MSC Income Fund, Inc.

Greetings and welcome to the MSC Income Fund second quarter earnings conference call. At this time, all participants are on a listen-only mode. A 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. Thank you, Mr. Vaughn. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's second quarter earnings conference call. Joining me today with prepared comments are Dwayne Ejok, Chief Executive Officer, David Magdahl, President and Chief Investment Officer, Nick Meserve, Managing Director and Head of the Private Credit Investment Group, Corey Gilbert, Chief Financial Officer. MSC Income Fund issued a press release yesterday afternoon that details the fund's second quarter financial and operating results. This document is available on the investor relations section of the fund's website at mscincomefund.com. The replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 21st. Information on how to access the replay was included in yesterday's earnings release. 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, August 14th, 2025, and therefore you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening. Today's call may contain forward-looking statements. Any 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 fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. The 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. 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. 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. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now I'll turn the call over to MSC Income Fund CEO, Dwayne Hichot.

Thanks, Zach. Good morning, everyone, and thank you for joining us for the MSC Income Fund second quarter conference call. We appreciate your participation on this morning's call, and we hope that everyone's doing well. On today's call, Nick, David, Corey, and I will provide you with the fund's key quarterly updates, after which we'll be happy to take your questions. We are pleased with the fund's performance in the second quarter, which resulted in a return on equity of 9% and favorable net investment income per share. We believe that the second quarter results provide visibility to the opportunity for continued favorable performance in the future, with the potential for increased net investment income and shareholder dividends as we work to expand the fund's investment portfolio over the next several quarters. We remain confident that the fund's increased current liquidity and path to additional debt capacity obtained through the fund's successful listing and related equity offering earlier this year, together with the change in the fund's investment strategy to be solely focused on its private loan strategy for investments in new portfolio companies, will strengthen the fund's ability to deliver attractive recurring total dividends and favorable total returns to the fund's shareholders in the future. The fund generated NII per share of 35 cents in the quarter, after excise tax and NII-related income taxes of 2 cents per share, or 37 cents on a pre-tax NII basis, which Corey will discuss in more detail. This favorable performance gave us the confidence to recommend that our fund's board of directors declare a regular quarterly dividend of 35 cents per share and a supplemental quarterly dividend of 1 cent per share, which I'll discuss in more detail later. The fund finished the quarter with an NAV per share of $15.33, which Corey will also discuss in more detail. While we are pleased with the fund's recent results, we continue to believe that the fund has the opportunity to increase its ROE in the future through several post-listing changes and activities, including the favorable changes to the fund's fee structure, which, among other changes, provides for additional future contractual reductions in the fund's annual base management fee percentage as the fund's lower middle market investments decrease as a percentage of the fund's total investment portfolio. The listing also provided the fund the opportunity to expand its utilization of debt capital, and we believe gives the fund the opportunity to achieve a lower cost of capital in the future. Although we continue to be encouraged by the favorable overall performance of most of the fund's portfolio companies, as noted on our call last quarter, and as Nick will discuss in more detail, we have experienced underperformance in certain of our private loan portfolio companies, and this is having a negative impact on the contributions from the fund's private loan portfolio. We continue to actively monitor these investments and are working with the portfolio companies to achieve the best possible outcome for each investment. Now turning to investment activity, the fund's private loan investment activity in the quarter was slower than the expected normal quarterly activity, primarily due to lower overall levels of private equity industry investment activity, resulting in a net decrease in private loan investments of $30 million, which Nick will cover in more detail. Despite the slower than expected private loan activity in the quarter, We remain confident in our ability to grow this portfolio in the future with the fund's additional liquidity and capital availability. The fund increases lower middle market investment portfolio in the quarter by $16 million as a result of several investments in existing portfolio companies. The fund remains highly focused on deploying the liquidity achieved through the recent equity offering and the corresponding increase in available debt capacity in the new private loan investments. maximizing the benefits from the fund's legacy lower-middle-market investment portfolio and recycling existing capital into private loan investments as investments are exited or repaid. In addition to the fund's focus on deploying its current liquidity, at the end of January 2026, the fund will achieve expanded regulatory leverage capacity, effectively doubling the fund's current regulatory leverage limit and providing the fund the opportunity to deploy additional capital into new private loan investments, further grow its investment portfolio, and achieve the benefits of a reduced base management fee percentage. Based upon the fund's results for the quarter, we are pleased that we are in position to recommend that the fund's board of directors declare a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share, both of which are payable on October 31 to shareholders of record as of September 30. Going forward, the fund expects to continue to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include a regular quarterly dividend and a supplemental quarterly dividend, to be set at an amount in line with the fund's pre-tax NII. As such, we expect to recommend that our Board continue to declare future supplemental quarterly dividends to the extent the fund's pre-tax NII exceeds its regular quarterly dividends paid in future quarters. Based upon the most recently declared regular and supplemental quarterly dividends and the current stock price, The fund is currently providing its shareholders a dividend yield of approximately 10%. As the fund executes its transition to a private loan-only investment strategy and investment portfolio and optimizes its use of leverage, our goal is for the fund to increase the total dividends paid to shareholders in the future. As we look forward to the fund's near-term investment activities, given the continued slower overall private equity industry investment activities, I would characterize the private loan investment pipeline as slightly below average. Despite this lower market environment, we continue to have a positive view of the current investment opportunities, and we remain confident in our ability to generate attractive new private loan investment opportunities in the future and grow the fund's investment portfolio over the next several quarters. My last comment is a reminder on the continued 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, Main Street has purchased over $21 million of equity in the fund, over $4 million of which was purchased as part of the fund's public equity offering in January. In conjunction with the offering, Main Street also 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 at times if and when the fund's shares are trading at predetermined levels below the fund's NAV per share. With the terms of such plan being identical to the fund's open market share repurchase plan, to purchase up to $65 million of the fund shares, and with any open market share purchases being split by the fund and Main Street on a pro-rata basis. We believe Main Street's significant equity ownership in the fund and its participation in the post-listing share purchase plan demonstrates Main Street's commitment to the future success of the fund and reinforces Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy. With that, I'll turn the call over to Nick.

Thanks, Dwayne, and good morning. As Dwayne highlighted in his remarks, we are pleased with the performance of the fund's private loan investment portfolio in the second quarter. The overall operating performance for most of the fund's private loan portfolio companies continue to be positive, which contributed to the fund's favorable second quarter financial results. The fund has continued to see softness in certain 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. We have been and continue to work with the private equity owners and management teams of the fund's private loan portfolio companies to understand their current tariff exposures and mitigation plans. Based upon those discussions and activities to date and the overall diversity of the private loan portfolio, we are comfortable with the fund's estimated tariff exposure. The largest portion of the fund's investments continues to be in its private loan strategy, which, as a reminder, is now the fund's sole focus with respect to new portfolio company investments. At quarter end, 93% 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. The portfolio had an attractive weighted average yield of 11.5%, which was down 50 basis points from the end of 2024, primarily as a result of decreases in the SOPR rates for these floating rate debt investments. During the second quarter, the fund invested $44 million in the private loan portfolio. which after aggregate investment activity resulted in a net decrease of $30 million. Funded in the second quarter with investments in 82 private loan portfolio companies, totaling $742 million of fair value and representing 60% of the fund's total investment portfolio at fair value. As Duane mentioned, our private loan pipeline is below average at the moment. As we all know, M&A activity overall, and especially within the private equity industry, has been lower than historical averages and the market's general expectations. While we expect activity to pick up in the second half of the year, we have also expected this activity to have been busier in the first half of the year. Another reason for the fund's lower investment activity has been market pricing on new deals. A portion of the market we focus on, the lower end of the middle market, has come in some over the last two quarters of 2025, and as a result, we missed out on a few opportunities. The good news is we are not seeing other terms become more aggressive on transactions, and we are encouraged that we have closed a few deals since quarter end and are starting to see the pipeline build. With that, I'll turn the call over to David.

Thanks, Nick. Good morning, everyone. In addition to the private loan portfolio that Nick just covered, the fund also maintains a portfolio 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, utilizing the customized one-stop shop debt and equity financing solutions provided by Main Street's lower middle market investment strategy. After the listing of the fund shares on the New York Stock Exchange at the end of January, the fund will not make any investments in new lower middle market portfolio companies, but will continue to participate in follow-on investments in existing lower middle market portfolio companies. We are pleased to report that the overall operating performance for most of the fund's lower middle market portfolio companies continues to be positive, which contributed to the attractive second quarter financial results. 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. During the second quarter, the fund had follow-on investment activity related to its existing lower middle market investments which resulted in a net increase in the lower middle market portfolio of $15.9 million. At quarter end, the lower middle market portfolio had investments in 57 portfolio companies, totaling $458 million of fair value and representing 37% of the fund's total investment portfolio. The lower middle market portfolio at fair value was comprised of 54% debt investments and 46% equity investments. These debt investments had an attractive weighted average yield of 13%, 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. 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 investment realized gains upon the future exit of these lower middle market portfolio companies. Turning to the fund's total investment portfolio as of June 30th, the fund continued to maintain a highly diversified portfolio with investments in 147 portfolio companies spanning across numerous industries and end markets. The fund's largest portfolio companies represented less than 4% of the total investment portfolio fair value at quarter end, and less than 3.5% of total investment income for the trailing 12 months ended June 30th, with most portfolio investments representing less than 1% of the fund's income and assets. With that, I will turn the call over to Corey.

Thank you, David, and thank you to everyone who has joined us today. The fund's total investment income for the second quarter was $35.6 million, an increase of $1.7 million. or 5% from the second quarter of 2024, and 7.3% higher compared to the first quarter. The second quarter included income considered less consistent or non-recurring in nature of $0.9 million. As we previously discussed, these non-recurring items vary quarter to quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment repricing, and other activity related to debt investments. For the second quarter, these items were $0.1 million lower than the average of the prior four quarters, $0.7 million lower than the second quarter of 2024, and consistent with the first quarter. Dividend income for the second quarter increased by $0.9 million from a year ago and decreased by $0.2 million from the first quarter. The increase in dividend income from prior year was primarily due to an increase in dividends from lower middle market and private loan equity investments. The decrease in dividend income from the first quarter was due to a decrease in dividends from lower middle market equity investments. As we previously discussed, dividend income will fluctuate quarter to quarter based on the underlying performance, cash flows, and capital allocation activities of the fund's portfolio companies. Interest income increased by $0.5 million from the second quarter of 2024 and by $1.9 million from the first quarter. The increase from prior year was primarily due to higher average levels of income-producing investment portfolio debt investments, partially offset by an increase in investments on non-accrual status and a decrease in interest rates on floating rate debt investments, primarily resulting from decreases in benchmark index rates. The increase in interest income from the first quarter was primarily due to higher average levels of income-producing investment portfolio debt investments, primarily driven by investments made late in the first quarter. Fee income for the second quarter increased by $0.3 million from a year ago and increased by $0.7 million from the first quarter. The increase in fee income from both the prior year and the first quarter was primarily due to changes in investment activities. The fund's expenses for the second quarter decreased by $1.2 million from the prior year and increased by $1.9 million from the first quarter of 2025. The decrease from prior year was primarily driven by a $0.9 million decrease in interest expense and a $0.3 million decrease in base management fees. 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 reductions to contractual spreads. partially offset by an increase in weighted average outstanding borrowings used to fund a portion of the growth of the investment portfolio. The $1.9 million increase in expenses from the first quarter was primarily driven by a $1.4 million increase in incentive fees and a $0.4 million increase in interest expense. The increase in incentive fees was primarily due to a lower incentive fee in the pre-listing first quarter period under the pre-listing incentive fee structure. The $0.4 million increase in interest expense from the first quarter was largely driven by an increase in weighted average outstanding borrowings used to fund a portion of the growth of the investment portfolio, partially offset by decreases in weighted average interest rates on the fund's credit facilities due to reductions to contractual spreads. The funds expense ratio calculated as the funds total operating expenses net of any waivers and excluding interest expense as a percentage of the funds average total assets was 3% on an annualized basis for the second quarter compared to 3.4% for the prior year and 2.6% for the first quarter. Excluding incentive fees, the fund's expense ratio was 1.9% on an annualized basis for the second quarter, a decrease from 2.2% in the prior year and consistent with the first quarter. These variances were primarily due to changes to the base management fee and incentive fees under the amended advisory agreement after the listing on January 29, 2025. The fund's NII before taxes in the second quarter was $17.3 million, or 37 cents per share, increasing from $14.4 million, or 36 cents per share, from the prior year. The fund's NII in the second quarter was $16.3 million, or 35 cents per share, increasing from $13.4 million, or 33 cents per share, from the prior year. During the quarter, the fund recorded a net increase in the fair value of its investments of $0.9 million, representing the combined impact of $4.8 million of net realized gains, partially offset by $3.9 million of net unrealized depreciation. The net fair value increase was attributable to an increase of $2.9 million in the lower middle market portfolio, partially offset by decreases of $1.5 million in the private loan portfolio and $1 million in the middle market portfolio. Overall, the fund's operating results for the second quarter resulted in a net increase in net assets of $16.3 million and an NAV per share of $15.33, a two-cent decrease from the first quarter. As of quarter end, the fund had non-accrual investments comprising 2.6% of the total investment portfolio at fair value and 6.3% at cost. As of quarter end, the fund's regulatory asset coverage ratio was 2.34, and its net debt to NAV ratio was 0.71. 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 through January 2026, at which point the fund will benefit from expanded regulatory leverage capacity as previously approved by the Funds Board in January 2025. With that, I will now turn the call back over to the operator so we can take any questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Once again, that's star one to register a question at this time. Our first question is coming from Robert Dodd of Raymond James. Please go ahead.

Hi, guys. First question, on kind of the shrinking private loan book in the quarter, obviously lower M&A activity, et cetera, but Nick talked about missing out because of lower pricing. So with the optimism kind of that you seem to have into the second half, do you expect to hold the line on what you view as appropriate pricing, or do you think you're going to move lower on those deployment spreads given where the market is on pricing terms at the moment?

Sure, Robert. Thanks for the question. I'll give a quick And I'll let Nick add on if he has any additional color he thinks is appropriate to add. I'd say most of our view of the better second half is more driven by an expectation that there is more activity. That would be one component. I think, as we say here today, we've already seen some of the activity increasing here recently. So that also drives optimism. And then I think we've talked about this before, but as we have a larger existing portfolio on the private credit, private loan side, Those companies that are doing well, there's more of those that have had an opportunity to grow through acquisitions. Those acquisitions need financing. We love providing follow-on or additional financing to those types of companies. So we've also seen some increase on that side, and we expect to see continued activity there in the second half. So I'd say that's the primary driver of the optimism. When you look at rates, I think, from my perspective, For a high-quality deal, would we go inside by 25 basis points of what we would have done in the first half? We probably would, but I think we're going to continue to try and maintain as much consistency on pricing as possible. But, Nick, you add on any additional color.

Yeah, I'd echo that. I think one thing on the first half of the year, and really it's always the case, but pricing is a little bit more of an art than a science. I think there's a few deals. We've talked about it in the past. We're not trying to do 75 or 80 deals per year. We're shooting for 15 to 25 per year. And if we miss on a couple of pricing, you know, we're off by 25 basis points and they go somewhere else, you know, we probably have more of that in the first half of the year than we have historically. And so, you know, I think we right-sized that a little bit. Maybe we do dip down for better deals on 25 basis points. The second half of the year, you know, that's kind of where we think we'll hit our numbers for the total year. Does that make sense, Robert?

Yeah, yeah, it does. Thank you. I mean, just to that point, I mean, before the kind of the indications where you might get, by kind of year end before January, you might get leverage into the 90s before the leverage limit changes. I mean, how do you feel about that given where you are now and what the expectations or maybe hopes are for more activity? I mean, do you think you're going to get, and it's a very hard question, I realize that, but just kind of sense of where do you think is realistic by kind of year end in terms of portfolio size leverage, whichever way you want to look at it?

Sure, Robert. I'd say that our view of our ability to get there today versus where it would have been six or nine months ago obviously is a little less confident just purely because of the activity that we've had in the first two quarters of the year. But I think when you look at our expectations, I think we still feel optimistic about our ability to grow the portfolio significantly and head in that direction. I don't know if we get all the way to that level by year end or even by January, but it's largely going to be dictated or determined by the overall market activity in the industry. But I think we still feel very confident about where we are, and I think we've got multiple drivers, just the overall investment activity, the existing portfolio growing through acquisitions and add-on financing for us that can still get us to a level that's very, very good for us.

Got it. Got it. Thank you. Then if, you know, a couple more. Well, on, I think Nick, you said in your prepared remarks, but obviously it's for anybody, comfortable with the level of tariff exposure in the portfolio right now? I mean, can you give us any more, I mean, has that been shifting in terms of like, you know, how much exposure there is? Well, I mean, the tariffs keep shifting as well. But can you give us any more, like what gives you the comfort? Is it adaptions on, the portfolio company side, or is it how tariffs are shaking out? What's kind of the give and take in that?

Like you said, it is moving around and shifting week by week. I think where I'd say where we feel comfortable is it's a combination of where the management teams have led. We don't have a lot of portfolio companies that have 100% exposure to one country or have no options to outsource elsewhere. And so we think most companies have some flexibility to move around. It might take a little bit of time to get there. and then also what they can do to work around different tariffs, have some exemptions, et cetera. I think as we look at the portfolio in whole, and as it moves around week by week, we do track that and see what we're exposed to. But right now, I think we feel overall comfortable it's going to be a massive impact to the portfolio.

Got it. Got it. Thank you. Then one final one off the fence. Housekeeping. Of the $912,000 in federal and state income, other taxes, et cetera, not the excess tax, the $900,000, how much of that was tax on dividend income at the blockers. I mean, ballpark. Is the majority of that number the tax on your dividend income where it's held in blockers, or any comment there?

Yeah, sure, Robert. I'd say that when you look at the amount of tax that's up in the NII-related section, I would say that the vast majority of that, outside of excise tax, the vast majority of that is going to be taxed on the dividend income from flow-through companies that are held by the blockers. So that's the driver. Obviously, you've got to split it between current and deferred in terms of what's payable versus something that will be paid at some point in the future. But the vast majority of it would be related to dividend income from the flow-through entities. Got it. Thank you. Thank you.

Thank you. The next question is coming from Brian McKenna of Citizens. Please go ahead.

Thanks. Good morning, everyone. So maybe just another question here on origination activity. I appreciate the detail on where the pipeline stands today and then also just kind of what you're seeing in the market more broadly. But in terms of activity in the second quarter, I'm assuming April was pretty slow. I mean, it was an air pocket broadly just given Liberation Day. But how did fundings trend in May and June and then Any more detail you can share just on quarter-to-date activity or even how July funding is compared to May or June?

You're spot on there. April, obviously, post-tariff announcements was a very slow month and everything kind of got delayed. I'd say the time of the quarter, most of that would have closed in June. And then for what we did close that quarter and also repayments came in much heavier in June than they would have been in April. On year-to-date or quarter-to-date, I'd say we've closed, you know, a few add-ons to the existing portfolio and then one new platform. But overall, I'd say we feel good about what we've closed to date. That's partially what's pulled the below average pipelines. We did close some of the pipeline that we had existing. Then we're building that back up today. The other one I'd say is, and just last one is, I think we were, when we say below average, I think it's barely below average, if you will. I think Dwayne said slightly below average. But it's kind of going back and forth on, it's building, so it's close to being average. Like right now, we're below average.

Brian, just give a little more color or granularity. When you look at our activity to date in the third quarter, the net activity on the private loan side is just over $50 million of net investment activity.

Yeah. Okay, that's helpful. Thank you both. And then just in terms of credit quality, you know, we talked about this a little bit the last couple quarters, you know, if I look at the 2-2 dynamics, you know, non-accrual debt costs increased a little bit to 6.3% from 6.1%. So can you just talk about some of the puts and takes here in the quarter? And then, you know, where are we in the process of working through some of these non-accruals? And then, I mean, is there any expectation on the timeline when some of these could get resolved or even, you know, non-accruals can start to move lower again?

Sure, Brian. I'll give a quick answer and then Nick can add on again if he has, you know, has some additional thoughts. I'd say in the quarter, it was plus one, minus one. You had one, you know, one investment that was on non-accrual status, you know, come off. You had a new one that came on. I think as we look at the the non-accruals. I do think that we're making progress on a couple of those non-accruals. We're hopeful that at least one, if not more than one of those, could move off non-accrual status back onto accrual. Obviously, as you probably expect, if something gets restructured, it won't go back 100% accrual, but we'll move to some of the investment being on accrual going forward. So I think we feel good about where we are. Obviously, those transactions are always difficult because there's a lot of gives and takes between us as a lender and the private equity sponsor and the portfolio company in terms of that negotiation. But I think we feel good about several of those activities, and we think several of the non-accruals will be resolved either in Q3 or Q4. But Nick, you can add on as well.

Yeah, we expect a couple of those to be done by the end of 3Q, and then one or two more to get done by fourth quarter. And so I think from the consumer-focused names, I think we've transitioned most of those and restructured the names that we're seeing weakness in. And so we expect that to get back to normal I'd say normal flow, if you will, going to 26.

Okay. I'll leave it there.

Thank you, guys. Thank you, Brian.

Thank you. The next question is coming from Aaron Saganovich of Truist Securities. Please go ahead.

Thanks. Maybe you could talk a little bit about your ability to exit some of the equity positions in the lower middle market and rotate those into the private loan and Maybe just remind us how much control you have in those situations and whether or not, or maybe just giving us a timeframe of expectation of when those might occur.

Sure, happy to do that. Thank you for the question and thanks for joining us this morning. I would say that similar to the comment we gave last week on the Main Street side, we had a couple of exits in the lower middle market portfolio for the Main Street platform Over the last nine months, unfortunately for MSC Income Fund, those were investments that they had not been invested in. Despite those exits, the guidance we gave last week was that we're continuing to see kind of elevated or some activity from an exit standpoint. In the case of those names that we referenced last week, MSC Income Fund is invested. If you recall, most of the investments historically on the lower middle market side were would have been an 80-20, 80% Main Street, 20% MSC income fund splits. You have to take that split into consideration. But I think we feel good about those investments. And if we were to exit, I think we would feel really good about where the realized event would compare to our historical or our current fair value. In terms of control, our approach on the low and middle market is always about partnership. So even if we had equity ownership control, we're not going to exit something without the support of our partners at the management team. So I would say in each of those situations where we're looking at a potential exit, it's kind of a joint decision, fully supported both by us and the management team. And I think it's supported because if we decide to seek an exit, we expect to have a really good outcome.

Yeah, that makes sense. And then in terms of the leverage getting higher over time, can you just remind me where your target range is there in what that represents to the extent that you still have some of the LMM in the portfolio. I'm assuming you carry a lower leverage on that than you would on the private loan side.

Yeah, I think when you look at our leverage, we look at it on a combined basis. Obviously, as we shift to the private loan portfolio and have a lower middle market decrease, that naturally will make you more comfortable in having a higher leverage. But as we've said in the past, the transition from lower middle market to private loan is going to take a long time. We take a long-term to permanent holding period on the lower middle market investments, so it won't be a quick switch or transition. But despite that, we do expect to take leverage up over the next couple of quarters. I'll let Corey kind of give a reminder on our current leverage targets and then how those leverage targets would move once we have the expanded BDC regulatory leverage.

Thanks, Dwayne. Good morning. Our leverage targets are, we are below it currently as of 6.30, and we try to lever the portfolio anywhere between .75 and .85 and .95. And as we mentioned on the call and in previous calls as well, that our board of directors back after we did the listing in January of 2025, have, you know, approved the expanded leverage, which will go into place, you know, in January of 2026, in which we will lever the portfolio anywhere between 1.15 and 1.25x. Okay. All right.

That's perfect. Thank you very much. Thank you.

Thank you. Once again, that's star one to register a question at this time. The next question is coming from Paul Johnson of KBW. Please go ahead.

Good morning. Thanks for taking my questions. On just the weaker consumer trends that you're sort of noticing, what is, I guess, your assessment of kind of the total underlying consumer exposure within the portfolio?

Sure, Paul. Thanks for joining us. Thanks for the question. I'd say, you know, when you look at our view of the consumer weakness, just as a reminder, I'd say that's not something that's new. I think we've been talking about it, at least on the Main Street side, When we were having quarterly conference calls prior to MSC income fund going public, probably been talking about it for probably two years, we had kind of seen it coming, had expected there to be some pain. And I'd say over that time period, you've seen a number of companies that have been able to deal with it fine, but you've seen some companies, as evidenced by the fair value depreciation and the non-accruals, seen some companies that have had more stress on their performance, which has resulted in the stress on the non-accrual side. I think Nick may have said this earlier. I'll let him kind of clarify if my memory is wrong, but I think as we look at it, we feel pretty good about the exposure today. I think we've taken most of the pain, both in terms of non-accrual, fair value depreciation, whether that's unrealized or if it's gone through a restructuring and it's already been realized. I think we feel pretty good about the downside that we've taken. Now we're just trying to maximize the recovery on those names, but I think that's the way that I would categorize it. I don't think we have a disproportionate exposure. It just has been a disproportionate amount of our underperforming companies for the last couple of years.

I would say one thing is none of them are really consumer product businesses. They're just the end user eventually becomes the consumer. We're using a pretty wide swath on how we say consumer, but really the driver of that is really consumer's pocketbook, whether that's a service or a a product that eventually works its way down to the consumer side of it. But like Dwayne said, I think we feel good that we've worked through most of those issues from a MARC perspective, a Fair Valley perspective, and now working through the back end of it of how do we drive that recovery on the restructuring.

I appreciate that. And last one for me, I'm wondering if there's any sort of relationship just between kind of the broader level of M&A activity, particularly in the lower middle market and the dividend income that you generate from the portfolio? I mean, is there some sort of relationship that plays out over time, whereas M&A activity stalls out or just remains sluggish? Does that drive higher than average dividend income from those companies over time as they're looking to potentially monetize some of their value out of that, or does that exist in your opinion?

Yeah, Paul, the way I would respond to that is our dividend income across the lower middle market portfolio, because that's where it's heavily concentrated, it's going to come from companies that have been in the portfolio for a while that have performed well and have delevered, and as a result, they have the same or greater amounts of free cash flow compared to what we underwrote, but they just don't have the same leverage. So there's less interest expense, there's more free cash flow, if they don't have a use for it, i.e., an acquisition or significant capex, then that cash likely will be paid out in the form of dividends. So that's really the key driver for our dividend income contributions. When we have high-performing companies and those companies exit, clearly we would lose that dividend income. But I wouldn't say it's a direct correlation with the M&A market. I think today, obviously, we've said the M&A market, from a private equity standpoint, and I would say probably in general, just given the uncertainty in the environment or the economy for the last couple of quarters, has been less than kind of average or at least historical average. But we've got a bunch of great companies, and those companies continue to perform. They get on the radar of every private equity group that's out there. And if they want to kind of acquire those companies and we and our partners decide that it makes sense to pursue that, you know, that exit, we're going to end up in a really good situation. So we will lose dividend income on those, but I wouldn't say that there's a direct correlation between the two if I understand your question.

Well, for me, thank you very much. Thanks, Paul.

Thank you. The next question is a follow-up coming from Brian McKenna of Citizens. Please go ahead.

Okay, great. Thanks for the follow-up. So just on the dividend issue, Looking out over the next 12 to 18 months, you know, there's a few variables within that just in terms of base rates and credit quality from here. But, you know, you're in a position to grow the portfolio. So, I mean, in the event earnings are flat to up over the next 12 to 18 months, you'll have some more capacity on the dividend. So, I mean, how are you going to pay that? I mean, would you look to increase the regular or would you pay that kind of step up in earnings if that exists through the supplemental?

Yeah, Brian, you may not like this answer, but I think it will be determined based upon the quality of the income. The more of that income that we think is recurring and will be there for several quarters in the future, the more likely you'll be to increase the monthly. The more that it's one time or less visible that it's recurring, I think you're more inclined to either increase the supplemental or just retain some of that for retained earnings or portfolio growth purposes. But I do think we feel comfortable with where we are in terms of having several levers that could allow us to potentially grow NII and grow the dividend going forward. I think you guys know it, but part of it is utilizing the significant leverage capacity that we have today, but more importantly, what we'll have beginning at the end of January. But also, as we continue to execute and grow the private loan portfolio and have some migration from lower middle market to a private credit, we'll eventually get the lower middle market to fall below 20% of fair value. And when we do that, just the simple contractual change that takes the base management fee down from 1.5% to 1.25% basically represents about $0.02 a share per quarter. So we think we've got a number of drivers that can be positive catalysts there, and our goal is to execute our strategy and deliver that benefit to the shareholder over the next couple of quarters, whether that's two quarters, four quarters, or six quarters. We feel confident in our ability to deliver that over the future time periods.

Thanks, Dylan.

Thank you.

Thank you. At this time, I would like to turn the floor back over to management for closing comments.

Thank you, Operator, and thank you again to everyone for joining us today. We appreciate the support of MSC Income Fund, and we'll look forward to talking to you again in November after our third quarter earnings release.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.