Main Street Capital Corporation

Greetings and welcome to the Main Street Capital fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the form of 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 Zach Vaughn. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's fourth quarter 2024 earnings conference call. Joining me today with prepared comments are Dwayne Hijak, Chief Executive Officer, David Magdahl, President and Chief Investment Officer, and Ryan Nelson, Chief Financial Officer. Also participating in the Q&A portion of the call are Jesse Morris, Chief Operating Officer, and Nick Mazur, Managing Director and Head of Main Street's Private Credit Investment Group. Main Street issued a press release yesterday afternoon that details the company's fourth quarter and full year financial operating results. This document is available on the investor relations section of the company's website at mainstcapital.com. The replay of today's call will be available beginning an hour after the completion of the call and will remain available until March 7th. 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, February 28th, 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. 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 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 Investment Income, or DNII. DNII is Net Investment Income, or NII, as determined in accordance with US Generally Accepted Accounting Principles, or GAAP, excluding the impact of non-cash compensation expenses. Management believes that presenting DNII and the related per share amount are useful and appropriate supplemental disclosures for analyzing Main Street's financial performance as non-cash compensation expenses do not result in a net cash impact to Main Street upon settlement. Please refer to yesterday's press release for reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per share basis. Mainstream defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net assets. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third party sources and has not been independently verified. Now I'll turn the call over to Main Street CEO, Dwayne Hesok.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone's doing well. On today's call, I will provide my usual updates regarding our performance in the fourth quarter. We're also providing a few updates on our performance for the full year. I'll also provide updates on our asset management activities, our recent dividend declarations, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates. Following my comments, David and Ryan will provide additional comments regarding our investment strategies, investment portfolio, financial results, capital structure and liquidity, and our expectations for the first quarter of 2025, after which we'll be happy to take your questions. We are extremely pleased with our fourth quarter results, which closed another great year for Main Street. as highlighted by a record annualized return on equity of 25.4% for the quarter. Our positive performance in all four quarters for the year resulted in a return on equity of 19.4% for the full year, strong levels of NII per share and DNII per share to fund our record level of annual shareholder dividends, and a new record for NAV per share for the 10th consecutive quarter. We believe that these continued strong results demonstrate the sustainable strength of our overall platform the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business, and the continued underlying overall strength and quality of our portfolio companies. 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. This allowed us to continue our trend of increasing the dividends paid to our shareholders over the last few years, We'll also continue to generate DNII per share, which exceeds the total dividends paid to our shareholders. 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, our significant available liquidity, and our cost-efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future. 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. Our NAV for share increased in the quarter, primarily due to the impact of net fair value increases in our investment portfolio, including the benefit in the quarter from the largest realized gain in our firm's history and the continued benefits from our asset management business. Ryan will discuss our NAV per share increase in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in our lower middle market equity investments. The realized gain that I referenced was a $54 million realized gain on the exit of our equity investment in Perlmire, 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 Pearlmire management team partners. The benefits for Main Street included significant dividend income, fair value appreciation, and the realized gain, resulting in best-in-class returns on our equity investment, in addition to the attractive interest income provided by our debt investments. This highly attractive investment also has one of the biggest benefits we provide to our portfolio 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 without experienced dilution of their existing ownership percentage. We continue these types of value-creating activities in the fourth quarter and are excited 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. 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 companies. Consistent with my comments over the last few quarters, we also continue 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. Our lower middle market investment activity in the fourth quarter included total investments of $168 million, including investments totaling $116 million in two new portfolio companies, which together with the elevated repayment activity in the quarter, primarily due to the Perlmire exit, resulted in a net increase in our lower middle market investments of $11 million. 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. We've also continued to produce favorable results in our asset management business. The funds we advised through our external investment manager continue to experience favorable performance in the fourth quarter, resulting in significant incentive fee income for our asset management business for the ninth consecutive quarter, and together with our recurrent management fees, a significant contribution to our net investment income. 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, growth in assets under management, and broader market-based drivers. 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. As part of our efforts to grow our asset management business, we are very pleased that in late January, MSC Income Fund, A BDC advised by our external investment manager and our largest asset management business initiative successfully completed a listing on the New York Stock Exchange and a public equity offering in which the fund raised net equity proceeds of $91 million. We were very pleased with the listing and equity offering, which resulted in the fund being able to accelerate the timing and increase the size of the offering. We are very excited about our future plans for the Missy Income Fund and believe that the fund's listing and equity offering, along with the transition of its investment strategy and investment portfolio, to be solely focused on co-investing with Main Street and our private loan investment strategy, provides the fund the ability to continue to provide its shareholders with a very attractive source of recurring dividend 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. 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 30 cents per share payable in March, representing our 14th consecutive quarterly supplemental dividend and regular monthly dividends for the second quarter of 2025 of 25 cents per share payable in each of April, May, and June. representing a 4% increase from the second quarter of 2024. The supplemental dividend for March is a result of our strong performance in the fourth quarter and will result in total supplemental dividends paid during the 12-month period of $1.20 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continue to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV. Based upon our expectations for continued favorable performance in the first quarter, we currently anticipate proposing an additional supplemental dividend payable in June 2025. Now turning to our current investment pipeline, as of today, I would characterize our lower-middle-market investment pipeline as average, with several new investments scheduled to close before quarter end. We believe that the unique and flexible financing solutions that we can provide to lower middle market companies and their owners and management teams in 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 lower middle market investment activity over the next few months. We also continue to be very pleased with the performance of our private credit team and the significant growth they have provided for our private loan portfolio and our asset management business. And as of today, I would also characterize our private loan investment pipeline as average. With that, I will turn the call over to David.