Main Street Capital Corporation

Greetings and welcome to the Main Street Capital Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughn with Denard Lascara Investor Relations. Thank you, Mr. Vaughn. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2021 earnings conference call. Main Street issued a press release yesterday afternoon that details the company's second quarter financial and operating results. This document is available on the investor relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 13th. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, August 6th, 2021, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These statements are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties, and other factors including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now I'll turn the call over to MainStreet's CEO, Dwayne Hijak.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate you taking the time to join us, and we hope that everyone is doing well and staying healthy and safe. Joining me today with prepared comments are David Magdahl, our President and Chief Investment Officer, and Jesse Morris, our Executive Vice President and Chief Operating Officer. Also joining us for the Q&A portion of our call are Vince Foster, our Executive Chairman, Nick Masserve, our Managing Director and Head of our Private Credit, formerly Middle Market Investment Group, and Brent Smith, our CFO. On today's call, I will provide my normal updates regarding our performance in the quarter, while also providing updates on our asset management activities, our investment activities and current investment pipeline, our recent dividend increase and our expectations for dividends going forward, and several other updates. Following my comments, David and Jesse will provide additional comments on our investment strategy, investment portfolio, financial results, and future expectations, after which we will be happy to take your questions. We are pleased with our second quarter results, which we believe demonstrate the strength and momentum of our Main Street platform and the quality and strong performance of our diversified group of portfolio companies. The quarter represented our third consecutive quarter of sequential growth in total investment income, with the total investment income for the quarter representing a significant increase from our pre-pandemic levels and with all components of income above their pre-pandemic levels. Our performance resulted in distributable net investment income, our DNII, well in excess of our monthly dividends paid to shareholders during the quarter and significantly higher than last year, along with continued improvement in our net asset value per share. Our results also included a net increase in net assets from operations of $1.39 per share and an annualized return on equity for the quarter over 24%, both of which are Main Street records. As we look forward to the second half of the year, we are excited about our investment activities since quarter end and the size and quality of our current investment pipeline in both our lower middle market and private loan investment strategies. and believe we are very well positioned to continue to execute on these attractive investment opportunities due to our conservative capital structure and significant liquidity position. The operating performance across most of our portfolio companies continued to improve during the quarter, resulting in over $35 million of net appreciation in our lower middle market investment portfolio and a 3.4% increase in our net asset value, our NAB per share in the quarter. The strong performance of our portfolio companies combined with ongoing organic and acquisition growth activities at several of our high-performing portfolio companies provide us optimism about our ability to generate incremental fair value improvement and NAV per share increases over the next few quarters. We also made continued progress in our asset management business during the quarter. This includes progress at MSC Income Fund, the non-traded BDC we advised through our external investment manager, which increased its investment portfolio by over 14% during the second quarter, and paid an increased dividend to the fund shareholders in July. We remain excited about our plans for the fund as we continue to execute on our investment strategies and other strategic initiatives, and we are optimistic with our outlook for the future performance of the fund. At MS Private Loan Fund 1, our new privately held fund that we launched a few quarters ago, We accept its significantly increased capital commitments from investors and continue to grow its investment portfolio through its co-investment activities with Main Street and MSC Income Fund and our private loan investment strategy. The growth of our asset management business has been significantly beneficial to our ability to execute our private loan strategy, and we expect these benefits to increase in the future. We remain excited about our strategy for growing our asset management business within our internally managed structure, an increase in the contributions from this unique benefit to our Main Street shareholders. Based upon our results for the second quarter and the positive developments that our existing portfolio companies, combined with our favorable outlook in each of our core investment strategies and for our growing asset management business, and the benefits of our efficient operating structure and strong liquidity position, earlier this week our board declared an increase to our monthly dividends for the fourth quarter to 21 cents per share, payable in each of October, November, and December, representing a 2.4% increase from our monthly dividends for the third quarter. We are also confident that we will be in position to generate DNII at levels sufficient to provide continued coverage of our monthly dividends and increase future dividends in 2022 consistent with our long-term historical practices. Now turning to some additional details on our investment activities in the second quarter and our current investment pipeline, we completed lower middle market investments of $26 million in the quarter. As of today, I would characterize our lower middle market investment pipeline as well above average. We remain very active in our lower middle market strategy, and we are excited about the investment opportunities in the current pipeline. Consistent with our activities since the beginning of the pandemic, our recent investments and the current pipeline include several follow-on investments in existing portfolio companies as we and our companies actively look to execute on various growth opportunities. We view these follow-on investment opportunities as very attractive, as they allow us to make follow-on investments in some of our top performing companies and management teams and provide the opportunity for meaningful equity value creation through these accretive acquisitions and continued fair value appreciation on these investments going forward. As we noted in our comments last quarter, we believe that several factors are driving the significant increase in activity in our current pipeline. These factors include an increased focus on financial and estate planning priorities by many entrepreneur owners, after the difficult environment experience broadly across the economy since early 2020, combined with significant uncertainty and concern regarding increasing future tax rates, particularly taxes on capital gains. Consistent with our historical experiences over the last two decades as the industry-leading partner for lower-middle-market companies and their management teams, we believe that our unique combined debt and equity investment offering and our ability to be a long-term to permanent partner for the companies we invest in positions us to be a favorite investment partner for these business owners. We expect that this position will continue to result in attractive new lower middle market originations for our Main Street platform through the end of the year. Due to the strength and quality of our lower middle market portfolio companies, we have also experienced robust interest in a number of these portfolio companies, which could result in a few additional exits and significant realized gains and additional fair value appreciation over the balance of the year. During the second quarter, we also continued the successful focus of our investments in our private loan strategy, resulting in new investments totaling approximately $200 million and representing a record level of originations for this strategy. As of today, I would characterize our private loan investment pipeline as above average. With that, I will turn the call over to David.