MAIN Q3 2026 earnings call transcript, November 6, 2026

...will allow us to continue to deliver superior results for our shareholders in the future. The favorable results for the third quarter, combined with our continued positive future outlook, resulted in our 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 significant net fair value appreciation in our lower middle market investment portfolio. Brian will also discuss our NAV per share increase in the quarter. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of meaningful dividend income contributions. A net fair value appreciation in our lower middle market equity investments. Consistent with my comments over the last few quarters, we continue to see increased impacts from higher levels of performance variances versus expectations. For both our over-performing and under-performing portfolio companies, and those impacts are again reflected in our current results. As a result, we are focused on maintaining a disciplined approach that's consistent with our historical practice to managing our relationships with our over-performing and under-performing portfolio companies. Overall, based upon our current views of the investment portfolio and feedback from our portfolio... ...company management teams, we continue to maintain a positive view regarding the expected future contributions from our lower middle market portfolio companies.

We also continue to see significant interest from potential buyers in several of our lower... ...middle market portfolio companies, which we expect will lead to favorable realizations over the next few quarters. We believe this interest further highlights the strength and quality of our portfolio companies and their acceptance... ...leadership teams. Now, turning to our investment activity, the third quarter was slower than our expected normal quarterly activity in both of our primary investment strategies. Our lower-minnewakin investment activity... ...included one new portfolio company investment, which, when combined with other investment activity, resulted in a net decrease in our lower-minnewakin investments of $19 million, while our private loan investment activity... ...resulted in a net decrease in our private loan investments of $2 million. David will discuss our investment activity in more detail. Now turning to our asset management business, we continue to produce... ...positive results for the funds we advise through our external investment manager, with the continued favorable performance in the third quarter, resulting in meaningful incentive-income for our asset management business, and together with our recurring... ...management fees, a significant contribution to our net investment income. We remain excited about our plans for the external funds that we manage, and are optimistic about the future performance of the funds and the expected returns...

the investors of each fund. We also continue to be excited about our strategy and expectations for growing our asset management business within our internally managed structure. As part of these efforts, we remain focused on growing the investment portfolio of MSC Income Fund, a publicly traded BDC advised by our external investment manager, which is solely focused on our private loan investment strategy with respect to new portfolio company. MSC Income Fund's 3rd Quarter 2026 Financial Results Conference Call will be held later this morning, during which we will provide additional details upon our results for the 3rd quarter. A favorable outlook for the future. Earlier this week, our Board declared a supplemental dividend of $0.30 per share, payable in December, representing our 21st consecutive quarterly supplemental dividend and an increase to our regular month. Dividends for the fourth quarter of 2027 to $0.27 per share. These first quarter regular monthly dividends represent a 3.8% increase from the regular monthly dividends paid in the first quarter of 2026. The supplemental dividend for December is a result of our favorable performance in the third quarter and our net realized gains over the last few years. and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 38% paid to our shareholders in excess of our regular monthly dividends.

We currently expect to recommend that our board continue to declare future supplemental dividends to the extent DNII, before taxes, significantly exceeds our regular monthly dividends paid, or we generate meaningful net realized gains. And we maintain a stable to positive NAV per share in future quarters. Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional significant supplemental dividend payable in March, 2027. Now, turning to our current investment pipeline, as of today, I would characterize our lower middle market investment pipeline as average. Consistent with our experience in prior periods of broad economic uncertainty, we believe that our ability to provide highly flexible and customized financing solutions to lower middle market companies and their owners and management teams together with our differentiated long-term to permanent holding periods represents an even more attractive solution to the needs of many lower middle market companies, and we are excited about our expectations for the continued growth of our lower middle market. In our private loan investment strategy, we continue to see an improved lending environment, and we have recently experienced a significant increase in the volume of attractive and viable opportunities. We believe has us well positioned to capitalize on new private loan investment opportunities and to generate growth for our private loan portfolio and our asset management business.

We also want to characterize our private loan investment pipeline as well above average. With that, I will turn the call over to David.

And the event improves each year as we refine our agenda based on the feedback we receive. Topics covered at our most recent event included artificial intelligence. Intelligent use cases presented by a panel of our portfolio company executives. Insurance and risk management best practices presented by our in-house. Chief risk officer. The business case for strategic talent management presented by our in-house talent operating partner. Beginning your AI journey presented by a third-party industry expert. We had an economist speak about his views on the U.S. economy, and our keynote speaker was Hall of Fame football coach who shared stories and strategies on leadership. Talent development, and how to build sustaining, winning teams both on and off the football field. As a result of this annual event, our portfolio companies have increasingly worked together, referred business teams, to each other, utilize each other as operational resources, and formed long-term relationships that we believe are invaluable. One important topic we covered this year was best practices for... using artificial intelligence in lower-middle market businesses. This session was led by two of our portfolio company CEOs, together with the individuals at their companies who lead their internal AI efforts. They presented specific cases... ...studies on how they've used AI in their businesses, how they got started, lessons they learned along the way, and what they would do differently if they were launching an AI initiative today. The audience Q&A was...

...very active, and we are highly encouraged by the potential benefits our lower middle market portfolio companies can achieve as they continue to adopt AI in the future. Two other important sessions that we... ...were led by Main Street executives and focused on risk management and human capital at portfolio company level. We are pleased to have our Chief Risk Officer present on how we can... ...support our portfolio companies with the implementation of enhanced risk management and insurance related initiatives that we believe will benefit our companies going forward. Our in-house talent operating partner presented on how we can support our companies as they assess... ...and strengthen their teams, compensation alignment, culture, and organizational efficiency. She also addressed succession planning and management, which is a critical area of value creation. ...and risk mitigation for our lower middle market companies. The engagement from the audience during the event was robust and led to post-event discussions that we believe will ultimately improve the future financial results and operating performance for our lower middle market portfolio companies. Given our primary focus on our lower middle market investment strategy and the unique benefits it can provide to us, our management team partners, and their companies, we are excited to bring together the key leadership. From our lower middle market portfolio companies at our annual president's meeting.

We always leave this 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 composition... of our investment portfolio as of September 30th, we continue to maintain a highly diversified portfolio with investments in 187 companies spanning across numerous industries and in markets. Our largest portfolio company... The External Investment Manager represented only 3.3% of our total investment income for the trailing 12-month period and 3.4% of our total investment portfolio fair value at... The majority of our portfolio investments represented less than 1% of our income and our... Our low middle market investment activity for the third quarter included total investments of approximately $61 million, including an investment of... $39 million in a new lower middle market portfolio company, which after aggregate investment activity results in the net decrease in our lower middle market portfolio of $19 million. In our private loan strategy, we completed $162 million in total private loan investments, which after aggregate investment activity resulted in a net decrease in our private loan portfolio of $2 million. At the end of the third quarter, our lower middle market portfolio included investments in 92 companies, representing $3.3 billion of fair value, which was 28% of our private loan payments.

Our private loan portfolio included investments in 86 companies, representing $2.1 billion of fair value. Total investment portfolio at fair value of quarter-end of our related cost basis. Additional details on our investment portfolio at quarter-end are included in the press release that we issued yesterday. With that, I'll turn the call over to Ryan to cover our financial results, capital structure, and liquidity position.

The decrease in dividend income from prior year is primarily due to a decrease in dividends from our lower middle market companies as a result of exits since the beginning of comparable period in prior year. and changes in the performance and capital allocations decisions of our existing lower middle market companies relative to the prior period and decreases from our external investment manager, partially off- set by an increase in dividend income from our private loan portfolio companies. The decrease in dividend income from the second quarter is primarily due to decreased dividends from our lower middle market. Middle market portfolio companies as a result of changes in the performance and capital allocation decisions of our existing lower middle market portfolio companies partially offset by an increase in dividends from our private loan portfolio companies other portfolio. Companies and the external investment manager. Fee income decreased by $100,000 from a year ago and by $4.4 million from the second quarter. The decrease in fee income from the second quarter is prior. Primarily due to a decrease in fee income from the refinancing and prepayment of debt investments, lower closing fees on lower middle market investments, and other investment activity. Fee income considered non-recurring increased by $700,000 from a year ago and decreased by $1.9 million from the second quarter of 2026.

The third quarter included income considered less consistent. Non-recurring in nature primarily related to dividend, accelerated interest, and fee income, which totaled $6.1 million. These income items were $1.8 million, or two cents per cent. Higher than the third quarter of 2025, $3.4 million, or four cents per share, lower than the second quarter, and fairly consistent with the prior quarter average. The increase from the prior year is primarily due to higher nonrecurring dividend income and fees. The decrease from the second quarter was primarily due to lower nonrecurring fees. and accelerated interest income. Our operating expenses increased by 6.7 million dollars over the third quarter of 2025 and by 1.2 million dollars from the second quarter. The increases in operating expenses from the prior year and second quarter were largely driven by increases in interest expense. The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund a portion of the growth of our investment portfolio and an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities partially offset by a decrease in the weighted average interest rate on our credit facilities resulting from decreases in benchmark index interest. rates. The increase in interest expense from the second quarter was primarily driven by an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities.

The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets was 1.2 percent for the quarter on an annualized basis. and 1.3 percent for the trailing twelve-month period and continues to be among the lowest in our industry our external investment manager contributed eight point four million dollars to our net investment income during the third quarter which represents a decrease of four hundred thousand dollars from the same quarter a year ago and a decrease of three hundred thousand dollars from the second quarter our external investment manager earned gross incentive fees of three point five million dollars during the third quarter and way received six hundred thousand dollars in incentive fees from MSC income fund resulting in net incentive fees of two point nine million dollars. This net result represents a decrease of one million dollars in net incentive fees from prior year and a decrease. of one hundred thousand dollars in net incentive fees from the second quarter of 2026. Our external investment manager ended the quarter with total assets under management of 1.8 billion dollars. This quarter we recorded net fair. value appreciation including net unrealized appreciation and net realized losses on the investment portfolio of 40.9 million dollars. This increase was primarily driven by net fair value appreciation. in our lower middle market and private loan investment portfolios partially offset by net fair value depreciation in our middle market investment portfolio and fair value depreciation.

of our external investment manager. the net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies. the net fair value appreciation in our private loan portfolio is primarily driven by net appreciation on several specific portfolio equity investments partially offset by depreciation primarily associated with increases in market spreads. the net fair value depreciation of our middle market portfolio is primarily driven by net depreciation on specific portfolio investments. the depreciation of our external investment manager was primarily driven by decreases in the valuation multiple And now. of publicly traded peers which we use as a benchmark for valuation purposes and average incentive fees partially offset by increased base management fees. Additional details on our net realized fair value activity are included. in the press release that we issued yesterday. We ended the third quarter with investments on non-accrual status comprising 0.9% of the total investment portfolio at fair value and 3.5% at cost. NUDAT Net asset value or NAV increased by 30 cents per share over the second quarter or 0.9% and by $1.44 per share or 4.4% when compared to a year ago to a record NAV per share. $34.22 at quarter end. Our regulatory debt-to-equity leverage calculated as total debt excluding our SBIC debentures divided by NAV was 0.7 times and our regulatory asset coverage was 0.7 times.

2.42 times. These ratios continue to be more conservative than our long-term target ranges of 0.8 to 0.9 times and 2.25 to 2.1 times respectively. We continue to be active on capital activities aided by our strong relationships as we continue to manage our overall capital structure diversity. In September, we received SBA approval to increase our SBIC Depensure. We received SBA approval to increase the capacity by $75 million to a total of $425 million, with the potential for at least $50 million of additional capacity under current SBIC Depensure. In October, we issued $500 million of investment grade on secured notes maturing in January 2030 with a coupon rate of 6.55% and a yield of 6.8%. Given our current liquidity position and recent net investment activity, we were less active in our at-the-market or ATM program, raising net proceeds of $10 million from the equity issuances during the quarter. After giving effect to our capital activities, we entered the fourth quarter with strong liquidity, including cash and unused capacity under our credit facilities, totaling $1.6 billion, with our next-term debt maturity of $400. million due in June 2027. 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 despite the current market uncertainty. Coming back to our operating results, DNII before taxes per share for the quarter of 98 cents

Our first question is from Robert Dodd with Raymond James. Please proceed with your question.

Our next question is from Melissa Ludo with UBS. Please proceed with your question.

You may disconnect your lines at this time.