Main Street Capital Corp

NYSE:MAIN

Earnings Call Transcript 2023-Q1

[Operator]

Greetings, and welcome to the Main Street Capital Corporation, First Quarter 2023 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. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zach Vaughan with Dennard Lascar Investor Relations. Please go ahead.

[Zach Vaughan, Dennard Lascar Investor Relations]

Thank you, operator and good morning everyone. Thank you for joining us for Main Street Capital Corporation's first quarter 2022 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; and Jesse Morris, Chief Financial Officer and Chief Operating Officer. Also participating for the Q&A portion of the call is Nick Meserve, 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 first 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 May 12.

Information on how to access this replay was included in yesterday's release. We also advised you that this conference call is being broadcast live through the Internet and can be accessed on the company's home page. Please note that information reported on this call speaks only as of today, May 5, 2023, 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 or DNII. DNII is net investment income or NII as determined in accordance with U.S. 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 since non-cash compensation expenses do not result in net cash impact to Main Street upon settlement. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Two additional key performance indicators that management will be discussing on this call 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. Main Street 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.

And now, I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

[Dwayne Hyzak, Chief Executive Officer]

Thanks, Zach. Good morning, everyone and thank you for joining us today. We appreciate your participation on this morning's call and we hope that everyone is doing well. On today's call I’ll provide my usual updates regarding our performance in the quarter, while also providing updates on our asset management activities, our recent dividend declarations, our expectations for dividends going forward, our current investment pipeline and several other noteworthy updates.

Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, and our expectations for the second quarter, after which we'll be happy to take your questions.

We're very pleased with our performance for the first quarter, which was highlighted by a return on equity of 14.9%, and includes new quarterly records for net investment income or NII per share and distributable net investment income or DNII per share, and net asset value, or NAV per share for the third consecutive quarter.

Our strong performance included continued positive results from our lower middle market and private loan investment strategies and significant contributions from our asset management business. These results demonstrate the continued and sustainable strength of our overall platform. The benefits are differentiated and diversified investment strategies; the unique contributions of our asset management business and the underlying quality of our portfolio companies.

We are also pleased that we've seen our pipeline of investment opportunities in both our lower middle market and private loan investment strategies continuing to grow over the last few months, returning to levels more consistent with our expected base investment activity levels. Our attractive investment pipeline, together with our conservative liquidity position and capital structure provides us a continued favorable outlook for the second quarter.

Our DNII in the first quarter exceeded the monthly dividends pay to our shareholders by 59% and the total dividends pay to our shareholders by 26%. This strong performance allowed us to deliver significant value to our shareholders, while still conservatively retaining a meaningful portion of our income and growing our NAV per share. These positive results and the favor by outlook for the second quarter resulted in our recommendations to our Board of Directors for our most recent dividend announcements, which I'll discuss in more detail later.

Our NAV per share increased in the quarter due to several factors, including our retention of the excess NII per share above our dividends paid in the quarter; the impact of the fair value increases in our lower middle market investment portfolio and our wholly owned asset manager and the accretive impact of our equity issuances in the quarter.

Our lower middle market portfolio companies continued their overall favorable performance, which resulted in another quarter of net fair value appreciation and the equity investments in this portfolio. As we look forward to the next few quarters, we remain excited about the benefits we expect certain of our lower middle market portfolio companies to realize from the acquisitions they have completed over the last 12 to 18 months, largely funded by follow on debt investments we made in those portfolio companies, and we expect to see continued fair value appreciation in these portfolio companies in the future.

While investment activity in the first quarter was a little slower than our normal quarterly activity, we were still pleased that we executed lower middle market investments of $59 million. These investments resulted in a net increase in our lower middle market investments after repayments of $8 million.

Our private loan investment activities in the quarter included new investments of $44 million, which after aggregate repayments resulted in a net increase in our private loan investments of $24 million. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue [inaudible].

We've also continued to produce attractive results in our asset management business. The funds we advise through our external investment manager continue to experience favorable performance in the first quarter. This positive performance resulted in a significant amount of incentive fee income for asset management business for the second consecutive quarter, and as a result, we received a significantly higher contribution to our net investment income from our asset management business.

We're remain excited about our plans for these external funds that we manage as we execute our investment strategies and 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. We also remain optimistic about our strategy for growing our asset management business within our internally managed structure and increase in the contributions from this unique benefit to our main three stakeholders.

As part of this growth strategy, we're happy to announce that we have formally launched our next private loan fund, as a successor fund to our existing private loan investment fund and we hope to have our first closing for the fund before the end of the second quarter. We look forward to sharing additional details and updates on the new fund on our next conference call.

Based upon our results for the first quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business and the benefits of our efficient operating structure, earlier this week, our board declared a supplemental dividend of $0.225 per share, payable in June, representing our largest and seventh consecutive quarterly supplemental dividend. Our board also declared an increase to our regular monthly dividends for the third quarter of 2023 to $0.23 per share, payable in each of July, August and September, representing a 7% increase from the third quarter of 2022.

The increased supplemental dividend for June is a result of our strong performance in the first quarter, which resulted in DNII per share that was $0.395, op 59% greater than our regular monthly dividends paid during the quarter. The June 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12 month period of $0.60 per share, representing an additional 23% paid to our shareholders in excess of our regular monthly dividends and significantly increase in the current yield we are providing to our shareholders.

Including our supplemental dividends, our DNII per share for the first quarter exceeded our total dividends paid by $0.22 per share or 26%. We are pleased to be able to deliver the significant additional value to our shareholders, while also maintaining a significant portion of our excess earnings to support our capital structure and investment portfolio against risks from the current economic uncertainties that may be realized in the future, and to further enhance the growth of our NAV per share.

We currently expect to recommend that our board continue to declare future supplemental dividends to the extent DNII significantly exceeds regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV. Based upon our expectations for the continued favorable performance in the second quarter, we currently anticipate proposing an additional supplemental dividend payable in the third quarter of 2023.

Now turning to our current investment pipeline, as of today I would characterize our lower middle market investment pipeline as average. Despite the current broad economic uncertainty, we expect to continue to be active in our lower middle market strategy. Consistent with our experience in prior periods of broad economic uncertainty, we believe that the unique and flexible financing solutions we can provide to lower middle market companies and their owners and management teams should be an even more attractive solution today and should result in very attractive investment opportunities for us.

We are excited about these new investment opportunities, and we expect our current pipeline will be helpful as we work to maintain our positive momentum from the last few quarters. 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.

[David Magdol, President, Chief Investment Officer]

Thanks Dwayne and good morning everyone. As Dwayne highlighted in his remarks, we believe our strong first quarter financial results continue to demonstrate the strength of Main Street’s platform, differentiated investment approach and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continue to be positive, which contributed to our attractive first quarter financial results.

The continued favorable operating performance for the majority of our portfolio companies resulted in a net increase to the fair value of our lower middle market investments during the quarter and provided increased dividend income contributions to Main Street. Both our NAV appreciation and dividend income are a direct benefit of our long-term strategy of maintaining a mature investment portfolio that is well diversified by end market, industry, vintage and security types. Maintaining a mature and diverse portfolio has been the cornerstone of our philosophy over our 20 plus years of investment history, and will continue to be a key to our investment strategy in the future.

Each quarter we try to highlight key aspects of our differentiated investment strategy. This quarter we'd like to revisit several reasons why we believe that our structure as a publicly traded investment company with the significant benefits of permanent capital is a great match with our focus on investing in both debt and equity capital and lower middle market businesses. We also believe that our permanent capital structure can provide additional value during times of increased economic uncertainty and depressed debt and equity capital investment activity, similar to the economy's current situation.

First, on the new lower middle market origination side, we believe that our permanent capital structure allows us to be an ideal long-term to permanent partner for the owners, management teams and employees of privately held businesses. One of the limitations of a typical term-specific private equity fund, is that they are generally required to underwrite to a relatively short-term holding period and generally cannot represent a longer-term or permanent partnership solution for a business owner or their management team.

Our long-term investment structure allows us the flexibility to compete for transactions based on superior structural considerations as opposed to solely on valuation. Ultimately, we believe our flexibility generates a highly attractive investment structures that more traditional private equity funds cannot provide.

In addition, our ability to be a long-term to permanent partner to the companies we invest in allows the owners of these businesses and their management teams the ability to maintain the identity and independence of their companies, while also achieving the best outcomes for their company stakeholders.

Second, our long-term holding periods generate a diversified portfolio of seasoned lower middle market portfolio companies. Out of our 79 lower middle market portfolio companies, over half have been in our portfolio for greater than five years and a quarter have been in our portfolio for greater than a decade. These seasoned investments typically have lower relative leverage profiles since they have generally used free cash flow from operations to deleverage over time.

This tends to create three attractive opportunities for our high performing lower middle market portfolio companies. The opportunity for long term equity appreciation, the opportunity to pay dividends, and the opportunity to efficiently take advantage of internal and external growth initiatives as they arise. Because of our equity ownership, we are well aligned with our portfolio company owners and management teams to help them evaluate and pursue the best alternatives to create shareholder value.

Alternatively, should the portfolio company face difficult industry or economic headwinds given their lower relative leverage profiles, they tend to be well positioned to work through negative cycles when they arise. Because of Main Street's strong capital availability and our ability to provide both debt and equity capital solutions to our portfolio companies, we are ideally situated to move quickly to support our portfolio companies with add-on acquisitions and other growth opportunities.

Today, the environment for add-on acquisitions by our portfolio companies remain strong. We welcome the opportunity to make incremental investments in our lower middle market portfolio companies as we strive to create long term value for Main Street's shareholders alongside our partners at the portfolio company level.

Now, turning to the overall composition results from our investment portfolio as of March 31, we continue to maintain a highly diversified portfolio with investments in 195 companies, spanning across more than 50 different industries among our lower middle market, private loan and middle market portfolios.

Our largest portfolio company represented 3.1% of our total investment portfolio fair value and 3.7% of our total investment income for the last 12 months. The majority of our portfolio investments represented less than 1% of our income and our assets.

Our investment activity in the last quarter included total investments in our lower middle market portfolio of approximately $59 million, which after aggregate repayments on debt investments and return of invested equity capital resulted in net increase in our lower middle market portfolio of $8 million. Driven by the capabilities and relationships of our private credit team, we also completed $44 million in total private loan investments, which after aggregate repayments of debt investments and return of invested equity capital, resulted in net increase in our private loan portfolio of $24 million.

Finally, during the quarter, we had a net decrease in our middle market portfolio of $12 million as we continue to strategically deemphasize this strategy. At the end of the first quarter, our lower middle market portfolio included investments in 79 companies, representing over $2.1 billion of fair value, which is over 20% above our cost basis. We also had investments in 86 companies in our private loan portfolio representing $1.5 billion of fair value. And our middle market portfolio had investments in 30 companies representing $306 million of fair value. The total investment portfolio at fair value at quarter end was 110% of the related cost basis.

In summary, Main Street's investment portfolio continues to perform at a high level and deliver on our long-term goals. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday.

With that, I'll turn the call over to Jesse to cover our financial results, capital structure and liquidity position.

[Jesse Morris, Chief Financial Officer, Chief Operating Officer]

Thank you, David. As Dwayne and David mentioned, we are very pleased with our operating results for the first quarter, which include a number of quarterly records, including those for total investment income, and for NII per share, DNII per share and NAV per share.

Our total investment income in the first quarter increased by $40.9 million or 51% over the same period in 2022, and $6.4 million or 5.6% for the fourth quarter 2022, for a total of $120.3 million. Interest income increased by $34 million from a year ago and $7.1 million over the fourth quarter. We estimate that the continued benefit from increases in benchmark index rates drove just over half of the increases for both periods, with the remainder driven primarily by the continued growth in our debt investments.

Dividend income increased by $7.6 million over a year ago and by $1.8 million over the fourth quarter. The increase over the prior year was driven primarily by increases in dividends received from our lower middle market portfolio of companies, and from the external investment manager, while the increase over the fourth quarter was driven by increase in dividends received from our lower middle market portfolio of companies.

The first quarter investment income included elevated dividends and accelerated pre-payment and other activity that are considered less consistent. In the aggregate, these were approximately $7.1 million or $0.06 per share above the average of the prior four quarters.

Our operating expenses increased by $12.1 million over the first quarter of 2022, largely driven by increases in interest expense and compensation related expenses, partially offset by an increase in expenses allocated to the external investment manager.

Interest expense increased by $8.3 million over the prior year, driven primarily by an increase in interest rate on our debt obligations, resulting from the addition of certain debt at higher interest rates, and increases in benchmark index rates, combined with an increase in average outstanding borrowings to fund our investment activity, and support the growth of our investment portfolio.

Cash compensation expenses increased by $3.1 million, driven primarily by increases in a set of compensation accrues as a result of our favorable operating performance, and higher levels of headcount to support increased investment activity and assets under management. Non-cash compensation expenses increased by $2 million, including increases in share-based compensation and deferred compensation expenses. As a reminder, deferred compensation expenses will fluctuate based on the change in the fair value of the underlying planned assets.

The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets was 1.3% for the quarter and 1.4% for the trailing 12 month period, and continues to be amongst the lowest in our industry. Our external investment manager contributed $8.1 million to our net investment income during the quarter. An increase of $3 million will compare to the same period of the prior year and $1.1 million will compare to the fourth quarter.

The manager earned $3.3 million incentive fees during the quarter, an increase of $3.2 million over a year ago, and $0.8 million over the fourth quarter as a result of the improved performance of the assets under management, and ended the quarter with total assets under management of 1.4 billion.

During the quarter we recorded net fair value appreciation, including net-realized losses and net unrealized appreciation on the investment portfolio of $6.7 million. We recorded a net fair value appreciation of $11.0 million in our lower middle market portfolio, driven by the continued performance of our portfolio companies.

In the quarter we resolved a long standing, non-accrual, lower middle market investment that had been carried at zero dollars on a fair value basis for multiple years, resulting in a realized loss recognized during the quarter, but no negative impact to net fair value. We also recognized $9.7 million of appreciation in the fair value of our external investment manager, driven by increases in peer trading multiples and increased revenues and a net fair value depreciation of $8.9 million in our middle market portfolio and $6.7 million in our private loan portfolio, driven by a combination of quoted market prices, changes in market spreads and the underperformance of specific portfolio companies.

NAV per share increased by $0.37 or 1.4% over the end of the fourth quarter and by $1.34 or 5.2% when compared to a year ago to $27.23 at March 31, 2023. We ended the first quarter with 13 investments on non-accrual status, comprising approximately 0.6% of the total investment portfolio at fair value and approximately 3.2% of costs.

As I mentioned earlier, we had one lower middle market investment previously on non-accrual, fully realized and added two middle market investments to non-accrual during the quarter. We continue to believe that our conservative leverage, strong liquidity and continued access to capital are significant strengths that have a well-positioned for the future.

Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures, divided by net asset value was 0.77 and our regulatory asset coverage ratio was 2.3x at quarter end, and are intentionally slightly more conservative than our target ranges of 0.8x to 0.9x and 2.1x to 2.25x respectively.

In the quarter we were active on the capital front, including the additional one new lender in our corporate revolving credit facility, increasing the total commitments by $60 million to $980 million, the execution of an additional $50 million in unsecured private placement notes and the issuance of equity under our ATM program, raising a net $41 million.

We ended the quarter with strong liquidity, including cash and availability under our credit facilities of $711 million. We believe this provides us with ample liquidity, continuing to be opportunistic and pursue attractive investment opportunities throughout 2023, while continuing to maintain a conservative leverage profile.

Moving back to our operating results, return on equity for the first quarter was 14.9% on an annualized basis and 12.8% for the trailing 12 month period, both representing strong results compared to the industry. DNII per share for the quarter was $1.7 per share, an increase of $0.04 or 3.9% for the fourth quarter and $0.31 or 41% over the same period a year ago.

The combined impact of certain investment income and deferred compensation expense, considered less consistent on the not recurring nature was $0.07 per share above the average of the last four quarter and $0.09 per share above the same quarter year ago.

As Dwayne mentioned, given the strength of our operating results and the outlook for 2023, our board approved an increase to our monthly dividends to $0.23 per share for the third quarter of 2023 and a supplemental dividend of $0.225 per share payable in June 2023.

Total dividends are declared for the second quarter of 2023 of $0.90 per share, representing a 5.9% increase over the total monthly and supplemental dividends paid in the first quarter of 2023 and a 25% increase over the total dividends paid in the second quarter of 2022.

Looking forward, given the strength of our underlying portfolio, we expect another strong quarter in the second quarter of 2023 with expected DNII per share of at least $0.95 per share and with the opportunity to exceed this level, driven by the level of dividend income and portfolio investment activities during the quarter.

With that, I will now turn the call back over to the operator so we can take any questions.

[Operator]

Thank you. [Operator Instructions] First question comes from Robert Dodd with Raymond James. Please go ahead.

[Robert Dodd, Raymond James]

Hi guys, and congratulations on the quarter obviously. A couple of questions on the portfolio – the lower middle market portfolio of companies dividends and then the asset management. So on the profiling companies, I mean you highlighted there was some unusually high income. But I mean, looking at it, it looks about somewhere between $20 million and $21 million from the portfolio companies, the dividend income, to take out the asset managers, take the I-45. I mean that's the second highest dividend quarter ever from those portfolio companies and the highest Q1 by a considerable margin.

Can you give us any – how much of that if any was non-recurring or it is obviously quite unusual to see such a strong Q1 or is it just – you know the economy is sending a lot of mixed messages right now, so maybe those businesses are just doing better or is there some unusual lumpiness to that particular dividend income component this quarter?

[Dwayne Hyzak, Chief Executive Officer]

Sure, thanks Robert. What I would say is that, just like last quarter, we have a certain number of our lower middle market companies, that despite what you hear about the overall economy and the headwinds and concerns, they are continuing to do really well.

Jesse highlighted in his comments that we did have some elevated or unusual activity there. There was one lower middle market company that had a large dividend that represented a good chunk, about 75%, 80% of the non-recurring portion of those dividends, so you do have that going through the first quarter. But outside of that we continue to have good production or contributions across the lower-middle market portfolio from a number of different companies contributing to that dividend income for the first quarter.

[Robert Dodd, Raymond James]

Got it, thank you. And then look at the asset manager, which is obviously doing well. It seems, with the base management fees that it received this quarter, $5.5 million, and MSC, I think has never paid more than $5 million. So is that, maybe it’s in excess five this quarter, we haven't seen the MSC filings yet. Is that an indication of the growth in the – obviously, starting up a separate private loan fund as well. The AUM is 1.4 and I think MSC is 1.1. So is that growth there? How much of that is kind of due to the success beyond the MSC advisory relationship and a ramp in your other asset management initiatives?

[Dwayne Hyzak, Chief Executive Officer]

Robert, what I would say is that we're seeing good performance across the entire platform. You see it at Main Street in our numbers, given the overlap of assets between Main Street, MSC Income Fund, as well as our private loan fund. You're also seeing that good performance at the funds that we manage, and that's driving contributions there through incentive fees. So I'd say the base management fee did not increase significantly quarter-over-quarter, but you did see a significant benefit from an incentive fee, just given the overall performance of the portfolio and the results that drives for each of those funds that we're managing.

[Robert Dodd, Raymond James]

Okay, thank you. That's it for me.

[Dwayne Hyzak, Chief Executive Officer]

You're welcome. Thank you.

[Operator]

Next question, Bryce Rowe with B. Riley. Please go ahead.

[Bryce Rowe, B. Riley]

Thanks. Good morning. Maybe I wanted to start with just kind of the pace or the state of the pipeline so to speak. I feel like last quarter you all talked about a below average to average pipeline, and actually a little bit surprised that it picked up. It seems to have picked up here at this point in the year. So Dwayne and David, maybe you guys could speak to maybe what's driving the pickup in pipeline? Is it just moving from winter to spring or are you seeing kind of better opportunities given maybe the tighter credit conditions we're seeing from other lenders?

[Dwayne Hyzak, Chief Executive Officer]

Sure Bryce, thanks for the question. I'll give a quick response, and then I'll let David add on. What I would say is, when we looked at the first quarter on our last call, we knew that there was a slowdown we were experiencing. The deal flow really started to slow down in December and you saw the impact of that slowdown through the first quarter.

As we move forward over the last couple of months, I would say that the view we have is that the market as a whole, private equity investors as well as sellers have gotten comfortable with the new dynamics of the marketplace, which the biggest change as you know would be the cost of capital on the debt capital side. So you've seen the market as a whole.

I understand that that's a new reality, and if you're going to transact, those parties have decided that they can transact, they may make other tweaks to their structure. There might be more equity, less debt or there may be a difference on the purchase price from an evaluation standpoint, but the market as a whole has concluded that there is a good opportunity to continue to make investments, and they're transacting again and I'd say that our improvement in our pipeline, both lower, middle market and private loan is a result of either market as a whole just returning somewhat more to normal, still not normal where it would have been six or nine months ago, but at least heading in that direction.

David, I don't know if you want to add anything to that?

[David Magdol, President, Chief Investment Officer]

Not much to add, but I think that the biggest catalyst for increased volume is the fact that last year there was so much nervousness, like Dwayne referenced on the debt availability. The market's gotten more acclimated to the new normal as far as the current conditions, so what we're hearing from a lot of the intermediaries we deal with is that, they are more willing to come to market because they have better visibility of what it takes on the buyer side to get deals done in the current environment, which sometimes takes more equity contributions, but that the market is accepting of that and so they are opening up the deal flow.

[Jesse Morris, Chief Financial Officer, Chief Operating Officer]

The one additional thing I would add Bryce, and I think we've said this over the last couple of quarters, but one of the things that gives us comfort despite the fact that we're investing into an uncertain environment from a debt capital standpoint and just from an overall economic standpoint, is I would say that the quality of the deals that we're seeing, that we're executing on, they're very good deals. Good sponsors on the private loan side, private credit side, and they're really good, attractive, lower middle market deals on the lower middle market side.

So despite everything you read about in the newspaper, there are companies that are doing well in the economy and we're seeing opportunities to invest with those teams and with those private equity sponsors and those opportunities.

[David Magdol, President, Chief Investment Officer]

Just one last add-on is that, you know the one-stop-shop element of our financings has become more powerful in this market. The ability to do both the debt and the equity means that if there are intermediaries that are concerned about the dynamics that might exist in the debt environment, if they are knowledgeable about us, they are coming to us more regularly in this kind of environment.

[Bryce Rowe, B. Riley]

Got it. Okay. Maybe switching gears a little bit to the capital structure, obviously active in a lot of different ways here in the past quarter, expanding the revolver, more private notes, continuing to be active on the ATM. Just kind of want to get your thoughts around, there is a maturity in ‘24, some senior notes. Just curious how you're thinking about that at this point. Would you be comfortable maybe using a piece of the revolver or capacity on the revolver to redeem that? Just any thoughts around that would be great.

[Dwayne Hyzak, Chief Executive Officer]

Sure Bryce. I'd say that we don't have a definitive answer for that. I think our goal is to always maintain a conservative capital structure, significant liquidity position, so we've got flexibility, and I think we've done a good job of putting ourselves in that position. We always have the opportunity, given how we've performed and how our stock price trades to utilize the ATM or other equity issuances as an option to support our capital structure and our liquidity position.

But I think as we sit here today, we're just going to continue to monitor things. If the market improves, you could expect to see us active on the investment grade or private placement side. If it doesn't, we have a number of other options, the ATM, our secured facilities or other options that we think give us the flexibility to deal with that maturity in May of 2024. So I think we'll continue to be opportunistic as it relates to what's available in the marketplace and deal with that maturity here over the next 12 months or so.

Jesse, I don't know if you want to add anything to that.

[Jesse Morris, Chief Financial Officer, Chief Operating Officer]

I think you covered it, Dwayne. I mean I think the only thing to add is over the last three to six months I think what you've seen from Main Street in addition to what we did in the first quarter, but going back to the fourth quarter has continued to diversify our funding sources. As Dwayne mentioned, on the ATM, something we've historically been active, we did add the SPV in the fourth quarter, and then we did some unsecured private placement notes. So I think it's a combination of different sources as we get closer and closer to May of 2024.

[Bryce Rowe, B. Riley]

Got it, okay. Last one for me. I think there was the press release made note of added headcount. Just kind of curious how you're staffing up? Are you adding some folks to maybe tackle more elements of the lower middle market?

[Dwayne Hyzak, Chief Executive Officer]

Sure, Bryce. I think as you've heard us say in our comments and some of the Q&A here, we expect to be active. We have a large growing portfolio, both on the lower middle market side and the private credit side. So to the extent we can add members to the team, we're doing that. So we've had some additions here. We expect to have more over the next couple of quarters and that's the activity that Jesse was referencing in his comments.

[Bryce Rowe, B. Riley]

Got it, all right. Well, great quarter. I appreciate the time.

[Dwayne Hyzak, Chief Executive Officer]

Thanks, Bryce.

[Operator]

Next question, Kenneth Lee with RBC. Please go ahead.

[Kenneth Lee, RBC]

Hi, good morning. Thanks for taking my question. Just one following-up on the lower middle market pipeline there. I wonder if you could just share your thoughts on – do you see any potential impact from an economic slowdown or broadly across the industry, seeing the slower M&A activity, wondering what sorts of impacts you could see down the line in terms of that pipeline there. Thanks.

[Dwayne Hyzak, Chief Executive Officer]

Sure, Ken. Thanks for the question. I'll give a quick answer and then I'll let David add on. Similar to what I said earlier, I'd say that the biggest impact we've seen, both in the lower middle market activity but also in our private credit business, has been the change in the cost of debt capital over the last 12 months or so. I think as I said earlier, I think that has been a change that the market has maybe not gotten comfortable with, but has accepted that that's a new reality, and as a result of that, I think that's the biggest driver that you're seeing in terms of an improvement or recovery, at least in the pipeline and the activity that we're seeing on our side.

I do think any investor, including Main Street, is more concerned in this environment when you look at the headwinds and the uncertainty in the overall economy. But we feel like our solution can be a really, really good financing solution for lower middle market companies in any environment.

We think it can be particularly effective in this type of an environment where an owner operator, management team that owns a good lower middle market company that wants liquidity will acknowledge that they probably won't maximize value today, but our unique structure, both as a minority investor or a majority equity investor, we can provide a significant amount of liquidity similar to what they would try and achieve out of a full change of control. That will allow them to either attain control from an equity ownership standpoint or at least retain a material minority position that allows them to get some liquidity today, but also retain a significant enough of that equity, significant portion of that equity to allow them to continue to benefit from that company in the future and hopefully sometime in the next couple of years, realize a higher valuation than they may realize in today's environment.

[David Magdol, President, Chief Investment Officer]

I'll just add one or two quick points. When we look at our lower middle market pipeline, we do have add-ons as a significant portion that's grown over the years. So this is, as we look at the overall portfolio for the lower middle market, as our companies deleverage, as I said in my comments, they have more capacity to go and be opportunistic in a time of market dislocation or concern overall in the economy.

The second thing is in the lower middle market as opposed to larger transactions, the same

types of transactions like succession planning, partner separations, estate planning take place year after year, and people look to transact and so that market is one that certainly has ups and downs like every market, but we still see the same reasons to transact. So it should be a good environment for us.

[Kenneth Lee, RBC]

Got you, very helpful there. One just one follow-up here. I think in the prepared remarks, you talked about the potential for fair value appreciation within the lower middle market portfolio, and it sounds like it's going to come from potentially follow-ons or acquisitions or add-ons, as you mentioned. Is the thinking there that with further investments, these companies could increase the enterprise values and therefore there could be some equity appreciation over time or is there something else that we should be keeping in mind here? Thanks.

[Dwayne Hyzak, Chief Executive Officer]

Sure, Ken. Thanks for that question. What I would say is what we intended with that comment was to reference some of our portfolio companies that have already completed acquisitions. So we're not referencing future acquisitions, but we're referencing acquisitions that they've completed over the last 12 to 18 months. And as those acquisitions get integrated and they realize the synergies, we may be a little more conservative than others in recognizing those synergies up front. We prefer to recognize them after they've been realized or they've been executed on.

So we're seeing some really good activity at several of our companies that have completed acquisitions and are now realizing those synergies. And as those synergies flow through their quarterly financial statements, we're seeing natural benefits on the fair value, and we expect to see those same benefits going forward. So that's what we were referencing on that comment.

[Kenneth Lee, RBC]

Got you. Very helpful there. Thanks again.

[Dwayne Hyzak, Chief Executive Officer]

Thank you.

[Operator]

Next question, Mark Hughes with Truist Securities. Please go ahead.

[Mark Hughes, Truist Securities]

Yes, thank you very much. On the incentive fee income, where you're doing well in the asset management, how much of that is driven by your outperformance versus just some favorable market dynamics in the areas that you're in?

[Dwayne Hyzak, Chief Executive Officer]

Mark, I would say we don't have an exact number of breakdown. I would say it's a combination of the two. I think we feel like we're doing a really good job on the portfolio, existing portfolio company side, so you're seeing benefits there. You can see it in our dividend income that we referenced earlier. But clearly, as interest rates have risen on the floating rate side, just like Main Street sees a benefit through our interest income, you see the same type of benefit across the platform, both at MSC Income Fund as well as our private loan fund.

You may even see more there, because those funds are heavier weighted towards our private loan strategy, which is much more heavily weighted to a floating rate environment on the investment side, as opposed to Main Street having a larger portion of its debt investments be fixed rate through our Lower Middle Market strategy.

Mark, did that answer your question?

[Mark Hughes, Truist Securities]

Oh yeah, sure did, I'm sorry. Quick question, when you look at sort of target lower middle market companies, how much do they transact with regional banks? Is that for the companies that you looked that might have established a relationship with? If credit does tighten up, is that going to be a meaningful catalyst or are those regional banks maybe not even part of the ecosystem, just sort of curious on your perspective on that?

[Dwayne Hyzak, Chief Executive Officer]

Sure Mark. I would say that our lower middle market companies probably do have a higher amount of activity with regional banks. These are smaller, locally focused businesses in general. So as a result they are probably more inclined to have a relationship with a regional bank than a national, larger national based business would. So while they don't – our portfolio of companies wouldn't be impacted by regional banks from a source of financing, because in our lower middle market strategy we're typically the only source of capital, both debt and equity.

So we are providing all their capital needs, both from an initial transaction standpoint, but also their future capital needs if they're growing organically, if they're seeking growth through acquisitions. So we don't see a negative impact in our current portfolio based upon a pullback in regional banks. But I do think our portfolio of companies would have existing relationships with regional banks more broadly.

[Mark Hughes, Truist Securities]

Very good, thank you.

[Dwayne Hyzak, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions]. Your next question comes from Eric Zwick with Hovde Group. Please go ahead.

[Eric Zwick, Hovde Group]

Thank you. Good morning, everyone. Most of the kind of topics I wanted to hit on have been discussed already, but just the market has changed quite a bit over the past 12 months in a number of ways from interest rates, regional banks, kind of pulling back from some of the markets. Curious if you could just kind of maybe summarize or highlight how that has impacted the kind of characteristics of your originations? Which have benefited the most in terms of either spreads or covenants, ability to interest rate floors, what would you characterize as kind of being the most dramatic changes from a year ago, and maybe kind of most important going forward as well.

[Dwayne Hyzak, Chief Executive Officer]

Sure Eric, thanks for the question. I would say in our lower middle market strategy, we haven't really seen much of an impact at all. Most regional banks, at least from our experience, they're not going to be active players in financing M&A type transactions, where capital is leaving the business, that's why our solutions in the lower middle market strategy, they fit the lower middle market so well, because there's not a lot of people that are actively providing debt capital to that market place. So because of that, even though you see the regional banks having their headwinds and issues, we're not seeing a significant impact or really any impact from our perspective on our lower middle market strategy.

In our private loan strategy, I would say that what you've seen is more – from my perspective, it's less an impact of the regional banks and it's more just a broader economic impact and a broader overall capital markets impact as that you are seeing less capital availability, people that are probably less inclined to invest, and as a result we've seen the spreads that we're achieving on our new private loan transactions expand. I'd say over the last 12 months, it's probably expanded by 100 basis points. That’s purely based on availability of debt capital in the marketplace and the perception that people have of the risk of investing in the current environment.

So that's what I would say has been the impact on the private loan or private credit side of our business, but I'd say that's not directly attributable to the regional banks. It's just more broadly attributable to the activities by the Fed, headwinds in the economy and concerns about inflation and other broader economic concerns.

Nick, I don’t know if you’d add anything on the private credit side.

[Nick Meserve]

Yeah, I would add also that spreads of widened out, but we've also gotten better terms across the board and so whether that's a slightly tighter covenant, less advance rates, lower LTV to start, lower leverage to start. Across the board and your documentation its better right now than it was 12 months ago, so across the board the overall terms have drifted more towards the lender than the borrower.

[Eric Zwick, Hovde Group]

That's all very helpful. Thank you very much.

[Dwayne Hyzak, Chief Executive Officer]

Thank you, Eric.

[Operator]

This concludes our question-and-answer segment. I would like to turn the floor over to management for closing remarks.

[Dwayne Hyzak, Chief Executive Officer]

Thank you again everyone for joining us this morning. We look forward to talking to everyone again in early August.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.