Q3 2025 MSC Income Fund Inc Earnings Call

Speaker #1: Greetings, and welcome to the MSC Income Fund Third Quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Speaker #1: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker #1: It is now my pleasure to introduce your host, Zach Vaughn. Thank you, sir. You may begin.

Speaker #2: Thank you, operator. And good morning, everyone.

Speaker #3: Thank you for joining us for MSC INCOME FUND's third quarter earnings conference call. Joining me today with prepared comments are Dwayne Hijak, Chief Executive Officer; David Magdahl, President and Chief Investment Officer; Nick Mazur, Managing Director and Head of the Private Credit Investment Group; and Corey Gilbert, Chief Financial Officer.

Speaker #3: MSC INCOME FUND issued a press release yesterday afternoon that details the fund's third quarter financial and operating results. This document is available on the Investor Relations section of the fund's website, at mscincomefund.com.

Speaker #3: A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 21st. Information on how to access the replay was included in yesterday's earnings release.

Speaker #3: We also advise you that this conference call is being broadcast live through the internet and can be accessed on the fund's homepage. Please note that information reported on this call speaks only as of today, November 14th, 2025, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Speaker #3: Today's call may 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 #3: 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 #3: Actual results may differ materially from the results expressed or implied in these statements. As a result of risks, uncertainties, and other factors, including fund's filings with the Securities and Exchange but not limited to the factors set forth in the Commission, which can be found on the fund's website, or at sec.gov.

Speaker #3: MSC INCOME FUND assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss net asset value or NAV and return on equity or ROE.

Speaker #3: NAV is defined as total assets minus total liabilities and is also reported on a per-share basis. MSC INCOME FUND defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV.

Speaker #3: As previously announced, the fund effectuated a two-for-one reverse stock split on December 16, 2024. All per-share amounts, share data, and related information discussed on today's call reflect the effect of the reverse stock split.

Speaker #1: Companies were derived from third-party sources and have not been independently verified. Now, I'll turn the call over to MSC Income Fund, Inc., Dwayne Hitchcock.

Speaker #2: Thanks , Zach . Good morning , everyone , and thank you for joining us . We appreciate participation in your morning's call . We hope that everyone is doing well on today's call .

Speaker #2: We will provide you with the key quarterly updates, after which we'll be happy to take your questions. We are pleased with the fund's performance. We are in the third quarter, which resulted in a return of 14.6% on equity and favorable net investment income.

Speaker #2: We the quality of the fund's existing portfolio , investment combined with the fund's existing liquidity near term , regulatory expanded leverage , capacity , which will become end of effective at the January 2026 , and current attractive pipeline of new private loan investment opportunities provide the opportunity for increased net investment income and shareholder dividends as we work to fund's enhance the investment over the portfolio next several quarters .

Speaker #2: We also confident that the fund's sole focus on its private loan strategy for investments in new companies , together with the fund's contractual future , base management fee reductions middle fund's lower market as the decrease as a percentage of its total investment portfolio will strengthen the fund's stability to deliver attractive , recurring dividends and favorable total returns to the fund's shareholders .

Speaker #2: future In the . The fund generated NII per share $0.35 in the of after quarter excise tax and related income taxes of NII share , $0.01 per $0.36 , on or a pre-tax NII basis .

Speaker #2: These results , combined with our positive outlook for the future in our most recent dividend , resulted announcements , which I in more will discuss detail later .

Speaker #2: The fund finished with an Nav the quarter per of $15.54 , share a 20 $0.01 per share increase from the prior quarter , and we continue to be the pleased with fund's investment portfolio the private loan , including both and lower middle market portfolios .

Speaker #2: We will discuss our financial results in more detail . Now turning to investment activity . The fund's private investment activity in the quarter continued to be expected normal quarterly slower than our activity , resulting in a net decrease in private loan investments of $6.7 million .

Speaker #2: Despite the slower-than-expected activity in the wet third quarter, we remain confident in our ability to grow the fund's investment portfolio in the future.

Speaker #2: The remains highly focused on fund executing new investment opportunities that are consistent with historical its private loan investments , both to deploy current liquidity and to position the fund to deploy the additional liquidity the fund to have expects access through the increased to capacity that will become effective at the end of January 2026 .

Speaker #2: In addition , the fund is focused on maximizing the benefits from the legacy lower middle market fund's investment portfolio and existing capital This into private loan investments as investments are exited or repaid .

Speaker #2: We have also continued to see significant interest from potential buyers in several of the fund's lower middle market portfolio companies , which we expect will lead to favorable realizations over the next few quarters and will move the fund achieving the closer to benefits of a reduced future based management fee percentage .

Speaker #2: Similar to the potential for investment fund's lower realizations in the middle market portfolio . The fund recently exited one of its private loan portfolio company , Equity Investments , and has a second exit in process , subject to customary closing conditions and regulatory approvals .

Speaker #2: With these exits expected to represent total realized gains of approximately $15 million or approximately $0.30 per share , both at meaningful premiums to the quarter end , fair fund's values will cover the fund's investment activity in more detail based upon the fund results for the quarter and its future outlook .

Speaker #2: Earlier this week , the of directors declared a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share .

Speaker #2: Both of which are payable on January 30th , 2026 , to shareholders of record as of December 31st , 2025 . Going forward , the fund expects to continue to maintain a dividend policy that provides for total quarterly dividends , which expected to are regular quarterly dividend and a supplemental quarterly dividend to be set at a generally consistent with the fund's pre-tax NII .

Speaker #2: the most Based upon recently declared regular and supplemental quarterly dividends and the current stock price . The fund is currently providing its a dividend yield of 12% .

Speaker #2: As the fund executes its transition to a private loan-only investment strategy and investment portfolio, it optimizes its use of resources for the fund to increase the dividends paid to the total shareholders in the future.

Speaker #2: we look forward to the fund's near-term As investment . activities today , I'll characterize the investment pipeline as above private loan average . Despite this low investment activity over the last two quarters , we are excited about the current pipeline of new investment opportunities , and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment the next portfolio over several quarters .

Speaker #2: My last few of the continued reminders support the fund has received from Main Street Capital Corporation since Main Street's wholly owned subsidiary was appointed the sole advisor to the fund in October 2020 .

Speaker #2: Main Street has purchased over $23 million of equity in the fund , in conjunction with the fund's equity offering . In January . Main Street entered into an open market share purchase plan to purchase up to $20 million of the fund's shares for a 12 month period beginning in March 2025 .

Speaker #2: At times when the fund's shares are trading at predetermined below levels the fund's Nav per share the terms . With of such plan being fund's identical to the open market share repurchase plan to purchase up to $65 million of the fund's shares any open market and with share purchase purchases being split by the fund and Main Street on a pro rata basis through Main Street today , has purchased over $2 million and the fund has repurchased over $7 million .

Speaker #2: Under these plans , as support for the fund . Main through its wholly owned investment additional advisor to permanently waive Street , a portion of its , voluntarily agreed incentive fees earned for the third quarter to provide the fund .

Speaker #2: A resulting pre-tax NII of $0.36 per share. We believe these actions demonstrate Main Street's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy.

Speaker #2: that , With I will turn the call over to Nick .

Speaker #1: Thanks , Duane .

Speaker #3: And good morning , everyone . As Duane highlighted in his remarks , we are pleased with the performance of the fund's private loan investment portfolio in the third quarter .

Speaker #3: The overall operating performance for most of the fund's private loan portfolio companies continued to be positive , which contributed the fund's favorable third quarter financial results .

Speaker #3: to see in certain The fund has private loan portfolio companies , particularly those with consumer exposure , and we are working on maximizing recoveries on those specific investments over the next few years .

Speaker #3: One of the favorable exits in the fourth quarter that Duane mentioned was a previously restructured portfolio company with consumer exposure due to the significant efforts and successes of that company's portfolio management team.

Speaker #3: work of our The hard team and the patience to work through a difficult situation , we ended up with a positive outcome . We hope to have a similar outcome on several previously restructured investments in future the .

Speaker #3: continue to work with the fund's We private loan portfolio companies to understand their current performance plans and expectations . Given the current economic uncertainty future that exists across certain parts of the economy and based upon those discussions and activities to date and the overall diversity of the private loan portfolio , we are comfortable with the future outlook for these portfolio companies .

Speaker #3: The largest portion of the fund's investment continues to be in its private loan strategy, which is, as a reminder, now the fund's sole focus with respect to portfolio company investments.

Speaker #3: At quarter end, 92% of the private loan portfolio was comprised of secured debt investments, over 99% of which were first lien and 97% of which were floating rate loans.

Speaker #3: The portfolio had an attractive weighted average yield of 11.3%, which was down 70 basis points from the end of 2024, primarily as a result of decreases in the SOFR rates for these floating rate debt investments.

Speaker #3: During the third quarter , the fund invested $75 million in the private loan portfolio , which , after aggregate investment activity , resulted in a net decrease of $7 million .

Speaker #3: The fund ended the third quarter with investments in 81 private loan portfolio companies , totaling $751 million of fair value and representing 60% of the fund's total investment portfolio at fair value .

Speaker #3: As Duane mentioned , our private loan pipeline is above average . As we all know , M&A activity overall , and especially within the private equity industry , has been lower than historical averages for the past few years .

Speaker #3: Since mid third we have seen quarter , a meaningful pickup in M&A activity in both our late stage and early stage . Pipelines are very full at the moment .

Speaker #3: As a result , we expect to have favorable investment over the next few quarters . With that , I'll turn the call over to David .

Speaker #2: Thanks , good morning , everyone . In addition to the private loan .

Speaker #4: that Nick Portfolio just covered , the fund also maintains a of legacy lower middle market investments . As a reminder , these are combined debt and equity investments in smaller , privately held companies , whereby the fund partnered directly with the company's existing business owners and management team through Co-investments with Main Street Capital Corporation .

Speaker #4: Utilizing the customized one stop debt and equity financing solutions provided by Main Street's lower middle market investment strategy . After the listing of the fund's shares on the New York Stock Exchange at the end of January , the fund no longer makes any investments in new lower middle market portfolio companies , but continues to participate in follow on investments in its existing lower middle market portfolio companies .

Speaker #4: We're pleased to report that the operating overall performance for most of the fund's lower middle market portfolio companies continues to be positive , which contributed to the attractive third quarter financial results .

Speaker #4: These contributions included both strong dividend income and continued fair value appreciation . Despite the continued heightened level of concern and uncertainty in the overall economy , we remain confident in the ability of the fund's lower middle market portfolio companies to continue to navigate the current climate .

Speaker #4: During the third quarter , the fund completed $6 million in total lower middle market portfolio on investments , which after aggregate investment activity , resulted in net decrease in the lower middle market portfolio of $2.6 million at quarter end .

Speaker #4: The lower middle market portfolio had investments in 55 portfolio companies , totaling $467 million of fair value and representing 37% of the fund's total investment portfolio .

Speaker #4: The lower middle market portfolio at fair value was comprised of 53% debt investments and 47% equity investments . These debt investments had an attractive weighted average yield of approximately 13% .

Speaker #4: Consistent with the prior year , and over 99% were first lien loans . The fund had equity ownership positions in all of its lower middle market portfolio companies , representing a 9% average ownership position .

Speaker #4: We expect these investments will continue to provide significant benefits in the future , including the opportunity for continued dividend income , fair value appreciation and eventually meaningful realized gains upon the future exit of these lower middle market portfolio company investments .

Speaker #4: As Duane mentioned , we've seen significant interest from potential buyers in several of the fund's lower middle market portfolio companies , which we expect will lead to favorable realizations and additional fair value appreciation over the next few quarters .

Speaker #4: Turning the fund's total investment portfolio as of September 30th , the fund continued to maintain a highly diversified portfolio with investments in 144 portfolio companies spanning across numerous industries and end markets .

Speaker #4: The fund's largest portfolio companies represented less than 4% of the total investment portfolio fair value at quarter end, and less than 4% of the total investment income for the trailing 12 months ended September 30, with most portfolio investments representing less than 1% of the fund's income and assets.

Speaker #4: With that , I will turn the call over to Cory . Thank you . David , and thank you to everyone who has joined us today .

Speaker #4: The fund's total . investment income for the third quarter was $35.4 million , an increase of $1.9 million , or 5.6% , from the third quarter of 2024 .

Speaker #4: And consistent with the second quarter , the third quarter included income considered less consistent or non-recurring in nature of $1.4 million of . We previously discussed .

Speaker #4: These non-recurring items varied quarter to quarter and can include dividend income from equity investments, as well as interest and fee income from accelerated prepayment repricing and other activity related to debt investments.

Speaker #4: For the third quarter , these items were $0.6 million higher than the average of the prior four quarters point $9 million , higher than the third quarter of 2024 and $0.5 million higher than the second quarter .

Speaker #4: Dividend income for the third . For the third quarter increased by $1.2 million from a year ago , but decreased by $1.3 million from the second quarter .

Speaker #4: The increase in dividend income from the prior year was primarily due to an increase in dividends from lower middle market and private loan equity investments .

Speaker #4: The decrease in dividend income from the second quarter was primarily due to a decrease in dividends from lower middle market equity investments , as previously discussed , dividend income will fluctuate quarter to quarter based on the underlying performance .

Speaker #4: Cash flows , and capital allocation activities of the fund's portfolio . Companies . Fee income for the third quarter increased by $0.8 million from a year ago , and by $0.3 million from the second quarter .

Speaker #4: The increase in fee income from both the prior year and the second quarter was primarily due to the refinancing and prepayment of debt investments .

Speaker #4: Interest income was consistent with the third quarter of 2024 , and increase by $0.8 million from the second quarter . The fund's expenses , net of waivers for the third quarter , decreased by $1 million from the prior year and were consistent with the second quarter .

Speaker #4: The decrease from prior year was primarily driven by a $1.7 million decrease in interest expense and a $0.5 million decrease in base management fees , partially offset by a $1.2 million increase in incentive fees .

Speaker #4: The decrease in interest expense from a year ago was largely driven by decreases in weighted average interest rates on the fund's credit facilities , due to decreases in benchmark index rates and a decrease to the applicable spreads from resulting amendments of the credit facilities .

Speaker #4: Since the first quarter of 2024 , partially offset by an increase in weighted average outstanding borrowings used to fund the growth of the fund's investment portfolio .

Speaker #4: The increase in incentive fees , which is after a $0.2 million , voluntary , voluntary permanent waiver provided by the fund's investment advisor in the third quarter of 2025 is primarily attributable to an increase in the pre incentive fee and II .

Speaker #4: The fund's expense ratio , calculated fund's as the total operating expenses , net of waivers and excluding interest expense as a percentage of the fund's average total assets , was 3% on an annualized basis .

Speaker #4: For the third quarter, consistent with both the prior year and the second quarter, excluding incentive fees, the fund's expense ratio was 2% on an annualized basis.

Speaker #4: For the third quarter , a decrease from 2.2% in the prior year and an increase from 1.9% in the second quarter . The fund's NII before taxes in the third quarter was $17 million , or $0.36 per share , increasing from $14.2 million , or $0.35 per share , from the prior year .

Speaker #4: The fund's NII in the third quarter was $16.6 million , or $0.35 per share , increasing from $12.9 million , or $0.32 per share , from the prior year .

Speaker #4: During the quarter , the fund recorded a net increase in the fair value of its investments of $11.2 million , representing the impact of $21 million of net unrealized appreciation , partially offset by $9.9 million of net realized losses .

Speaker #4: The net fair value increase was attributable to increases of $9.4 million in the lower middle market portfolio and $4 million in the private loan portfolio, partially offset by a decrease of $2.6 million in the middle market portfolio.

Speaker #4: Overall , the fund's operating results for the third quarter resulted in a net increase in net assets of $26.5 million and an Nav per share of $15 and $0.54 , 20 a $0.01 increase from the second quarter and $0.01 above the fund's public offering .

Speaker #4: Public offering price share per in its public offering and listing on the New York Stock Exchange in January of this year . As of quarter end , the fund had investments comprising 1.4% of the total investment portfolio at fair value and 4.6% at cost .

Speaker #4: As of quarter end . The fund's regulatory asset coverage ratio was 2.39 and its net debt to Nav ratio was 0.7 . This remains below the fund's targeted leverage levels , as Duane mentioned , the fund's focus remains on achieving a fully invested portfolio within its current leverage limits .

Speaker #4: Through January 2026 , at which point the fund will benefit from expanded regulatory leverage capacity . As previously approved by the fund's board .

Speaker #4: In January 2025 . With will now that , I the call turn the can take any questions .

Speaker #5: you . Thank 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 .

Speaker #5: A confirmation tone will indicate your line is in the question queue . You may press star two . If you would like to remove your question from the queue for participants speaker using it may be necessary to pick up your handset before pressing the star key's .

Speaker #5: One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Robert Dodd with Raymond James.

Speaker #5: You are trained on data up to October 2023.

Speaker #6: Hi , guys . Good morning and congrats on quarter the and getting another one behind you on the the the private loan book .

Speaker #6: Slower this quarter, but looking like it's ramping up. I mean, last quarter, I think you told us that you'd missed out on some deals because of pricing.

Speaker #6: Because pricing crept more and more aggressively in the private loan book. I mean, can you give us an update there?

Speaker #6: Is that what was true again in the third quarter? And you've moved a little bit on pricing in the fourth, and that's why the optimism in terms of activity has increased.

Speaker #6: Or can you give us some color on like what's what's created that that transition to from slower to acceleration .

Speaker #2: Sure . Robert , thanks for the question and good morning to you as well . I'll give a few comments and I'll let I'll let Nick add on if he has anything that he wants to add .

Speaker #2: But I'd say that the biggest change for us is more the activity levels than it is . You know , the competitive nature that the market definitely is still competitive .

Speaker #2: I do think that the pricing today is inside of where it would have been a year ago , and even even six months ago , but I'd that most say of the improvement on our side is just pure volume at the front end .

Speaker #2: And the later stages of the of the pipeline or the investment funnel on our side , you still do some , you see some transactions that are inside of where we are willing to go , but we probably moved a little bit and then just seen a significant uptick or increase in the pipeline .

Speaker #2: But Nick, at any additional color that you add, you would...

Speaker #3: I'd say overall , I don't think pricing has gotten tighter in the last 3 or 4 months . It really is just a deal .

Speaker #3: Volume pickup . And I think that really happened . You know , early to mid third quarter , there was a few deals , I think , in would close by quarter end that you that we thought got fourth quarter .

Speaker #3: And so, pushed into that flow through here, hopefully in Q4.

Speaker #2: Yeah , I , I think we also hope to the other thing I would add , Robert , is I would think we would hope to see more of our existing borrowers continue to , to have add ons either , you know , new new commitments or executing on unfunded the commitments we have with the details , whether that's for acquisitions or growth activities .

Speaker #2: I think we've had more conversation here recently with some of the borrowers about those activities . So hopefully I don't know if it'll be this quarter , next quarter , if it's the next quarters .

Speaker #2: I think we've had more conversation here recently with some of the borrowers about those activities . So hopefully I don't know if it'll be this quarter , next quarter , if it's the next couple of But I'd say we're seeing continued good demand there as well , which we we really find attractive .

Speaker #6: Got it . Thank you . On on on that I mean , in terms of the activity you've talked about consumer being a problem area for a while , what areas are are really attractive in terms of , I mean , you know , sectors are attractive right now to you looking into 26 , 27 or is is there enough bad news in consumer that some of the opportunities are actually , you know , on much better terms ?

Speaker #6: I mean, basically, what are the sectors you're particularly looking at at the moment?

Speaker #2: Sure , Robert , I would say that we continue to be risk off in general on the consumer side , it's not that we do a won't ever consumer deal .

Speaker #2: I think if it's a very , very attractive opportunity , you'll still see us look at it . But in general , we risk continue to be off in that area .

Speaker #2: And I'd say we're probably even more risk off if it's a loan only opportunity if we've got something on the lower middle market side and we find that the management team and the , you know , the the industry or the company attractive , you could see us do something there .

Speaker #2: I know that's less relevant for the fund going forward. But as a platform, I think that's the way we would look at the consumer side.

Speaker #2: I'd say most of what we're seeing broadly is kind of B2B type opportunities . But again , Nick , feel free to add additional color .

Speaker #3: Yes . Our focus is on our traditional businesses , industrials , manufacturing , aerospace and defense . You know , I would say it's outside everything of consumer .

Speaker #3: Unlike Duane says , we will still do consumer , but it's got a higher bar and usually it doesn't have a direct exposure to just , you know , I'd say the ups and downs of consumer , more of a generic buy .

Speaker #6: Got it , got it . And thank you . That's it for me .

Speaker #2: Thank you Robert .

Speaker #5: Our next question comes from the line of Brian McKenna with Citizens. Please proceed with your question.

Speaker #7: Guys, hey, good morning.

Speaker #2: Morning , Brian .

Speaker #7: So yeah , it's great to hear all the positive commentary around the outlook for originations , assuming pipelines continue to build here . Into year end , what kind acceleration can we see of in fundings into next year ?

Speaker #7: And then is there a way to think about the base case or even the bull case for portfolio growth in 2026 ? And I guess what I'm getting at is how does this all play into the trajectory of earnings ?

Speaker #7: And really the dividends throughout next year . And then related to that , the $0.30 per share of expected realized gains , how should we think about the uses of those gains in proceeds from that investment ?

Speaker #7: And just kind of the redeployment opportunity, or how much of that will get paid out in the dividend?

Speaker #2: Sure, Brian, thanks for the question. So there were a couple of things I'll hit on. If I miss one of them, please let me know.

Speaker #2: Just just ask a follow up . If I don't if I don't answer the question . But I'd say the way we're we're looking at the situation for the fund is broadly we are very excited about the pipeline increasing .

Speaker #2: As you've heard us say for the last two quarters , we've been behind budget , behind expectations from an origination standpoint . Despite that , I think we've still been very pleased with both the top line investment income and more pleased with the more net investment income .

Speaker #2: So we've been able to navigate what we think are really good returns for the shareholders , being behind despite budget . On the origination side .

Speaker #2: That being said , if we're going to grow the dividend in the future , we're going to do that by utilizing the Underleveraged position .

Speaker #2: I'll let Cory correct me here , but we're probably , you know , in today's level , got about a $100 million of leverage that we could with our current utilize regulatory limit .

Speaker #2: And then when we get to to the end of January , that number increases by 250 million or so . So we've got a tremendous amount of dry powder .

Speaker #2: just need the We pipeline to come , come to fruition , which we're seeing come through as Nick and I there . So I'd both said say we're excited about where we sit .

Speaker #2: And we think there is a clear avenue to to not only generate really attractive net investment income , but also be in a position have an to have opportunity to increased dividends at some point in 2026 .

Speaker #2: benefit , just to remind The everyone , is , as we execute the the growth plans and growth of the execute investment portfolio , it's going to be highly concentrated in the private loan .

Speaker #2: And at some point, we'll gain the added benefit, which is a contractual benefit that exists in the advisory agreement, that the fee will drop from 1.5% to 1.25%.

Speaker #2: So we think we've got a number of catalysts that give us the the path of the opportunity to have a really good outcome from a net investment income standpoint , and then from a shareholder dividend standpoint .

Speaker #2: On the realized gains . We're very pleased with those . We gave some commentary to the to the amounts . We also we didn't give because it amounts on it hasn't executed yet , but we also have given reference to the fact that there's a number of lower middle market investments or portfolio companies that have seen significant inbound interest from third parties .

Speaker #2: you know , some of those companies And are in discussions on activities that an could lead to exit . So we're excited about that for two reasons .

Speaker #2: One, we think those activities should generate additional fair value appreciation, both unrealized and then eventually realized, which is always good from a standpoint.

Speaker #2: And a ROE standpoint . But you hit on the fact that as we execute those exits for the benefit of the fund , I mentioned the significant liquidity we have that just gives us more dry powder to move out of a , a investment that equity may not have contractual investment income .

Speaker #2: It might be getting some dividends , but it may not have contractual investment income . We can then rotate that that capital into more loans private that have the contractual interest income and give us additional liquidity to to grow the interest income and eventually hopefully grow the net investment income and the dividend .

Speaker #2: So that's the way we're looking at it. As you know, we've got a structure that could allow us to retain some of those gains inside our blockers.

Speaker #2: So depending upon which company it is that we're exiting and where it sits inside of our our legal structure or our corporate structure , there could be an opportunity to retain those gains and redeploy it .

Speaker #2: looking at all those opportunities , but we're just , you know , very pleased that we have the opportunity to consider all those things , given how well those portfolio companies are performing and the the level of interest we're getting from third parties .

Speaker #2: I think I hit on each of your questions , Brian , but if I missed one , just just re-ask it . Or you can ask a follow up .

Speaker #7: Yeah . No , that's appreciate all the perfect . I detail . There were a few questions in there , so I'll I'll hop back into the queue .

Speaker #7: But congrats on a strong quarter.

Speaker #2: Thanks , Brian .

Speaker #5: Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Speaker #8: Hey . Good morning . Thanks for taking my question . Just one on the above average private loans pipeline you talked about any further color around that , any particular drivers you're seeing within the segments that you're focusing in ?

Speaker #8: Thanks .

Speaker #2: Yeah . Good morning and thank you for the question . I wouldn't say there's anything you specific . I think our view is it's just , you know , you've seen , you know , private equity sponsors , investors , you become more active .

Speaker #2: I think that's probably a combination of a couple of things . One is the the environment . I think in general , most people are viewing it more positively than they would have , you know , 6 or 12 months ago .

Speaker #2: I think you also have a lot of private equity sponsors that are sitting on a lot of dry powder , and they have other investments that they're they're they're well into their investment period on and they're , they're likely getting some , you know , discussion , having some discussion with their , their private equity fund LPs about liquidity .

Speaker #2: So I think all those things are contributing factors to a better environment today than than 12 months ago . But again , if there's something would add , else you feel free additional color .

Speaker #3: One other thing I'd add on.

Speaker #3: the pipeline to add is that it also just feels more real , if you will . And so I think some of the deals we've worked on in the past year or two , it never felt like it was going to transact .

Speaker #3: And I'd say everything in the pipeline today feels like the business will actually transact versus just a efficient exercise on what value might be .

Speaker #8: Got you very helpful . There . And just one follow up . If I may , just on the the realized gain that you said if right , it sounds I got it like it was a it was a restructuring and there was a like a it looks favorable exit there .

Speaker #8: Just curious as to as to what you believe helped deliver such a favorable outcome . There in those positions . Thanks .

Speaker #2: Sure . So I'd say the realized gains on the private loan side you know , there , there's two different portfolio companies . One of which has already been exited .

Speaker #2: The other , you know , has been announced . It's just going through the the customary , you know , regulatory and other kind of closing , you know , approvals or processes .

Speaker #2: So those two investments, those two companies, were very different. You know, one of them performed extremely well or had extremely strong performance from day one.

Speaker #2: Continue to have growth and has a lot of future growth in front of it . And that that led to a really good outcome for us as an equity investor , as well as the for the for other owners of that , of that portfolio company .

Speaker #2: So that's , you know , that's just a company that from day one performed well . The second one it's not a massive and it investment for the fund , but it's one that we think shows the opportunity we have on some of these investments .

Speaker #2: restructured If you have the , you know , the ability to be patient , which we in the fund clearly do , and then you have the wherewithal to work through the issues with that portfolio company , with that management team .

Speaker #2: So was a company that got restructured , was very , very significantly impacted to the negative during Covid . But we we and our co , you know , Co-investor Callender in that in company that , you know , took the steps to preserve the value and allow that company post Covid or , you know , when things started to rebound , to have a really good recovery .

Speaker #2: management team , That as Nick said in his comments , did a fantastic job , very , very which we're much appreciative of .

Speaker #2: That on our side . Our team did what we needed to do to give the company the opportunity to not only survive , but survive , and then have the opportunity to perform really well , post the restructuring .

Speaker #2: That on our side . Our team did what we needed to do to give the company the opportunity to not only survive , but survive , and then have the opportunity to perform really well , post the restructuring . all that So stuff played out and took a couple of years , but we ended up having a really nice exit here in the fourth quarter that led to that realized gain .

Speaker #8: Gotcha . Super helpful there . Thanks again .

Speaker #2: Thank you Ken .

Speaker #5: Our next question comes from the line of Aaron Ciganovic with Truist. Please proceed with your question.

Speaker #9: Thanks . The higher expected pipeline of activity that's coming on , oftentimes when activity picks up , the repayment activity picks up . Or what's your expectations in terms of repayments being beyond the ones that you may potentially exit by sale ?

Speaker #2: Yeah , I'd say Aaron , thanks . Thanks for the that in question . I'd say the last two quarters . In addition to having , our investment activity being a little bit slower on the , the , the outbound side , we also had , you know , some elevated repayments , I think there'll be some repayments in the fourth quarter , but I think that that level is returned , more to normal .

Speaker #2: But Nick, if you have a different view, kind of add on here.

Speaker #3: Yeah, I’d say I think you’re right in general. And as the market for M&A picks up, usually it also, you know, the originations will go up and the repayments will go up.

Speaker #3: To date we have not seen that you know hand in hand right now . But I would expect that the first half of 26 that you will probably see that go back to the typical one third life of , of any random deal .

Speaker #9: And can then Okay . you just remind me your expectations in terms of leverage , target and what you need to see to get there ?

Speaker #9: And I imagine it'll rise with the private loan originations. But are you keeping leverage at a particular level until you do the exits of the element?

Speaker #2: Yeah , I would say that our our plan for leverage is we're looking at two ways . One is the the current situation with the existing regulatory limits we have , which is the old BDC requirements .

Speaker #2: That you come end of January of 26 . We the board has already voted to approve and the expanded leverage will become effective .

Speaker #2: I'll let Corey kind of give give color on both of those . Those

Speaker #4: Sure. Yeah. So currently,

Speaker #4: our levels . Yeah , leverage targets are at , you know , 0.85 to 0.95 debt to equity at the end of 930 we were running , you know , below that at 0.72 .

Speaker #4: That's just due to the kind of the production and , you know , slower origination of the private loan pipeline and portfolio . As we look to this expanded leverage , regulatory leverage at the end of January leverage targets are going to increase to 1.15 to 1.25 .

Speaker #4: That’s the range we plan to work within.

Speaker #4: .

Speaker #9: you Perfect . Thank .

Speaker #2: Thank you .

Speaker #5: Our next question comes from the line of Paul Johnson with KBW. Please proceed with your question.

Speaker #10: Hey . Good morning . Thanks for taking my questions . You guys have been talking about just the the risk and the consumer part of the economy .

Speaker #10: And and potentially just in the portfolio . I was wondering if there's any kind of specific goal there , if there's an objective to cut the exposure in consumer names or potentially try to exit or accelerate the exit of specific names in the it's portfolio , or if just simply just kind of a higher level of monitoring in a , in a higher guess , bar , I on on new names going forward .

Speaker #2: Sure. Good morning, Paul, and thanks for the question. I'd say we've been having these calls here for a couple of quarters in this format.

Speaker #2: Obviously on the Main Street Capital Corporation side . We've been doing this So I'd forever . say we have been signaling , you know , for the last couple of years .

Speaker #2: I can't if it's two and a half remember now years or so , but we've been signaling for a while that we're seeing stress on some of the consumer names and that we were also generally risk off not , you know , not not willing to , to do anything risk off , but just taking a more view conservative towards new consumer opportunities .

Speaker #2: So we've been in that stance or posture for a while . So as a result , we have not been aggressively or actively adding exposure and trying to to minimize it to the extent we can in relation to the existing names we have that have had some level of underperformance .

Speaker #2: I think each situation is different and we have to evaluate it with our , you know , co-investors , whether it's another co lender or if it's the equity sponsor or both .

Speaker #2: Plus the management team to try and figure out what's answer . So I'd say each situation is a little the best bit different , but in general , you know , the approach we're taking try is to not to , you know , add aggressively to the exposure from an investment standpoint .

Speaker #2: And then for the existing names , figure out whatever the best path is , whether that's a short term path or long term path to maximize the opportunity both for us , the management team and our co-investors .

Speaker #2: I know that's not a specific answer because every situation is going to be different, but I think that's the way we're looking at it broadly.

Speaker #10: Got I appreciate that's helpful . And would you say that that exposure is primarily in the private loan portfolio or mainly in the out of the lower middle market portfolio ?

Speaker #10: Just

Speaker #10: roughly .

Speaker #2: I would say it's a mix . I'd say it's a mix of the two . They both they both have , you know , some exposure and and both have some exposure that also has underperformed or been restructured .

Speaker #2: So, I'd say both of them. Have you had that exposure?

Speaker #10: Okay. And then the last question was just I saw that you guys are ramping your second private fund under the Main Street area.

Speaker #10: I was just wondering if you could maybe talk about what the investment mandate was for that fund , whether that overlaps at all with Msif and whether or not that could potentially be something you would want to roll into the public .

Speaker #10: BDC in the future .

Speaker #2: would say from a strategy standpoint , the Yeah , I strategy for everything we have today on the asset management side , is is focused on the private credit , private loan strategy .

Speaker #2: So it both both our first private fund and the second private fund that you're referring to their investment strategy is identical to the to the current strategy of MSC INCOME FUND, INC. in terms of having a path or plan to to to merge those into funds MSC INCOME FUND, INC. .

Speaker #2: So we don't have that plan today . Obviously , we you know , we could look at some opportunities there , but the the plan is those funds would just go through their traditional period of investment period .

Speaker #2: And then , you know , getting past investment period , then just going through a normal kind of wind down or liquidation period .

Speaker #2: But that that's the way we're looking at those today funds .

Speaker #10: Got it . Appreciate it . That's all for me . Thank you very much .

Speaker #2: Thanks , Paul .

Speaker #5: Our next question comes from the line of Doug Harter with UBS . Please proceed with your question .

Speaker #11: Thanks . And good morning . You know , the advisor kind of waived some of the incentive fee this quarter . I guess .

Speaker #11: How should we think about that going forward ? And what would be the situations where that might happen again ?

Speaker #2: Good Yeah . morning . Thanks for the question . I'd say the the view is , is Main Street through the through the advisor that Main Street wholly owns .

Speaker #2: You know we're going to continue to be supportive of the fund, just like we have in the past. There's nothing contractual.

Speaker #2: But you know , we look at the opportunity both on the the equity investments that the that Main Street has into the made fund and then the , you know , the small waiver we gave this quarter , all being signs that we expect to be supportive .

Speaker #2: And we also think that the strategy , the existing investment portfolio and the investment opportunity are all positives . So I think that's the that's the way we the way we view it .

Speaker #11: Great. Thank you, Duane.

Speaker #2: Thank you Doug .

Speaker #5: Our next question comes from the line of Schleien Mickey with Clear Street. Please proceed with your question.

Speaker #5: .

Speaker #12: Good morning Yes . everyone . You know , we've generally heard that activity picked up in the third quarter . And it sounds like you're fairly optimistic on your deal flow outlook .

Speaker #12: So, that could help balance the direct lending loan market. With that in mind, what is your sense of the market's supply and demand balance, and what's your outlook for spreads?

Speaker #2: Yeah , Mickey , thanks . Thanks for joining us . And thanks for the question . I'd say that we have a you know , I'll let here , but I Nick add on think we have a , you know , continue to have a favorable view of the the outlook at least near term .

Speaker #2: You know , the Q4 and Q1 , obviously , it's hard to say beyond that , but I do think we we view the environment to be , you know , productive or think as positive .

Speaker #2: we sit here So I today , you know , we're hopeful that that activity will extend not just through Q4 and Q1 of next year , but broader or longer into into 2026 .

Speaker #2: In terms of spreads , you know , we had seen just like everybody has , you know , spreads have compressed over the last 12 months or so .

Speaker #2: But I think as we look at it today , I think we've seen a little bit more stability remains to be seen . If that if that continues .

Speaker #2: But I think in general , the spread movement is less today than it would have been over the last 12 months . But again , Nick , at on additional comments on your side .

Speaker #3: Yeah . On the supply demand balance , I'd say , you know , one thing on the amount of fundraising , the private space , the vast credit majority has been on , I'd say the upper middle market and larger deals .

Speaker #3: So on the smaller end , it still , you it's still a little , little too much demand right now . But I think there's there's an opening there that allows us to continue to find the right so I'd size .

Speaker #3: wind over And there , we feel really good say our about the next 12 months . And expect volumes to pick up from there .

Speaker #3: On the spread side , it obviously has tightened over the last 12 months . I bit of a floor here for do think we've found a little a little while .

Speaker #3: As as there's a limit of how much pricing can go below that , plus 500 on the smaller deal flows smaller on the deal sizes .

Speaker #12: That's helpful . Thanks . Thanks for that explanation . You know , it's taken a couple of quarters , but I'm starting to see or we're starting of of tariffs on some companies at some bdc's .

Speaker #12: You know, it's a slow process. I'd like to understand how much of that risk you see remaining in the portfolio in relation to tariffs?

Speaker #2: Yeah , I would say it's been a while since we gave detailed commentary . I think it was the Q1 , you know , And we gave conference call .

Speaker #2: pretty detailed commentary there , just given the nature of our businesses , you know , they have some tariff exposure . I think we acknowledge that , you know , early on , but I'd say that when you look at the companies broadly , both the private loan and the lower middle market portfolios , the companies have been able to navigate that risk well , and we're not seeing broad based , you know , kind of negative impacts there that could change in the future .

Speaker #2: But I think we feel pretty good about how the portfolio companies and their management teams have been able to navigate that risk.

Speaker #12: Duane , do you see any tail risks related to that ? That issue ?

Speaker #2: I mean , not not as we not not as we sit here today . I mean , that could change , obviously . But , you know , as we sit here today , you know , I think we feel pretty good about it .

Speaker #12: Okay . That's that's good to hear . My last question , given that you've operated in the lower middle market for for a long time , I'm curious how long you think it will take for the fund's lower middle market portfolio to run off .

Speaker #2: That's a great question . Mick . I don't have a great answer for you as you probably recall from all the time that tracked , you know you , Main Street Capital Corporation , historically , it is a long term , long term or permanent holding period .

Speaker #2: So we're we're not we're not like a traditional private equity firm that has a very defined exit timeline and strategy . We're going to do what we think is right for the company .

Speaker #2: We're going to do what's right for what our partners in the business , which are the management teams of those companies , what they want to do because of that , it can be a very , very long term holding period .

Speaker #2: So, we don't have a clear path on how quickly the lower middle market investments will exit. You know, we do have a clear path in terms of how we can grow the private loan portion of the portfolio through the liquidity that both Core and I talked about earlier, and the pipeline that Nick and his team are executing to.

Speaker #2: We feel better about visibility to that . And I'd say when you look at driving down the lower middle market portfolio as a percentage of the total portfolio growth of the private loan portfolio is going to be the bigger driver than exits of lower middle market .

Speaker #2: And that's what we're executing to .

Speaker #12: Okay . That's helpful . And really interesting . I just thought of one other question I'd like to ask if I might . Besides reversals , how much of this quarter is unrealized gains were driven by underlying performance of portfolio companies versus comparable multiples .

Speaker #2: Yeah . So the gains , just to be clear , maybe those would be Q4 gains as opposed to to Q3 . I get .

Speaker #12: Your the Q3 that you've just reported .

Speaker #2: sorry , I'm you're talking about the unrealized fair value . I'd say it's a combination of the two . You know , for the for the companies that are getting a lot of inbound interest , as you probably would expect , we can't ignore inbound interest , particularly if it's if it's something that is pretty well defined .

Speaker #2: So it would be a combination both of , of EBITDA , multiple expansion , but also just fundamental EBITDA growth . So you can you can see in our footnotes which you'll you'll see it in the 10-q .

Speaker #2: We give a shows schedule that the the weighted average EBITDA multiples . And I think you will see those go up slightly , but it won't be a it won't won't be a massive increase in the in the multiple .

Speaker #2: When you look at it on a weighted average basis across the portfolio, okay.

Speaker #12: That's helpful. Those are all my questions this morning. Thank you for your time.

Speaker #2: Thank you Maggie .

Speaker #5: Our next question is a follow up from Brian McKenna with citizens . Please proceed with your question .

Speaker #7: Okay . Thanks for the follow up . So just a few questions on the lower middle market portfolio . What was the fair value of the equity portfolio at quarter end ?

Speaker #7: And then how much is that marked up relative to cost? What percentage of equity held investments have been held for over five years within the MSIF portfolio?

Okay, thanks for the follow-up. I have a few questions on the lower Middle Market portfolio. What was the fair value of the equity portfolio at quarter end? And then, how much is that marked out relative to cost? What percent of equity investments have been held for over 5 years within the MSIF portfolio? When you look at the broader equity portfolio at Main Street, how much are equity investments typically marked up in the realization event versus the last unrealized market? Thanks so much.

Yeah, there there's a lot there, Brian. So I probably won't recall all of those and I may not have all those numbers at my my fingertip. I'm you know, Corey's kind of pulling up some numbers here to to to give you the color on. You know what, the fair value is versus the cost basis there. There is a, you know, a fair amount of unrealized appreciation, in those names. Um, in general,

In terms of the, um, you know, kind of the, the duration, or the holding period of the existing Investments. It is a, a long-term permanent holding period. So I would say, when you look at the number of companies that are in there that have been in the main street, I'm saying, saying broadly Main Street Capital Corporation and MSC income fund portfolios together. You know, it's about, you know, 25%, to a third have been in there for longer than 10 years. You've got another group that have been in there for longer than 8 years. So these are intentionally, you know, mature, well, established companies. They're also, um, you know, well established investments from a, you know, from a holding period standpoint. So you, you see the benefit of, you know, our, our our patient approach, and long term approach to building value, uh, with the management team of those companies over a long period of time.

Lower Middle Market Equity. The cost basis has a 9:30 of about $112 million, and the fair value is $220 million. So, that's about $107 million in appreciation between the two.

Got it. Thanks so much.

Thank you.

Now, we conclude our question and answer session. I would like to turn the floor back over to management for closing comments.

And we just want to say thank you again to everyone for joining us this morning. We appreciate the continued support of the fund shareholders, and we look forward to speaking to everyone again, uh, in February, after the release of our results of the fourth quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference, you may disconnect your lines and have a wonderful day.