Prospect Capital Corporation (PSEC), Fifth Street Finance Corp. (FSC): How Main Street Capital Corporation (MAIN) Makes Money

Equity investments allow it to “double dip” on its loan investments. By the nature of accounting, when a portfolio company repays a loan owed to Main Street Capital, shareholder’s equity in the company goes up. Each time it records a payment received on a debt investment, it can also mark up its equity stake as the portfolio company deleverages — a true win-win.

The Main Street edge
Being a smaller operator is a blessing for Main Street Capital, which can create its own deals in the fragmented lower middle market financing business. The company also finds that lower middle market businesses are willing to accept equity investments, often at lower multiples than publicly traded companies.

Main Street Capital is internally managed, reducing operating costs to just 1.7% for the last 12 months. Other BBCs like Prospect Capital Corporation (NASDAQ:PSEC) and Fifth Street Finance Corp. (NASDAQ:FSC) charge management fees of 2% of assets plus 20% of all returns over 7%-8% per year. 

Operating costs have a huge impact on total returns. If Main Street Capital Corporation (NYSE:MAIN) earns 10% per year on its investments, investor wealth would increase by 8.3%, holding operating costs constant. However, the same 10% return for Prospect Capital Corporation (NASDAQ:PSEC) and Fifth Street Finance Corp. (NASDAQ:FSC) would result in 6% returns to shareholders after all management and expense fees are paid.

With as many as 175,000 lower middle market companies in the United States, Main Street Capital has plenty of investment opportunities now and in the future. In the coming days and weeks, I’ll delve deeply into the company to explain the ins and outs of this very interesting BDC.

The article How Main Street Capital Corporation Makes Money originally appeared on Fool.com and is written by Jordan Wathen.

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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