Main Street Capital Corporation Price & Performance (MAIN)

We also advise you that this conference call is being broadcast live through the Internet can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, February 28, [indiscernible] 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. Statements are based on management's estimates, assumptions 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 the statements as a result of risks, uncertainties, and other factors including, but not limited to, the factors set forth the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non GAAP financial measures including distributable investment income, or DNII. DNNII is net investment income or NII as determined in accordance with U. S. Generally Accepted Accounting Principles excluding the impact of non cash compensation expenses.

Management believes that representing DNII and the related per share amount are useful in appropriate supplemental disclosures for analyzing Main Street's financial performance as non cash compensation expenses do not result Please refer to yesterday's press release for a reconciliation of these non GAAP measures to the most directly comparable GAAP financial measures. Through additional key performance indicators that management will be discussing on this call are net asset value or NAV and return on equity NAV is defined as total assets minus total liabilities and is also reported on a per share basis. Maestro 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 has not been independently verified. Now I'll turn the call over to Main Street's CEO, Duane Hishak. Thanks Zach.

Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call. We hope that everyone is doing well. On today's call, provide my usual updates regarding our performance in the fourth quarter, while also providing a few updates on our performance for the full year.

I'll also provide updates on our asset management activities, our recent dividend declarations, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates.

Following my comments, David and Ryan will provide additional comments regarding our investment strategies, investment portfolio, capital structure and liquidity, and our expectations for the first quarter of twenty twenty five after which we'll be happy to take your questions.

We are extremely pleased with our fourth quarter results.

Which closed another great year for Main Street as highlighted by a record annualized return on equity of 25.4% for the quarter, Our positive performance in all four quarters for the year resulted in a return on equity of 190.4% for the full year strong levels of NII per share, and DNI per share to fund our record level of annual shareholder dividends and a new record for NAV per share for the tenth consecutive quarter. We believe that these continued strong results demonstrate sustainable strength of our overall platform the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business and the continued underlying overall strength and quality of our portfolio companies. Our continued positive performance allowed us to increase our total dividends paid to our shareholders in the fourth quarter by 6% over the prior year resulting in an 11% increase for the full year This allowed us to continue our trend of increasing the dividends paid to our shareholders over the last few years also continue to generate DNNII per share which exceeds the total dividends paid to our shareholders.

We continue to be encouraged by the favorable overall performance of the companies and our diversified lower metal market and private loan investment portfolios and remain confident that these strategies together with the benefits of our asset management business, significant available liquidity and our cost efficient operating structure will allow us to continue to deliver superior results for our shareholders the future.

These positive results combined with our favorable outlook for the first quarter, resulted in our recommendations to our Board of Directors most recent dividend announcements which I will discuss in more detail later.

Our NAV per share increased in the quarter primarily due to the impact of net fair value increases in our investment portfolio including the benefit in the quarter from the largest realized gain in our firm's history and the continued benefits from our asset management business. Ryan will discuss our NAV per share increase in more detail.

The continued favorable performance of the majority of our Lower Mineral portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in our lower middle market equity investments.

The realized gain that I referenced was a $54,000,000 realized gain on the exit of our equity investment in Main Meyer we believe is a great example of the unique benefits of our lower middle market investment strategy and which resulted in significant benefits for Main Street and our Pearl Main management team partners. The benefits from Main Street included significant dividend income, fair value appreciation and the realized gain resulting in best in class returns on our equity investment in addition to the attractive interest income This highly attractive investment also has one of the biggest benefits we provide to our portfolio companies through our lower middle market investment strategy which is the ability of our portfolio companies to execute significant growth through acquisitions, with the acquisitions funded 100% by debt financing from Main Street. Thereby allowing the management team to execute significant value creation without experienced dilution of their existing ownership percentage.

We continue these types of value creating activities in the fourth quarter and are excited about the follow on investments we made to finance strategic acquisitions by three of our high performing lower middle market portfolio companies each of which were funded by follow on debt investments by Main Street, for a total of over $36,000,000 of incremental debt investments in these portfolio companies. We expect that these follow on investments will provide the opportunity for additional future fair value appreciation in addition to providing us the highly attractive incremental debt investments in these high performing portfolio companies.

Consistent with my comments over the last few quarters, we also continue to see increased interest from potential buyers in certain portfolio companies that could lead to favorable realizations over the next few quarters further highlighting the strength and quality of our portfolio companies. Our aluminum market investment activity in the fourth quarter included total investments $168,000,000 including investments totaling $116,000,000 in two new portfolio companies, which together with the elevated repayment activity in the quarter resulted in a net increase in our lower middle market investments of $11,000,000 Our private loan investment activities in the quarter included total investments of $108,000,000 which after repayments and other investment activity resulted in a net increase in our private loan investments of $7,000,000 We've also continued to produce favorable results in our asset management business.

The funds we advised through our external investment manager continue to experience favorable performance in the fourth quarter resulting in significant incentive fee income for our our asset management business for the ninth consecutive quarter and together with our recurrent management fees, a significant contract We also benefited from significant fair value appreciation and the value of our investment manager Main, due to a combination of the continued increase in fee income, growth in assets under management, and broader market based drivers. We remain excited about our plans for the external funds that we manage as we execute our investment strategies and explore other strategic initiatives and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund and about our strategy for growing our asset management business within our internally managed structure. As part of our efforts to grow our asset management business, we are very pleased that in late January, MSE Income Fund a BDC advised by our external investment manager, and our largest asset management business initiative successfully completed a listing on the New York Stock Exchange and a public equity offering in which the Fund raised net equity proceeds of $91,000,000 We were very pleased with the listing and equity offering.

Which resulted in the fund being able to accelerate the timing and increase the size of the offering. We are very excited about our future plans for Massey Income Fund and believe that the fund's listing and equity offering along with the transition of its investment strategy and investment portfolio, be solely focused on co investing with Main Street and our private loan investment strategy, provides the fund the ability to continue to provide its shareholders attractive total shareholder returns and also provides significant future benefits to Main Street through the opportunity to grow the asset management fees that our external investment manager receives from the fund as it executes its growth plans. Based upon our results for the fourth quarter, combined with our favorable outlook in each of our primary investment strategies, and for our asset management business, Earlier this week, our Board declared a supplemental dividend of $0.3 per share payable in March.

Representing our fourteenth consecutive quarterly supplemental dividend, and regular monthly dividends for the second quarter of twenty twenty five of $0.25 per share payable in each of April, May and June representing a 4% increase from the second quarter of twenty twenty four.

The supplemental dividend for March is a result of our strong performance in the fourth quarter and will result in total supplemental dividends paid during the trailing twelve month period of $1.2 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continue to declare supplemental dividends to the extent DNII significantly cedes regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV.

Based upon our expectations for continued favorable performance in the first quarter, We currently anticipate proposing an additional supplemental dividend payable in June 2025. Now turning to our current investment pipeline. As of today, I would characterize our Lower Minnehwa Investment pipeline as average with several new investments scheduled to close before quarter end we believe that the unique and flexible financing solutions that we can provide to lower middle market companies their owners and management teams and our differentiated long term to permanent holding periods, we represent an attractive solution to the needs of many lower middle market companies And despite the current broad economic uncertainty, we are confident in our expectations for favorable lower middle market investment activity over the next few months Main. 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'd also characterize our private loan investment pipeline as average. With that, will turn the call over to David.

Thanks, Duane, and good morning, everyone. Each year end provides a good opportunity to look back at our history and highlight the results for our unique and diversified investment strategies and discuss how these strategies have enabled us to deliver highly attractive returns to our shareholders over an extended period of time. Since our IPO in 02/2007, we have increased our monthly dividends per share by 127% we've declared cumulative total dividends to our shareholders of almost $45 per share or approximately three times our IPO price of $15 per share.

Our total return to shareholders since our IPO calculated using our stock price as of yesterday's close and assuming reinvestment of all dividends received since our IPO, was 16 times money invested This compares favorably to the 4.4x money invested for the S and P five hundred over the same period of time and is significantly higher when compared to other BDCs. As we previously discussed, we believe that primary drivers of our long term success have been and will continue to be our focus on making both debt and equity investments in the underserved lower middle market our private credit investment activities to the benefit of our stakeholders and for the clients of our asset management business our internally managed structure, which allows us to maintain an industry leading cost and the strong alignment of interest between our employees and our shareholders as a result of our team's meaningful stock ownership.

Most notably and uniquely, our lower middle market strategy provides attractive leverage points and income yield on our first lien debt investments while also creating a true partnership with the management teams and other equity owners of our portfolio companies through our flexible and highly aligned equity ownership structures. This approach provides us significant downside protection to our first lien debt investments and preferred equity positions while still providing the benefits of significant upside potential through our equity investments.

Main Street's long term historical track record of investing in the lower middle market market coupled with our view that this market continues to be underserved gives us confidence that we will be able to continue to find attractive new investment opportunities in this primary area of investment focus for our business Our ability to provide highly customized and differentiated capital solutions for the predominantly family owned businesses that exist in the lower middle market has been and continues to be a strong differentiator for us. In 2024, Main Street invested $466,000,000 in our lower middle market strategy. Dollars $228,000,000 of this capital was deployed in seven new lower middle market platform companies, with the remaining $238,000,000 predominantly representing follow on investments in existing and well performing lower middle market companies Consistent with our comments in prior quarters, the majority of these follow on investments were made to support growth strategy in some of our highest performing portfolio companies which makes this aspect of our lower middle market investment activity very exciting for us. Our follow on investments are typically used sectors including acquisitions, product or geographic expansion opportunities and recapitalization transactions. Most importantly, these follow on investments are made into represent significantly less investment risk when compared to providing capital to new investment portfolio companies.

Since we are significant equity owners in our lower middle market companies, we also benefit from participating alongside the proven manager in these businesses as they strive to achieve meaningful equity value creation. As we've stated in the past, as our lower middle market portfolio companies perform over time, they naturally deleverage the free cash flow generated from operations This allows us along with our lower middle market portfolio management team partners to benefit from a larger portion of the portfolio company's cash flow after debt service which can be available for distribution to the equity owners. Given the strength and quality of our lower middle market portfolio, and the long term holding period for many of our companies, expect dividend income to continue to be a significant contributor to our results in 2025 and in the future. Additionally, this deleveraging coupled with the attractive overall operating results from our lower middle market portfolio companies allowed us to achieve $120,000,000 in net fair value increases in 2024 for a lower middle market portfolio including the largest realized gain in our firm's history. The benefit from realized gains our lower middle market equity investments is unique to us among our BDC peers and provides the opportunity to offset losses, which will naturally incur when investing in non investment grade asset classes.

As our lower middle market equity investments perform, they also provide us the opportunity for unrealized appreciation, which allows us to continue to grow our which is an opportunity that the investment strategies of other BDCs simply do not have. A great example of a lower middle market equity investment that highlights the benefits of our unique investment strategy was the exit from our portfolio [indiscernible] Pearl Meyer that Duane mentioned in his remarks.

We completed the exit in our investment in Pearl Meyer in the fourth quarter which resulted in a realized gain of $54,000,000 In addition to the realized Main achieved upon exit, Promeyore also distributed total dividends to us of $32,000,000 over the life of our investment As a result, on a cumulative basis, since our initial investment in April 2020, and taking the realized gain and dividends into consideration, we realized an annual internal rate of return of sixty nine percent and seven point seven times money invested return on our equity investment. Including all debt and equity investments in Main Meyer, Main Street realized an IRR of 33% The last important area I'd like to cover regarding our 2024 accomplishments are the impressive contributions that our private credit team delivered during the year. Our private credit team continued to execute on our strategy to dedicate significant resources towards growing the private loan segment of our business which we believe provides a very attractive risk adjusted return profile for us and for the clients of our asset management business. During 2024, we completed gross investments approximately $900,000,000 in our private loan strategy and grew the cost basis of our private loan investment portfolio by $449,000,000 As a result of these investment activities, our private loan portfolio represented 46% of our total investment at cost at year end and our middle market portfolio declined to represent less than 5% of our total investment As Duane discussed earlier, our private loan capabilities are also primary driver of our strategic objective to continue to grow our asset management business As of December 31, we had investments in 190 portfolio companies spanning across numerous industries [indiscernible] Our largest portfolio company excluding the external investment manager, represented only 3.3% of our total investment income for the year and only 3.8% of our total investment portfolio fair value at year end The majority of our portfolio investments represented and our assets.

Now turning to our investment activity in the fourth quarter, we made total investments in our lower middle market portfolio of $168,000,000 including investments of $116,000,000 in two new lower middle market portfolio companies which after aggregate repayments on debt investments return of invested equity capital from several equity investments and a decrease in the cost basis due to realized losses on certain portfolio investments resulted in a net increase in our lower middle market portfolio of $11,000,000 During the quarter, we also completed $108,000,000 total private loans investment which after aggregate repayments of debt investments and a decrease in cost basis due to a realized realized losses on several portfolio investments resulted in a net increase in our private loan portfolio of $7,000,000 At year end, our lower middle market portfolio included investments in 84 representing $2,500,000,000 of fair value which is 29% above our related cost basis. We had investments in 91 companies in our private loan portfolio representing $1,900,000,000 of fair value The total investment portfolio at fair value at year end was 6% above our related cost basis. Additional details on our investment portfolio at year end included in the press release that we issued yesterday.

With that, I will turn the call over to Ryan to cover our financial results capital structure and liquidity position. Thank you, David.

To echo Duane's and David's comments, we are pleased with our operating results for the fourth quarter which included a number of quarterly records and capped a year in which Main Street achieved records for net investment income and distributable net investment income and net assets net asset value per share. Our total investment income for the fourth quarter was $140,400,000 increasing by $11,100,000 or 8.6% over the fourth quarter of twenty three by $3,600,000 or 2.6% from the third quarter of twenty The positive momentum we experienced during the first three quarters continued into the fourth quarter and culminated in a year with strong levels of interest, dividend and fee income which again demonstrated the continued strength of our differentiated and asset management strategies.

Interest income increased by $9,300,000 from a year ago and decrease $600,000 when compared to the third quarter. The increase over the prior year was driven primarily by the impact of increased net investment activity over last year, partially offset by the impact of an increase in investment on non accrual status and a decrease in interest rates on our floating rate debt investments primarily resulting from decreases in benchmark index rates. The decrease from the third quarter was primarily driven by the impact of decreases in interest rates on our book floating rate debt investments partially offset by an increase in net investment activity. Dividend income increased by $700,000 or 3.1% when compared to a year ago including a $200,000 increase in unusual or non recurring dividends.

An increase by $1,300,000 or 5.5% from the third quarter including a $300,000 increase in unusual or non recurring dividends. The increases in dividend income are a result of the continued underlying strength of our portfolio companies. Fee income increased by $1,100,000 or 23.3% a year ago, an increase by $2,900,000 or 96.6% from the third quarter of twenty twenty four The increase in fee income from the prior year was primarily driven by higher closing fees on new and follow on investments partially offset by a decrease from accelerated amortization and an exit prepayment and amendment fees driven by investment activity. The increase in fee income over the third quarter was primarily driven by higher closing fees on new and follow on investments during the fourth quarter and increased prepayment and amendment fees driven by investment activity. Prepayment and other fee income considered non recurring decreased by $200,000 compared to a year ago and increased by $1.2 compared to the third quarter of twenty twenty four The fourth quarter included reduced levels of income considered less consistent or nonrecurring in nature in comparison to the fourth quarter of twenty twenty three and elevated levels of income considered less consistent or non recurring in nature in comparison to the third quarter of twenty twenty four including dividends from our equity investments and accelerated prepayment, pre pricing and other activity related to our debt investments.

In the aggregate, these items totaled $3,700,000 and were $1,300,000 $0.02 per share lower compared to the average of the prior four quarters were $1,600,000 or $0.02 per share lower than such items Main fourth quarter of twenty twenty three and $1,500,000 or $0.02 per share higher than the third quarter of twenty twenty four.

Our operating expenses increased by $10,900,000 over the fourth quarter of twenty twenty three largely driven by increases in interest rate expense and compensation related expenses partially offset by an increase in expenses allocated to the external investment The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund a portion of growth of our investment portfolio and an increase in the weighted average rate on our debt obligations.

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 for the year and continues to be among the lowest in our industry.

Our external investment manager contributed $8,700,000 to our net investment income during the fourth quarter representing a decrease of $500,000 from the same quarter a year ago which resulted in a total of $34,300,000 for the year representing an increase of $1,000,000 or 3% over the prior year.

The manager earned $3,400,000 in incentive fees during the quarter and $13,700,000 for the year, representing a decrease of $500,000 and an increase of $300,000 respectively over the same period in the prior year. The manager ended the quarter with total assets under management of $1,600,000,000 including net realized gains and net unrealized appreciation on the investment portfolio of $80,800,000 This increase was driven by net fair value appreciation in our lower middle market portfolio and our external investment manager Main. Partially offset by net fair value depreciation in our private loan portfolio and certain of our other portfolio investments. The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive The net fair value depreciation in our private loan portfolio was driven [indiscernible] partially offset by decreases in market spreads. The fair value appreciation of our external investment manager was a result of a combination of increases in the valuation multiples of publicly traded peers which we use as one of the benchmarks for valuation purposes, and an increase in the fee income generated by the external investment manager. We ended the fourth quarter with investments on non accrual status point 9% of the total investment portfolio at fair value and approximately 3.5% at cost.

Net asset value or NAV increased by $1.08 per share over the third quarter and by $2.45 or 8.4% when compared to a year ago, for a record NAV per share of 31.65 at year end. Our regulatory debt to equity leverage calculated as total debt excluding our SBIC debentures divided by net asset value six, four times and our regulatory asset coverage was 2.56 times and these ratios continue to be more conservative than our long term target ranges of 0.8 to 0.9 times and 2.1 to 2.25 times Given our current liquidity position, were less active during the fourth quarter and our at the market or ATM program, raising net proceeds of $8,900,000 from equity issuances. After giving effect to the capital activities in 2024, we entered 2025 with strong liquidity including cash and availability under our credit facilities in excess of $1,000,000,000 with one near term debt maturity of $150,000,000 in December of twenty twenty five.

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 discussed last quarter, the discount level of liquidity we currently expect to fund our new net investment activity in 2025 through a greater portion of debt financing And as such, we would expect leverage to continue to increase during this time to be closer to our long term stated targets. However, we expect to continue to operate throughout the year at leverage levels more conservative than our long term targets. Coming back to our operating results, As a result of our strong performance for the quarter, return on equity for the fourth quarter was 25.4% on an annualized basis and 19.4% for the year. DNII per share the quarter of $1.08 decrease from DNII per share for the fourth quarter of last year by $0.04 or 3.6% and exceeded DNNII per share for the third quarter by $0.02 per share or 1.9%. The combined impact of certain investment income considered less consistent or non recurring in nature on a per share per share basis was $0.02 per share below the average of the last four quarters $0.02 per share below the same quarter a year ago and $0.02 per share above the third quarter.

For the year, these items were $0.05 per share below 2023 levels. Looking forward, we expect headwinds on top line earnings, related to the decrease in floating market index rates but given the strength of our underlying portfolio, we expect another strong earnings quarter in the first quarter of twenty twenty five with expected DNNII of at least $1.05 per share with potential for upside driven by portfolio investment activities during the quarter. And we would also expect that we would recommend to our Board that it declare another supplemental dividend in the second quarter. With that, I will now turn the call back over to the operator. So we can take any questions.

And answer session. Our first question is come from the line of Robert Dodd with Raymond James. Please proceed with your questions. Hey, Robert, can you check if you're self muted, please?

I am self muted. I apologize. Congratulations on the Quarter And Pearl Mine Main particular.

Segue in from Matt. Can you give us any color on Exposure in the portfolio to potential tariff issues or government efficiency initiatives, I mean, it's it's not that first rodeo with tariffs. And adapted pretty well before, but can you just give us any thoughts on that given the economic environment and what's coming out of D. C. At the Main? Robert, we're happy to do that. So good morning and thanks for the question. I'd say on the tariff topic, clearly we're in some very interesting times here. And I think our view is that if the tariffs are implemented and Main, the way that they're being discussed right now that there's many businesses and industries in The U. S. That are going to have some issues or some exposure just given the global nature of the business world today. And I'd say when you look at [indiscernible] There are certain companies in our portfolio that will definitely have an impact But as you probably heard us say in the past, we do have a very, very diverse portfolio.

We think that's a benefit in all periods. We think it would also be a benefit when you look at the potential impact of tariffs going forward. We also look at the companies that we have As you've heard us say in the past, particularly in the lower middle market, these are largely U. S. Domestic focused businesses, both customers and vendors Are you going to be more focused from a U. S. Domestic standpoint? So while we will be impacted, if we compare our expected impacts to the broader U. S. Economy, we do think that our impacts will be less. So not that we won't be impacted, but we think it will be a favorable comparison relative to other parts of The U. S. Economy. But despite that view, as I think you'd probably expect, I'd say we have been and we are actively working with our portfolio companies to make sure that they're being diligent Main looking at their plans or playbooks to deal with the issues that could come about. As you just said in your comments, they've dealt with this kind of thing before.

Both with COVID-nineteen, supply chain issues and then tariffs historically and then more recently, the kind of high inflation period. So we think that our companies and their management teams have dealt with these types of issues in the past. And when we look at our performance since COVID, we think they've done a really good job of dealing with the un be hopeful that they can continue to navigate things in a positive Main. But we are clearly focused on it, spending time on it. We'll continue to focus on that with our management teams and our company. You've heard us also say this before, but one of the things we've always loved about the lower middle market is that we do think we have best in class management teams. I think we've proven that over the last five to ten years with the performance in the lower middle market. So these are great operators. They're also very, very much aligned with us, much more focused on their equity ownership position as opposed to just a paycheck or a bonus. So we think that they manage their businesses in a very productive manner. And because of the size of the companies, when they execute a plan, that plan can actually have an impact very, very quickly.

So we think those are all positives. I think it'll be interesting to see how this plays out not just for us, but for the more broad U. S. Economy. But I think we feel that we're in good shape relative to others and are confident in the abilities of our teams to manage it. On your second question or topic about the impacts from a government efficiency standpoint, I'd say we have some limited exposure there. There's a couple of companies that we can think of that have significant exposure. And obviously, we're just like we are on the tariff topic, We're talking to those companies and those management teams frequently to one, stay up to date on what's going on, but also do what we can to help them plan and navigate it. One of those companies I would say has a lot more impact. The other one I think is actually continuing to do exceptionally well and we think this despite what's going on from a federal efficiency standpoint, we expect continue to do well. But we think we have a limited exposure on that front when you look at the portfolio we have.

One more, still tied to DC.

That's obviously the best Can you hear me?

Yes, we can hear you. Can you hear me, Rob?

Yes, Robert, can you hear us? [indiscernible] I can hear you.

Yes, now. Sorry.

There's potential that capital gains taxes come Main, maybe this year, maybe next year, who knows. Are you hearing anything from potential on the front of new plats acquisitions where is there any slowdown in expected activity as people are like Main for clarity on taxes because obviously a lot of these entrepreneurs that potentially have tax exposure if they sell their business depending on variety of factors. But is that entering anybody's mind at the moment? Or is that just not a big deal?

Yes. Robert, I'll give my views and I'll let David add on he has any additional comments. But I'd say, as we look at the the first quarter, I think you probably heard this from other BDC or management teams that you've talked to. I think activity, both low middle market and private loan or private credit has been a lot slower than we expected it to be.

But I don't think it's related to any potential changes from a capital gains rate standpoint. I think there is some reluctance or caution just given everything that's going on in The U. S. Economy with the topics that you touched on earlier. So I do think that that is probably kind of dampened some of the expectations from an M and A standpoint, but I don't think I've heard people talking about the capital Main stuff and David's kind of shaking his head here saying that he hasn't either. So we have not seen that not seen that pop up. Obviously, if there was a positive change there, that could be a positive catalyst, but we just haven't heard that enter the of the companies we've been talking to.

Got it. Got it. Thank you.

Thank you, Robert.

Thank you. Our next question is come from the line of Kenneth Lee with RBC Capital Markets.

Hey, good morning and thanks for taking my question.

Just one on leverage.

So still below target ranges and it sounds like the expectation is a little bit of conservatism for this year. Just want to dig into that a little bit more. Is this based on any kind of macro factors And do you see there being enough origination activity to be able to bring up the leverage meaningfully over the near term? Thanks.

Yes, Ken, good morning. Thanks for the question. I would say that views we're given on leverage are really we entered the year in a pretty significant under levered position. I'd say that's given driven by a couple of different things. One is less than expected investment activity both on the lower middle market and private loan side of our business as we exited the fourth quarter and that's continued to be the case as I said a few minutes ago, as we look at the first couple of months of the year. But I think Ryan covered this in his prepared comments, but we do expect and are focused on trying to get our leverage up. And the way we're going to do that will be driven by two things. One is just actual investment activity on a net investment activity basis. That's going to be the biggest driver of where we end the year from a a leverage standpoint. And then the other side of that is just given where we're at today from a leverage position, we expect to be less active under the ATM. So as we do grow our investment portfolio and grow our capital structure alongside that, you should expect it to be much more heavily weighted toward the debt capital side of the capital structure.

Ryan, if there's anything else you would add on, feel free to add on there.

I think that about covers. I mean, one thing I would mention, as was called out in the prepared remarks was the exit of ProMyer happened at the very December. And that was a sizable check that was written, which is great for us, but obviously had an impact on those leverage ratios as we hit year end. So that also has a little bit of interplay there.

Got you. Very helpful there.

And then within the lower mid market portfolio there and I think you mentioned in the prepared remarks seeing increasing interest and there could be some potential realization at some point Wondering if you could just go a little bit more details around that. What sort of the nature of these kind of discussions? And is the level of interest increasing based on macro factors, regulatory outlook or any other specific factors there? Thanks.

Yes, Ken, just like we are, Zara, we're going to be a little limited in what we say there. Obviously, if there's activities going on, it's under confidential kind of situation in terms of having a transaction that may be in process that is not public. But as we said in the past, we think we've got some fantastic companies in our aluminum market portfolio similar to what you saw with Pearl Meyer And at some point, those companies may be Main be called on by either a strategic or a larger private equity firm because just like we find these companies very attractive they may also find them attractive and that may lead to dialogue could lead to a process being run by our portfolio company with Main Street to maximize the value in those transactions. I'd say that's similar to what happened on the the Pearl Meyer side. We don't mandate anything, as you've heard us say in the past. We absolutely view our relationships with our lower middle market companies and their management [indiscernible] and the management team Main used as an attractive opportunity. But when that happens, we're going to support them Main maximizing the value and we think we will consistently have really good outcomes in that type of a scenario just like we had on Promeyer David, if you want to add anything to that, feel free to add on.

Great. Well, will that be anything else on that?

No, that's very helpful. Thanks again. [indiscernible] Thank you.

Our next question has come from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Yes, thanks. Good morning. Appreciation in the quarter in the external investment manager Main. [indiscernible] or was that appreciation in 4Q already factoring that Main? [indiscernible] Say, Mark, the appreciation in Q4 didn't really have anything to do with the listing and the offering. It was more based upon continued growth with the consistent incentive fees we've been been earning and receiving there as well as just the market. We have a number of different factors that go into our valuation approach. One of those factors, not the only factor, but one of those factors is a publicly traded peer set. And I just think that peer set has been trading except [indiscernible] You'll see some benefit there from a valuation approach standpoint.

And then when we think about the public offering, just the increase in [indiscernible] will that kind of logically trigger more value for the external manager Main is that still looking at the peer group and and other inputs Yes. I think when you look at the changes that happen in conjunction with the listing and offering, the changes are such that the benefit to Main Street or through the external investment manager to Main Street are going to be fairly limited unless there's a significant operating results at MSE Income Fund. What I mean there is we lowered the base management fee, so that change in the percentage will reduce the base management fees we get. We also changed the incentive fee structure to to be more consistent with what you see from other externally managed BDCs. And those two at consistent operating results it would be close to breakeven. The structure was intended to provide MSE Income Fund shareholders additional benefits as we grow and have better performance both at the net investment income line and the ROE line. So if we do that, there will be lower incentive fee relative to performance. But overall, when you look at the growth of assets, and Main increasing level of performance, we still think it's a really good outcome for Main Street as well when we look at the relationship we have with the Missy Income Fund.

Very good. From a regulatory standpoint, Duane, I think you've mentioned a time or two you've lost some lending opportunities to local banks prospects you think for new regulation on banks to get them more active with that be a competitive impact hard to see, but any thoughts there?

Yes. I'll give a few thoughts and I'll let Nick add on if he has a different view because I think what we see most of the pressure for the last two, three, four years and from that angle it's not on the lower middle market side, it's on the private credit side. And I'd say Main the last quarter, we had another attractive company performing well. I wouldn't say it was knocking the cover off the ball in terms of their performance versus original underwriting expectations, but a bank came in and took us out of that at a significant reduction in the spread. So you're still seeing some of that. It is very limited. But my view would be I would not expect you to see there be being significant enough changes in the banking regulations to change that. I think you'll still see some of that from time to time. But I think it's less specific or related to changes in the bank regulatory environment and more a bank decides they want to do something explain why they do it, but they go out and do something that we think is fairly aggressive. But beneficial for the company that they end up giving that loan to.

Nick, feel free to add on The usual case for that is, it's not a fresh LBO, it's transaction that happened maybe twelve or eighteen months before and maybe the bank had been a banking partner before the sponsor bought the business.

They couldn't get there on the first transaction. Usually, it's either speed or timing and leverage issue. As the company performs better, a lot of times that regional or local bank will step back in again with a lower rate to try to get re involved in that business.

Understood. Thank you. I said I'd say from a fresh LBO perspective, we don't see them really as competition there.

Yes, yes. Okay, very good. Thank you.

Thank you, Mark. Thank you. Thank you. Our next question is come from the line of Douglas Harter with UBS.

Proceed with your questions.

Hi, this is Corey Johnson on for Doug.

I just have a question, just speaking with the competition for a second.

Just given the success that you've had in your lower middle market strategy, on that portfolio Do you have any, I guess, what are your thoughts in regards to perhaps concerns from competition regarding other BDCs possibly moving down market? Or or perhaps even imitating middle market strategy, just what are your thoughts on competition in general?

Yes. Thanks for the question. I'd say we haven't seen change there. You're definitely not a change from the from the BDC industry in terms of being more competitive with our our lower middle market strategy or approach I think when you look at it and that's why we have two very distinct and different teams at Main Street a team that looks like what I expect most BDCs investment team to look like. It's going to be very consistent with what Nick and his team at Main Street do. Their credit focus, that's their history, that's their experience and that's their their approach. Our lower middle market team is much more a private equity type focus. We're underwriting the transaction, the exact same way that a private equity sponsor or fund would or that a strategic acquirer would. And those are just two very different approaches and very distinct skill sets. So we haven't seen anybody trying to come in and duplicate or become competitive with us in our lower middle market strategy. We also don't expect them to, given that dynamic in terms of the differences in the skill set and experience. Could they? They could. I think over the last twenty years of being in the industry, have seen some people do it a long time ago, probably ten, fifteen years ago.

And I'd say that those companies they're not around anymore and they did not fare very well because you had kind of lenders or credit guys trying to do private equity and it just it's a totally different skill set.

Thank you.

Thank you. This now concludes our question and answer session. I would now like to turn the floor back over to management for any closing comments.

Thank you very much. And just from our side, just thank you to everyone again and we'll look forward to talking to everyone again in a few months after our first quarter Have a wonderful day.