously, if there's activities going on it's under confidential.
Kenneth Lee: Kind of situation.
Kenneth Lee: And in terms of having a transaction that may be in process that is not public but.
Kenneth Lee: But as we said in the past we think we've got some fantastic companies in our aluminum market portfolio similar to what you saw with Pearl Meyer.
Kenneth Lee: And at some point those companies may be may.
Kenneth Lee: To be called on by either a strategic or a larger private equity firm because just like we find these companies very attractive. They may also find them attractive and that may lead to dialogue could lead to a process being run by our portfolio company with main street's assistance to maximize the value of those transactions I'd say, that's similar to what happened on the on.
Kenneth Lee: Pearl Meyer side, we don't mandate anything as you've heard us say in the past, we absolutely view, our relationships with our lower middle market companies and their management teams just partnerships. So it's got to be something that both we and the management team views as an attractive opportunity, but when that happens we're going to support them and maximizing the value and we think we will consistently have really good outcomes in that type.
Kenneth Lee: A scenario just just like we had on Pearl Meyer, David If you want add anything to that feel free to add on.
Kenneth Lee: Robert.
Kenneth Lee: Great well that's it.
Kenneth Lee: Nothing else on that.
Kenneth Lee: No that's very helpful. Thanks again.
Ken: Thank you Ken.
Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Ken: Yes.
Speaker Change: Our next questions come from the line of Mark Hughes with <unk> Securities. Please proceed with your question.
Speaker Change: Yes, thanks, good morning.
Martin Google: Good morning, Martin Google.
Martin Google: Appreciation in the quarter and the external investment manager.
Martin Google: Anything.
Martin Google: We can anticipate related to the public offering or was that the appreciation in <unk> already factoring that in.
Martin Google: Yes, I would say mark the appreciation in Q4, it didn't really have anything to do with the.
Martin Google: The listing in the offering it was more based upon continued growth with the consistent incentive fees we've been Ben.
Martin Google: Earning and receiving there as well as just the market. We have a number of different factors that go into our valuation approach one of those factors not not the only factor, but one of those factors is a publicly traded peer set and I just think that peer set has been trading exceptionally well not just in Q4, but for the last last couple of quarters, you'll see some benefit there from.
Martin Google: From a valuation approach standpoint.
Martin Google: And then when you think about the public offerings the increase in assets.
Martin Google: Will that kind of a logical trigger more.
Martin Google: Value for the <unk>.
Martin Google: External manager or is that.
Martin Google: Still looking at the peer group.
Martin Google: And other inputs.
Martin Google: Yes, I think when you look at that.
Martin Google: The changes that happen in conjunction with the listing and offering.
Martin Google: The changes are such that the benefit to main street are through the external investment manager to main street are going to be fairly limited unless there is a significant change to the operating results at MSC income fund what I mean, there is we lowered the.
Martin Google: The base management fee, so that that change in the percentage will reduce.
Martin Google: The base management fees, we get we also changed the incentive fee structure to be more consistent with what you see from other externally managed bdcs and those two at <unk>.
Martin Google: Consistent operating results would be close to breakeven. The structure was intended to provide MSC income fund shareholders additional benefits as we grow and have better performance. Both at the net investment income line.
Martin Google: ROE line.
Martin Google: So if we do that there will be a lower incentive fee relative to performance, but overall when you look at the growth of assets and a increasing level of performance. We still think it's a really good outcome for main street as well when we look at the relationship that we have with MSC income fund.
Martin Google: Very good from a regulatory standpoint.
Speaker Change: Duane I think you've mentioned a time or two you've lost some.
Speaker Change: Lending opportunities to local bank.
Speaker Change: Any.
Speaker Change: Prospects, you think for looser regulation on banks to get them more active with.
Speaker Change: Net.
Speaker Change: B a competitive impact for <unk>.
Speaker Change: Hard to see but any thoughts there.
Speaker Change: Yes, I'll give a few thoughts and I'll, let Nick add on if he has a different view because I think what we see.
Speaker Change: Most of the pressure for the last two or three or four years from that angle, it's not on the lower middle market side, it's on the private credit side and I would say in the last quarter. We had another attractive accompanying performing well I wouldn't say it was knocking the cover off the ball in terms of their performance versus our original underwriting expectations, but a bank came in and took us out of that.
Speaker Change: Significant reduction in the spreads so youre still seeing some of that it is very limited, but my view would be I would not expect.
Speaker Change: You will see there'll be being significant enough changes in the banking regulations, you have to change and I think you'll still see some of that from time to time.
Speaker Change: But I think it's less specific related to changes in the bank regulatory environment and more a bank decides they want to do something.
Speaker Change: Again can't explain why they do it but they go out and do something that we think is fairly aggressive, but it's beneficial for the company that they end up given that loan to make it feel free to add on that.
Speaker Change: Usual case, where that is it's not a fresh LBO transaction happened, maybe 12 to 18 months before and then maybe the bank had been a banking partner before the sponsored by the business. They couldn't get there on the first transaction, usually it's either speed or timing and leverage issue. So as the company performs better a lot of times that regional or local bank will step back.
And again with a lower rate to try to get re involved in that business.
Speaker Change: Understood. Thank you.
Speaker Change: I'd say from a fresh LBO perspective, we don't see them really as competition there.
Speaker Change: Yes, yes, okay very good thank you.
Mark: Thank you Mark Thank you.
Speaker Change: Thank you. Our next question is coming from the line of Douglas Harter with UBS. Please proceed with your questions.
Hi, This is Cory Johnson on for Doug.
Speaker Change: I just had a question just sticking with the competition for a second.
Speaker Change: Just given the success that you've had in your a little lower.
Speaker Change: Middle market.
Speaker Change: Strategy.
Speaker Change: On that portfolio.
Speaker Change: Do you have any I guess what are your thoughts in regards to <unk>.
Speaker Change: Perhaps concerns often competition.
Speaker Change: Regarding other bdc's, possibly moving.
Speaker Change: Down market or or perhaps.
Speaker Change: Imitating the lower middle market strategy, just what are your thoughts on competition again.
Speaker Change: Yes. Thanks for the question I'd say, we haven't seen a change there is definitely not a change from the from the BDC industry in terms of being more competitive with our our lower middle market strategy or approach I think when you look at it and Thats why we have two very distinct and different teams at main street.
Speaker Change: Team that.
Speaker Change: It looks like what I expect most bdcs investment team to look like it's going to be very consistent with what Nick and his team at main street do there their credit focus thats their history that theyre experiencing thats there.
Speaker Change: Our approach our lower middle market team is much more a private equity type focus we're underwriting the transaction. The exact same way that a private equity sponsor of fund would or that a strategic acquirer would and those those are just two very different approaches and very distinct skill set so we haven't seen anybody.
Speaker Change: I'm trying to come in and duplicate or become competitive with us in our lower middle market strategy. We also don't expect them to given that dynamic in terms of the differences in their skill set and experience.
Speaker Change: They could I think over the last 20 years of being in the industry. We have seen some people do it a long time ago, probably 10, 15 years ago, and I'd say that those companies, they're not around anymore and they did not they did not fare very well because you had.
Speaker Change: Lenders are credit guys trying to do private equity and it just it's a totally different skill set.
Speaker Change: Alright, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. This now concludes our question and answer session I would now like to turn the floor back over to management for any closing comments.
Speaker Change: Thank you very much and just from our side just thank you to everyone again for joining us today, and we'll look forward to talking to everyone again in a few months after our first quarter earnings release. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Speaker Change: Have a wonderful day.
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