Main Street Capital Corporation (NYSE:MAIN) Q3 2024 Earnings Call Transcript

Main Street Capital Corporation (NYSE:MAIN) Q3 2024 Earnings Call Transcript November 8, 2024

Main Street Capital Corporation misses on earnings expectations. Reported EPS is $1 EPS, expectations were $1.02.

Operator: Greetings, and welcome to the Main Street Capital Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan. Thank you, you may begin.

Zach Vaughan: Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation’s third quarter 2024 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer, David Magdal, President and Chief Investment Officer, and Ryan Nelson, Chief Financial Officer. Also participating in 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 third 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 November 15th.

Information on how to access the replay was included in yesterday’s release. We also advise you that this conference call is being broadcast live through the internet and can be accessed on the company’s homepage. Please note that information reported on this call speaks only as of today, November 8th, 2024, and therefore, your 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 the 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 impairment to Main Street upon settlement.

Please refer to yesterday’s press release for reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are Net Asset Value, or NAV, and Return on Equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per-share basis. 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: Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning’s call, and we hope that everyone’s doing well. On today’s call, I will provide my usual update regarding our performance in the quarter. We’re also providing updates on our asset management activities, our recent dividend declarations, our expectations for dividends going forward, our recent investment activities in current investment pipeline, and several other noteworthy updates. Following my comments, Nick and Ryan will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, and our expectations for the fourth quarter, after which we’ll be happy to take your questions.

We’re pleased with our performance in the third quarter, which resulted in an annualized return on equity of 18.8%, DNII per share that continued to exceed the dividends paid to our shareholders, and a new record for NAV per share for the ninth consecutive quarter. We believe that these continued strong results demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business, and the continued underlying strength and quality of our portfolio companies. We are also pleased that we further enhanced our strong capital structure and liquidity position during the quarter, which Ryan will discuss in more detail. And we continue to maintain very strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment.

We maintain attractive investment pipelines in both our lower middle market and private loan investment strategies, and we remain excited about the opportunities in our lower middle market and private loan investment portfolios and in our asset management business, each of which has us well positioned for the future and provide us a continued favorable outlook for the fourth quarter. We remain confident that these strategies, together with our cost-efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future. Our positive results for the third quarter, combined with our favorable outlook for the fourth 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, primarily due to the impact of net fair value increases on our investment portfolio and our asset management business and the accretive impact of our equity issuances, which Ryan will discuss in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in the equity investments in our lower middle market portfolio. We are also excited to have several portfolio companies in the advanced stages of completing strategic acquisitions, which, if successful, will provide the opportunity for additional future fair value appreciation, in addition to providing us highly attractive incremental debt investments in these high-performing portfolio companies.

We also continue to see increased interest from potential buyers in several of our lower middle market portfolio companies that could lead to favorable realizations over the next few quarters and which we believe further highlights the strength and quality of our portfolio companies. Our lower middle market investment activity in the third quarter included total investments of $52 million, which after repayments and other investment activity, resulted in a net increase in lower middle market investments of $2 million. Although this investment activity was lower than our expectations for the quarter, we are pleased to have completed two new lower middle market platform company investments shortly after quarter end, which David will cover in more detail.

And we expect to have additional lower middle market investment activity before year end. We are very pleased with our private loan investment activity in the quarter. This activity included total private loan investments of $309 million, which after repayments and other investment activity, resulted in a net increase in our private loan investments of $163 million. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio over the next few quarters. We’ve also continued to produce positive results in our asset management business. The funds we advised through our external investment manager continue to experience favorable performance in the third quarter, resulting in significant incentive fee income for asset management business for the 8th consecutive quarter, and together with our recurring base management fees, a significant contribution to our net investment income.

We also benefited from significant fair value appreciation from the value of our external investment manager due to a combination of the continued increase in income, growth in assets under management, and broader market-based drivers. We remain excited about our plans for the external funds that we manage as we execute our investment strategies and other initiatives, and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund, and about our strategy of growing our asset management business within our internally managed structure. As part of these efforts, we are very pleased with our progress in exploring a potential listing of the shares of MSC Income Fund, a non-listed BDC advised by our external investment manager.

As detailed in MSC Income Fund’s recent definitive proxy statement, upon the approval of the fund’s shareholders and effective upon a listing of the fund’s shares, the fund would transition its investment strategy to be solely focused on its private loan investment strategy, accompanied by an amendment to its investment advisory agreement to among other things, align its fee structure with the go-forward investment strategy. The fund plans to hold a special meeting of its shareholders in early December to consider and vote on a proposal set forth in the fund’s definitive proxy statement, each of which is intended to position the fund to listed shares. We are very excited about these potential activities and changes, which we believe represent significant catalysts to the future growth of the fund and the opportunity for significant future benefits to both the fund’s shareholders and our asset management business.

Based upon our results for the third quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, earlier this week, our board declared a supplemental dividend of $0.30 per share payable in December, representing our 13th consecutive quarterly supplemental dividend and an increase to our regular monthly dividends for the first quarter of 2025 to $0.25 per share. The first quarter regular monthly dividends are payable in each of January, February, and March and represent a 4% increase from the regular monthly dividends paid in the first quarter of 2024. The supplemental dividend for December is a result of our strong performance in the third quarter and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the trailing 12 months of over $4 per share and a current total yield we are providing to our shareholders of approximately 8%.

We currently expect to recommend that our board continue to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters and we maintain a stable to positive NAV. Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional supplemental dividend payable in March 2025. Now turning to our current investment pipeline. As of today I would characterize our lower middle market investment pipeline as above average. We believe that the unique and flexible financial solutions that we can provide to lower middle market companies and their owners and management teams and our differentiated long-term to permanent holding periods represent an attractive solution to the needs of many lower middle market companies and we are confident in our expectations for favorable lower middle market investment activity over the next few months.

We also continue to be very pleased with the performance of our private credit team and the significant growth that they have provided for our private loan portfolio and our asset management business and as of today I’ll characterize our private loan investment pipeline as average. With that, I will turn the call over to David.

David Magdal: Thanks, Dwayne and good morning everyone. As Dwayne highlighted in his remarks, we believe our strong third quarter financial results continue to demonstrate the strength of Main Street’s platform, our differentiated investment approach, and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continued to be positive, which contributed to our attractive third quarter financial results. We did, however, experience continued softness in certain portfolio companies with consumer discretionary focused products or services which we have been monitoring for several quarters and we are actively working to maximize our recoveries on these specific investments.

As we’ve discussed in the past, the largest portion of our investment portfolio and the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market and specifically our strategy of investing in both the debt and the equity of lower middle market companies. In our view on the relative attractiveness of investing in the lower middle market remains unchanged and we expect this will continue to be our primary area of focus in the future. Each quarter, we try to highlight key aspects of our investment strategy and differentiated approach. For today’s call, we thought it would be useful to spend some time discussing the support we provide to our lower middle market portfolio companies. In addition to our ongoing investment management activities and the managerial assistance we offer to our lower middle market portfolio companies, we specifically want to highlight an annual event we host for the leaders of our lower middle market portfolio companies, our 8th Annual Main Street President’s Meeting.

For those of you who are not familiar with our President’s Meeting, it’s an annual event Main Street hosts for our lower middle market portfolio company and leaders to network, build relationships, share best practices, learn from each other, and benefit from being part of Main Street’s portfolio. Based on post-event feedback we received from our lower middle market portfolio company executives, the event is highly valued by the participants and the event improves each year as we refine our agenda based on the feedback we received. Topics covered in the most recent meeting included an M&A panel with several portfolio company CEOs, considerations for effectively utilizing artificial intelligence, Q&A on today’s political landscape, an economic update, and cybersecurity best practices.

As a result of this annual event, our portfolio companies have done business together, referred business to each other, utilized each other as operational resources, and made long-term friendships that are invaluable. To provide more context, one panel we received very positive feedback on this year was focused on M&A best practices for add-on acquisitions. The panel was comprised of a peer group of our lower middle market portfolio company leaders who led a discussion on the benefits of pursuing an add-on acquisition strategy, developing and executing a successful integration plan, and lessons learned while executing an external growth strategy. We are highly confident the lessons learned that were shared by the panelists will be very helpful examples for other portfolio company executives to consider as they execute acquisition strategies in the future.

Another valuable topic we covered was best practices for a CEO considering using artificial intelligence in their business. This session was led by an experienced industry expert who presented the benefits and potential pitfalls of AI. The discussion explored various used cases, technical implications, and takeaways to evaluate how AI can be used to potentially accelerate and improve various business processes and sales and marketing strategies. The engagement from the audience for both sessions was robust and led to several post-event discussions, including the sharing of key third-party resources and best practices that we believe will ultimately improve the financial results and operating performance for our portfolio companies in the future.

Given our focus on our lower middle market strategy and the unique benefits it can provide, we are excited to bring together the key leadership from our lower middle market portfolio companies at this highly effective annual President’s Meeting event. We always leave the event very excited about the quality of the individuals leading our lower middle market portfolio companies and the future value creation that we expect they and their teams can generate for our mutual benefit in the future. We left this year’s event more excited than ever. Now turning to the overall competition and results from our investment portfolio. As of September 30th, we continue to maintain a highly diversified portfolio with investments in 193 companies spanning across numerous industries and end markets.

Our largest portfolio companies, excluding our external investment manager, represented only 3.6% of our total investment income for the trailing 12-month period and 3.2% of our total investment portfolio fair value at quarter end. The majority of our portfolio investments represented less than 1% of our income and our assets. Our investment activity in third quarter included total investments in our lower middle market portfolio of $52 million, which after active repayments on net investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of $2 million. As Dwayne mentioned in his remarks, post quarter end in the first half of October, we closed two additional lower middle market platform investments, representing an additional $116 million of invested capital.

Driven by the capabilities and relationships of our private credit team, we also completed $309 million in total private loan investments, which after aggregate repayment, sales of several private loan portfolio debt investments, and return of invested capital from a private loan portfolio company equity investment, resulted in a net increase in our private loan portfolio of $163 million. Our private loan investment activity also included significant benefits of a $26 million realized gain on an equity investment that resulted in an impressive 5.6 times multiple of invested capital. At the end of the third quarter, our lower middle market portfolio included investments in 84 companies representing $2.5 billion of fair value, which is over 28% above our cost base.

We had 92 companies in our private loan portfolio representing $1.9 billion of fair value. Total investment portfolio at fair value of quarter end was 115% of the related cost case. In summary, Main Street’s investment portfolio continues to perform at a high level and deliver on our long-term results and goals. Additional details on our investment portfolio quarter end are included in the press release that we issued yesterday. With that, I’ll turn the call over to Ryan to cover financial results, capital structure, and liquidity.

Ryan Nelson: Thank you, David. To echo Dwayne’s and David’s comments, we are pleased with our operating results for the third quarter. Our total investment income for the third quarter was $136.8 million, increasing by $13.6 million, or 11% over the third quarter of 2023, and by $4.7 million, or 3.5% for the second quarter of 2024. Our results for the third quarter of 2024 included strong levels of investment income, which, as Dwayne and David touched on, demonstrates the continued strength of our differentiated investment and asset management strategies. Interest income increased by $11.2 million from a year ago and by $10.5 million when compared to the second quarter. The increase over the prior year was driven primarily by the impact of increased net investment activity over the last year, partially offset by the impact of an increase in investments on non-accrual status and a decrease in interest rates on our floating rate net investments, primarily resulting from decreases in benchmark index rates.

The increase over the prior quarter was driven primarily by the impact of increased net investment activity. Dividend income increased by $2 million, or 9.7% when compared to a year ago, including a $300,000 increase in unusual or non-recurring dividends and decreased by $3.4 million, or 12.9% from the second quarter after the impact of a $1.9 million decrease in unusual or non-recurring dividends. The continued underlying strength of the majority of our lower middle market portfolio companies, together with the unique benefits of our asset management business, drove the strong level of dividend income in the third quarter. Fee income increased by $0.4 million from a year ago and decreased by $2.4 million from the second quarter. The decrease in fee income over the prior quarter was primarily driven by lower closing fees on new and follow-on investments during the third quarter.

Fee income related to refinancing and prepayment fees, considered non-recurring, decreased by $0.4 million compared to a year ago and decreased by $1 million compared to the second quarter. For the third quarter, the impact of certain income considered less consistent or non-recurring in nature, including dividends from our equity investments and accelerated prepayment, repricing, and other activity related to our debt investments totaled $2.2 million. In the aggregate, these items were $2.4 million, or $0.03 per share, lower than the average of the prior four quarter, and $2.9 million, or $0.03 per share, lower than the second quarter, and $1.6 million, or $0.02 per share, higher than the third quarter of last year. Our operating expenses increased by $8.2 million from a year ago, largely driven by increases in interest expense, share-based compensation expense, and deferred compensation expense.

The increase in interest expense from a year ago was primarily driven by an increase in weighted average rate on our debt obligations and an increase in average borrowings to fund a portion of the growth of our investment portfolio. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.3% for the quarter on an annualized basis and continues to be among the lowest in our industry. Our external investment manager contributed $7.9 million to our net investment income during the third quarter, representing an increase of $0.3 million from a year ago and a decrease of $1.3 million from the second quarter. The Manager earned $2.4 million in incentive fees during the quarter, decreasing by $0.2 million from the prior year and $1.7 million from the second quarter.

The Manager ended the quarter with total assets under management of $1.6 billion. During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized appreciation, on the investment portfolio of $48.1 million. We recorded net fair value appreciation of our external investment manager, our lower middle market portfolio, and our other portfolio, partially offset by net fair value depreciation in our private loan portfolio and our legacy middle market portfolio. The fair value appreciation of our external investment manager was a result of a combination of an increase in the valuation multiples of publicly traded peers, which we use as both a benchmark for valuation purposes, and an increase in the fees generated by the external investment manager driven by the continued strong performance of our asset management business.

The net fair value appreciation in our lower middle market was largely driven by the continued positive performance of certain of our portfolio companies. The net fair value appreciation in our private loan portfolio was driven by the net impact of increases in market spreads and specific portfolio company underperformance, partially offset by the net fair value appreciation related to the favorable exit of a portfolio company at a $25.5 million realized gain in the quarter, as David discussed. We ended the third quarter with investments on non-accrual status comprising approximately 1.4% of the total investment portfolio at fair value and approximately 3.9% at cost. Net asset value, or NAV, increased by $0.77 per share, or 2.6% over the second quarter, to a record NAV per share of $30.57 at the end of the third quarter.

Our regulatory debt-to-equity leverage calculated as total debt excluding our SBIC debentures divided by net asset value was 0.69 times, and our regulatory asset coverage ratio was 2.44 times, and these ratios continue to be more conservative. There are long-term targets of 0.8 to 0.9 times, and 2.1 to 2.25 times, respectively. We continue to be active in the quarter on capital activities. In September of this year, we issued an additional $100 million of unsecured notes maturing in June 2027, resulting in a yield to maturity of approximately 5.6% on such issuance. The additional issuance increased the total amount of our June 2027 notes to $400 million, and we barred an additional $63.8 million SBIC debentures, increasing our total outstanding amount to a $350 million regulatory limit.

We also amended our SPV facility in September, increasing commitments by $170 million to $600 million, decreasing the interest rate by 25 basis points, and extending maturity to September 2029. We were also active in our at-the-market or ATM program, raising net proceeds of $65.6 million during the quarter. After the investment in capital activities in the third quarter, we continue to maintain very strong liquidity, including cash and availability under our credit facilities in excess of $1.3 billion. We continue to believe that our conservative leverage, strong liquidity, and continued access to capital are significant strengths that have proven to benefit us historically and have us well positioned for the future, allowing us to continue to execute our attractive investment strategies.

As we discussed last quarter, with the current level of liquidity, we currently expect to fund our new investment activity for the next few quarters through a greater portion of debt financing. And as such, we would expect leverage to continue to increase during this time period to be closer to our long-term stated targets. Coming back to our operating results, as a result of strong performance for the quarter, our return on equity for the third quarter and the first nine months of the year was 18.8% and 17.4% on an annualized basis, respectively. DNII per share for the quarter of $1.06 was $0.2, or 1.9% higher than DNII per share for the third quarter of last year, and was $0.1, or 0.9%, lower than the DNII per share for the second quarter.

These results are the impact of certain investment income considered less consistent or non-recurring in nature, as I discussed earlier, which was $0.3 per share below the second quarter, $0.3 below the average of the last four quarters, and $0.2 below per share above the same quarter a year ago. Looking forward, given the strength of our underlying portfolio, we expect another strong top line in earnings order in the fourth quarter with expected DNII of at least $1.08 per share with the potential for upside driven by the actual 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. We will now be conducting a question and answer session. [Operator Instructions] The first question is from Bryce Rowe from B. Riley Securities. Please go ahead.

Q&A Session

Bryce Rowe: Thanks. Good morning, all. Hey, I wanted to, Dwyane, maybe start on your commentary around the pipeline. Last quarter you had well above average comment. And it sounds like some of the lower middle market activity might have slipped here to the fourth quarter. Just wanted to make sure I’m kind of reading into that the right way. And then any commentary around the move from well above to above for lower middle market. And then within the private loan book going from well above to average.

Dwayne Hyzak: Sure, Bryce, thanks. Thanks for the question. I’ll get some initial comments. I’ll let David add on any additional comments he has. I think when you look at the lower middle market pipeline guidance, I’d say there’s a couple of things. One is what we touched on in the script. We had a couple of investments that we were expecting or hoping would close in the third quarter. They just slipped into the first week or two of October. So that was about $115 million of new investment activity. So that was part of the movement or underperformance relative to our expectations on the lower middle market investment activity in the third quarter. But we’ve also had a number of transactions or investments that we were actively actually getting on in due diligence and legal documentation that just for one reason or another just slipped away.

Some of it was due diligence issues. And at least one case, it was the owner operator of the company rethinking what he and they were doing and deciding to hold off on doing a transaction. So we had at least three transactions off the top of my head that because of one of those two reasons, it did not end up closing in the third quarter and it won’t close in the fourth quarter. Despite that, we continue to feel good about the pipeline. We do have a number of transactions in the lower middle market focus area or strategy that we expect to close between now and year end. And if we achieve that, we think we’ll be in good shape both for Q4 and heading into 2025. On the private loan side, I’d say the team there has been very active. If you look back, not just to the third quarter, but also the second quarter, we had a significant amount of investment activities.

And I would say that the pipeline for that group as they executed those activities has just cooled off a little bit. So it’s not a negative pipeline, but they have returned back into that average classification after two quarters of significant activity and a lot of efforts on the investment side. David, anything you would add on the lower middle market side?

David Magdal: No, I think it’s covered.

Bryce Rowe: Good deal. And Dwayne you noted a pretty active third quarter for private loan. Can you talk a little bit about kind of what you’re seeing from a pricing in terms perspective, especially in light of all the talk of spreads compressing and then obviously lower base rates that we’re starting to see flow through portfolios. So any commentary around competitive levels within the private loan market around both pricing and terms?

Dwayne Hyzak: Sure, Bryce. Again, I’ll give a couple of initial comments that I’ll let Nick, our Managing Director that leads our private credit team, I’ll let him add on anything that he has. I would say we obviously can’t control the base rate in the market component. So that is what it is. We just like other BDCs and other private credit funds, our results will continue to be impacted by that. So we don’t really focus on that just because we can’t control if you’re going to be in the space. That’s just part of your investment management that you’re going to have to deal with. On the spread side, I’d say we have seen some pressure. The way I would categorize it is probably 25 basis points of pressure since quarter end, maybe 75 to 100 basis points since a year ago.

So we’re seeing some pressure. We continue to have the view based upon what we hear from other BDCs that are focused on the larger companies, kind of the upper middle market that we’re seeing less pressure than they are. But we are seeing some pressure there. And we wish that pressure wasn’t there, but we still find the spread levels and the quality of the investment opportunities to be good for our strategy and investments that we think we can still do really well on in our private credit, private loan strategy. So it hasn’t deterred us from investing, but we have seen some pressure there. The other thing I’d say we’ve seen is we have seen some regional, local commercial banks that have surprised us and have really stepped up on some of our portfolio companies where they come in and beat us by a wide margin in terms of spread.

Again, that’s not something we can control. We do expect that to be more sporadic as opposed to a permanent part of the marketplace. But we have seen that more on some repayment activity as opposed to new investment activity. But that’s the way I would kind of respond to your question. But I’m happy to let Nick add any additional color.

Nick Meserve: I think you nailed it there. We’ve really seen a consistent tightening of 75 to 100 basis points over the year. I think we’ll see a little bit more pricing 25 basis points since quarter end. I think we’ll maybe grind a little bit tighter as the year ends. And we’re seeing a few new competitors step in that might need to spend for the year because of their budget and they’re willing to kind of come down on pricing to win some deals.

Bryce Rowe: That’s helpful.

Dwayne Hyzak: Bryce, just one other comment. I’d say the significant activity we had in Q2 and Q3, we feel really good about it given some of that spread compression.

Bryce Rowe: Yeah, understood. Maybe last one for me. You guys have certainly made the comment maybe leaning into the available debt capital to fund. And just kind of curious, in the third quarter, we saw net balance sheet leverage go down. Was that just your conservative nature not knowing what might come here in the fourth quarter? Just kind of curious why you didn’t lean on that debt capital a little bit more in the third quarter? Relative to the comments about future quarters here, you’ll likely use debt capital to fund new investments.

Dwayne Hyzak: Yeah, Bryce, I’d say some of it was just our continued conservative nature. But I’d say the biggest factor was we had a really, really large form of market pipeline. Some of that pipeline did not come to fruition. So we were probably more active under the ATM program in the quarter than we would have otherwise been if we had known what the actual lower middle market activity was going to be. So nothing significant other than the expectations for that well above average lower middle market investment pipeline not coming to fruition in the third quarter.

Bryce Rowe: Okay. All right. I’ll jump back in queue. Thanks, guys.

Dwayne Hyzak: Thanks, Bryce.

Operator: The next question is from Robert Dodd from Raymond James. Please go ahead.

Robert Dodd: Hi, guys. Thank you. Just an immediate follow-on to that one from Bryce. First on, so the ATM usage obviously in Q3, you just explained why. Those deals have closed, or some of them, at least, are closing in Q4. So should we expect lower ATM usage in Q4 because you essentially pre-funded, in a sense, the deals with the ATM in Q3 that have been closed in Q4? Or can you give us any color on what the trends are going to be near term there without giving too much away?

Dwayne Hyzak: Yeah, Robert. I think that is the right conclusion. In the absence of the low middle market pipeline, you’re really building significantly from here. You should expect us to see, or to have less activity under the ATM in Q4.

Robert Dodd: Got it. Thank you. On the dividend income, there was a lot of clarity that the dividend income of the quarter was below the — Non-recurring dividend income was lower than normal average. I mean, it’s not recurring, but it’s typically happening. But it didn’t happen as much this quarter. So was there any theme there? Was it holding on to maybe a little bit of incremental capital ahead of election or something like that? Do you think that might catch up in Q4? Or was it non-recurring that’s just not going to happen? It’s not been deferred. But any thoughts there?

Dwayne Hyzak: Sure, Robert. So I’ll give a couple of comments. And then again, David can add on anything else he has. But I’d say the low middle market portfolio continues to perform really well across the board. And specifically for the companies that are the key contributors to dividend income, they continue to perform really, really well. So we’re not seeing anything that is a concern. But as you’ve always heard us say, we have high levels of predictability and visibility to interest income. We don’t have as much visibility or predictability on the dividend income. And it’s not just the performance of the companies, but it’s what they decide to do with their capital. I think we’ve mentioned that for a couple of quarters, we have several companies that are pursuing acquisition growth strategies.

But if they’re executing those strategies, they’re likely going to be less focused on paying dividends. I think you see just some impact of that. But the other is just the quarterly, monthly variability from one quarter to the next that drives that. So nothing that’s concerning on our side is just the normal variability. I will point out, you probably saw this in the results or if you didn’t, you’ll see it when you get to the 10-Q. But one part of the dividend income movement quarter to quarter was on the asset management business. So you saw less incentive fees come through and that has a direct impact on dividend income. So just make sure you caught that when you look at the quarter over quarter fluctuation. Yeah…

Robert Dodd: Thank you. I did catch that. Sorry, go ahead. David?

David Magdal: All I was going to say is to echo Dwayne’s comments. There’s nothing thematically in the portfolio that’s being called back. We just have various contributors that are not only doing, pursuing acquisitions strategies, but also reinvesting in their own platform by way of assets and new product innovation and such. So it just ebbs and flows quarter by quarter. There’s nothing thematic there.

Robert Dodd: Got it, thank you. And then one more, if I got it. You mentioned a realized gain, I think in the private loan portfolio, I think a $26 million realized gain on that side. Was that after quarter end or was that in Q3? I haven’t gone through it yet, but can you give me, what was the source of that? Was it after quarter end? And if it was, was that asset also held? And is it going to affect incentive fee income from the asset manager if it was in Q4? I’m just trying to figure out when that actually happens.

David Magdal: Yeah, it was in Q3, Robert. It will not impact the incentive fees.

Robert Dodd: Got it, thank you.

Operator: [Operator Instructions] The next question is from Mark Hughes from Truist Securities. Please go ahead.

Mark Hughes: Yeah, thank you. Good morning.

Dwayne Hyzak: Morning, Mark.

Mark Hughes: Just out of curiosity, was the lower middle market activity influenced by the election?

Dwayne Hyzak: No, I don’t think we would say it was influenced by the election at all. Like I said in the earlier response to Bryce, it was in two situations, when you get into due diligence, you’re expecting certain things. If those things aren’t there, we’re going to be very consistent and we may want to still move forward, but it’s different terms. And when you have that happen, the other side has to agree to that. I’d say in at least two of those situations, it was diligence factors that resulted in a transaction not closing. And then the other one was the owner-operator changing his mind.

Mark Hughes: Yeah. And on non-accruals, just a slight uptick. I think you’d mentioned the consumer discretionary. You’re continuing to work through that. Any sense on timing or kind of what end markets that might be in where you could potentially see improvement?

Dwayne Hyzak: Yeah, that new non-accrual was also in a business focused on the consumer. So it’s kind of a consistent or continued trend there. I do think that we expect to see significant progress on that specific name over the next couple of months. Whether it happens in Q4 or early Q1 remains to be seen, but we do expect to see progress there. But in each of these situations that we have, it’s a consumer-focused business. I think we expect it to be a longer-term road to recovery as opposed to something that’s going to happen quickly.

Mark Hughes: Understood. Then the EBITDA growth within the lower middle market portfolio. I think you kind of touched on some of the contours of this, but anything that you’re seeing about growth last quarter versus, say, the first six months?

Dwayne Hyzak: Yeah, we didn’t kind of put out any numbers, Mark. What I would tell you from more of a qualitative standpoint is the portfolio as a whole continues to perform well. I do think if you looked at it and kind of put it into three buckets, companies over performing on one end, companies underperforming on the other, and then a bunch of companies kind of in the middle. The companies on the right end of that, the over performing side, are really, really continuing to perform exceptionally well. The groups in the middle, I’d say it’s probably flat to maybe just slightly down a little bit. Nothing concerning, but definitely a portfolio where the really good performers are just performing exceptionally well.

Mark Hughes: Yeah. And then you talked about the prepayment activity or repayment activity that maybe some banks, regional banks, getting involved selectively. I’ll ask the question again. How far through that process would you say you are? Is there much more to go in your portfolio? Or is that stabilized?

David Magdal: You know, I’d say, Mark, the regional banks or local banks we come across, it’s usually more idiosyncratic where they’ve banked a company in the past, maybe it was before Private Key Sponsor bought them, they didn’t take part in the buyout, and then they come back a year or two years into it after it’s performed well and step in and refinance us at a much cheaper rate. So, in recent examples, we refinanced a business, I think in the first quarter of ‘24 at S plus 650, and then we got refinanced two weeks ago at S plus 225. Obviously, we’re not going to match that. But it was a local bank that had refinanced that company for a decade plus before we got involved.

Mark Hughes: Yeah, yeah. So no particular trend there, just idiosyncratic, as you say?

David Magdal: Exactly. And still I’d say it’s much, much more localized banks than a regional bank.

Mark Hughes: Thank you.

Dwayne Hyzak: Thanks, Mark.

Operator: This concludes the question-and-answer session. I would like to turn the floor back over to management for closing comments.

Dwayne Hyzak: We just want to say thank you again, everyone, for joining us this morning. We appreciate your long-term interest and support of Main Street. We’ll look forward to talking to you again in late February after our year-end earnings release.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.