Main Street Capital - Q4 2025

Transcript

Operator (participant)

Greetings, welcome to the Main Street Capital fourth quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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 (Investor Relations)

Thank you, operator. Good morning, everyone. Thank you for joining us for Main Street Capital Corporation's fourth quarter 2025 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, 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 fourth quarter and full year 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 March sixth. 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, February 27, 2026, therefore, you're 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. Any 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, 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. Make sure there seems 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 US 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 a net cash impact to Main Street upon settlement. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per-share basis. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. 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. Now I'll turn the call over to Main Street CEO, Dwayne Hyzak.

Dwayne Hyzak (CEO)

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call. We hope that everyone's doing well. On today's call, we will provide you with our key quarterly updates. We're also providing a few updates on our performance for the full year. Following our comments, we will be happy to take your questions. We're extremely pleased with our continued strong performance in the fourth quarter, which closed another great year for Main Street. Our strong performance resulted in a return on equity of 17.7% for the fourth quarter and 17.1% for the full year. Strong levels of DNII per share, a new record NAV per share for the 14th consecutive quarter, and extremely strong investment activity in our unique lower middle market investment strategy, which resulted in an annual record for gross lower middle-market investments.

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 strength and quality of our portfolio companies, particularly our existing lower middle-market portfolio companies. We remain confident that our unique investment income and value creation drivers, together with our cost-efficient operations and conservative capital structure, will allow us to continue to deliver superior results for our shareholders in the future. Our favorable results in the fourth quarter, combined with our positive outlook for the first quarter, 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 increases in both our lower middle market and private loan investment portfolios, including the benefits of material net realized gains, 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 our lower middle market equity investments. Based upon our current views of these investments and feedback from our portfolio company management teams, we expect the strong contributions to continue.

Consistent with my comments over the last few quarters, and as David will discuss in more detail, we're pleased to have exited our investments in one high-performing lower middle market portfolio company, Mystic Logistics, in the fourth quarter, and our investments in another high-performing company, KBK Industries, in the first quarter of 2026. In both cases, resulting in material realized gains in addition to significant dividends received over the life of our equity investments. We believe that these investments serve as yet another great example of our highly unique lower middle market investment strategy, which delivered significant benefits for both Main Street and our management team partners, including significant dividend income, fair value appreciation, and realized gains, resulting in investing class returns on our equity investments, in addition to the highly attractive interest income on our debt investments.

Even after these recent realizations, we 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, and which we believe further highlights the strength and quality of our portfolio companies and their exceptional leadership teams. We are also excited about the new and follow-on investments we made in our lower middle market strategy during the quarter, which included the addition of five new portfolio companies and a net increase in lower middle market investments of $253 million, representing our highest level of quarterly lower middle market net investment activity since the fourth quarter of 2021.

Consistent with our prior guidance, our private loan investment activity in the fourth quarter returned to our expected normal level of quarterly activity and generated a net increase of $109 million in our private loan portfolio. In addition to the favorable investment realizations in our lower middle market portfolio, we also completed successful exits of two private loan portfolio company equity investments in the fourth quarter, both at meaningful premiums to our third quarter fair values. David will discuss our investment activity in more detail. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio for the foreseeable future. We are excited about the current opportunities we are seeing. We also continue to produce positive results in our Asset Management business.

Funds we advise through our external investment manager continue to experience favorable performance in the fourth quarter, resulting in significant incentive income for our Asset Management business, and together with our recurring base management fees, a significant contribution to our net investment income. We remain excited about our plans for the external funds that we manage as we execute our investment strategies, 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 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 the private loan investment strategy with respect to new portfolio company investments.

As a result of the increase to its regulatory debt capacity, which became effective at the end of January 2026, the fund maintained significant capacity to add additional debt to fund the future growth of its investment portfolio. MSC Income's fourth quarter and full year 2025 financial results conference call will be held later this morning for those who would like additional details. 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 $0.30 per share, payable in March, representing our 18th consecutive quarterly supplemental dividend and regular monthly dividends for the second quarter of 2026 of $0.26 per share.

The second quarter regular monthly dividends represent a 4% increase from the regular monthly dividends paid in the second quarter of 2025. 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 12-month period of $1.20 per share, representing an additional 39% 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 net realized gains, and we maintain a stable to positive NAV in future quarters.

Based upon our expectations for continued favorable performance in the first quarter, we currently anticipate proposing an additional significant supplemental dividend payable in June 2026. Turning to our current investment pipeline. As of today, I'd characterize our lower middle market investment pipeline as above average. Consistent with our experience in prior periods of broad economic uncertainty, we believe that our ability to provide unique and flexible financing solutions to lower middle market companies and their owners and management teams, and our differentiated long-term to permanent holding periods, represent an even more attractive solution to the needs of many lower middle market companies, given the current economic environment, we're confident in our expectations for strong lower middle market investment activity in the first quarter.

We continue to have an increased number of existing portfolio companies that are actively executing acquisition growth strategies that we anticipate will provide attractive follow-on investment opportunities for us in the near-term future, and significant value creation opportunities for these portfolio companies in the longer-term future, consistent with the successes we've demonstrated and experienced with other portfolio companies. To date, in the first quarter of 2026, we have made follow-on investments in four high-performing lower middle market portfolio companies to support strategic acquisitions for a total of over $45 million in incremental investments in those portfolio companies.

We also continue to be 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 over the last few years. As of today, I'd characterize our private loan investment pipeline as above average. With that, I will turn the call over to David.

David Magdol (President and Chief Investment Officer)

Thanks, Dwayne. Good morning, everyone. Each year end provides a good opportunity to look back at our history and highlight the results of our unique and diversified investment strategies, and discuss how these strategies have enabled us to deliver highly attractive returns to our shareholders over the last 19 years. Since our IPO in 2007, we have increased our monthly dividends per share by 136%, we have declared cumulative total dividends to our shareholders of more than $49 per share, or approximately 3.3x our IPO share price of $15. 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 17x money invested.

This compares very favorably to the 5.3x money invested for the S&P 500 over the same period of time, and is significantly higher when compared to most public companies. As we've previously discussed, we believe that the 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, highly attractive lower middle market. Our Private Credit Investment activities for the benefit of our stakeholders and for the clients of our Asset Management business. Our internally managed structure, which allows us to maintain a highly efficient and industry-leading operating structure, 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 yields 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 through our first lien debt investments and preferred equity positions, while still providing the benefits of significant upside potential through these equity investments. Main Street's long-term historical track record of investing in the lower middle market, coupled with the fact that this continues to be a large, addressable, and underserved market, gives us confidence that we will be able to continue to find attractive new investment opportunities in our primary investment strategy.

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 our primary differentiator. In 2025, Main Street invested over $700 million in our lower middle market strategy, which represents the largest year of lower middle market originations in our firm's history. $482 million of this capital was deployed in 13 new lower middle market platform companies, with the remaining $219 million predominantly representing follow-on investments in existing, seasoned, and well-performing lower middle market companies. Our follow-on investments are typically used to support multiple objectives, including growth, capital, and organic expansion opportunities, acquisitions, and recapitalizations.

Most importantly, these follow-on investments are made in support of proven management teams that we believe represent significantly lower investment risk when compared to investments in new portfolio companies. Since we are significant equity owners in our lower middle market companies, we also benefit from participating alongside these proven operators as they strive to achieve meaningful equity value creation. As we've stated in the past, as our lower middle market companies perform over time, they naturally deleverage with 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 company's free cash flow after debt service, which can be available for distributions to the equity owners.

Given the strength and quality of our lower middle market portfolio and the long-term to permanent holding period for many of our companies, we expect dividend income to continue to be a significant contributor to our results in 2026 and in the future. Additionally, this deleveraging, coupled with the strong underlying operating results of our lower middle market portfolio companies, allowed us to achieve $150 million in net fair value appreciation in 2025 from our lower middle market portfolio. In 2025, we also achieved $77 million in net realized gains in our lower middle market portfolio, including the largest realized gain in our firm's history.

The benefit from realized gains in our lower middle market equity investments is unique to our strategy and provides the opportunity to offset losses, which will naturally occur when investing in non-investment grade asset classes. As our lower middle market equity investments perform, they also provide the opportunity for unrealized appreciation, which allows us to continue to grow our NAV per share. A great example of a lower middle market equity investment that highlights the benefits of our unique investment strategy was our investment in Mystic Logistics, which we exited in the fourth quarter. This exit resulted in a realized gain of $24 million. In addition to this realized gain, Mystic Logistics also distributed total dividends to us of $22 million over the life of our investment.

The last important area I'd like to cover regarding our 2025 accomplishments are the contributions we received from our private loan investment strategy. We believe that our private loan investment strategy provides a very attractive risk-adjusted return profile for us and for the clients of our Asset Management business as we execute on our strategic objective to continue to grow our Asset Management business. Despite a challenging investment environment for most of the year due to slower-than-expected private equity industry activity, we completed gross investments of approximately $672 million in our private loan strategy, and at year-end, our private loan portfolio represented 43% of our total investments to cost. As a reminder, in our private loan strategy, we are primarily a lender to private equity-backed businesses. We also occasionally make small equity investments in our private loan portfolio companies.

In the fourth quarter, we recognized a significant realized gain of $34 million in our investment in Pergeright. This exit provides evidence of the potential benefits of our private loan equity co-investment strategy. As of December 31st, we had investments in 189 portfolio companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 5.2% of our total investment income for the year and only 3.3% of our total investment portfolio fair value at year-end. Majority of our portfolio investments represented less than 1% of our income and our assets. Now turning to our investment activity.

In the fourth quarter, we made total investments in our lower middle market portfolio of $300 million, including investments of $241 million in five new lower middle market portfolio companies, which after aggregate investment activity, resulted in a net increase in our lower middle market portfolio of $253 million. During the quarter, we also completed $231 million of total private loan investments, which after aggregate investment activity, resulted in a net increase in our private loan portfolio of $109 million.

At year-end, we had investments in 92 companies in our lower middle market portfolio, representing $3.1 billion of fair value, which is 26% above our cost basis, and investments in 86 companies in our private loan portfolio, representing $2 billion of fair value. The total investment portfolio at fair value at year-end was 17% above our cost basis. Additional details on our investment portfolio at year-end are 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.

Ryan Nelson (CFO)

Thank you, David. To echo Dwayne's and David's comments, we are very pleased with our strong operating results for the fourth quarter, which included several quarterly records and capped a year in which Main Street Capital achieved a record in NAV per share. Our total investment income for the fourth quarter was $145.5 million, increasing by $5.1 million or 3.6% over the fourth quarter of 2024, and increasing by $5.7 million or 4.1% from the third quarter of 2025. Our positive performance for the first three quarters continued in the fourth quarter and culminated in a year with favorable total investment income, highlighted by strong levels of dividend and fee income, which again demonstrate the continued strength of our differentiated investment and asset management strategies.

Interest income decreased by $7.2 million from a year ago and by $500,000 from the third quarter of 2025. The decrease from prior year was principally attributable to a larger negative impact from investments on non-accrual status and a decrease in interest rates, primarily resulting from decreases in benchmark index rates on our floating rate debt investments and other decreases in interest rates on existing debt investments, partially offset by the impact of the growth of the investment portfolio. The decrease from prior quarter was principally attributable to a decrease in interest rates, primarily resulting from decreases in benchmark index rates on floating rate debt investments and other decreases in interest rates on existing debt investments, and a larger negative impact from investments on non-accrual status, partially offset by the impact of the growth of the investment portfolio.

Dividend income increased by $11.4 million when compared to a year ago, including a $4.5 million increase in unusual or non-recurring dividends, and increased by $4.6 million from the third quarter, including a $4.2 million increase in unusual or non-recurring dividends. The increases in dividend income for both comparable periods are primarily a result of the continued underlying positive performance of our lower middle market portfolio companies and their capital allocation decisions. Fee income increased by $900,000 from a year ago and by $1.6 million from the third quarter. The increases in fee income are primarily due to higher closing fees on new and follow-on investments, partially offset by a decrease in fee income from the refinancing and prepayment of debt investments and other investment activity.

Fee income considered non-recurring decreased by $700,000 from a year ago and by $100,000 from the third quarter of 2025. The fourth quarter included increased levels of income considered less consistent or non-recurring in nature in comparison to the comparable periods, primarily related to dividends from our equity investments. In the aggregate, these items totaled $7.6 million and were $3.9 million, or $0.04 per share, higher than the fourth quarter of 2024, and $3.4 million, or $0.04 per share, higher than the third quarter of 2025. Our operating expenses increased by $1.4 million over the fourth quarter of 2024 and by $1.1 million from the third quarter.

The increase in operating expenses from the prior year was largely driven by increases in cash compensation related expenses, share-based compensation expense, and general and administrative expenses, partially offset by a decrease in interest expense and an increase in expenses allocated to the external investment manager. The decrease in interest expense from a year ago was primarily driven by a decrease in the weighted average interest rate on our unsecured debt obligations, resulting from the issuance of the August 2028 notes and the early repayment of the December 2025 notes, and a decrease in the weighted average interest rate on our credit facilities, resulting from decreases in benchmark index interest rates and decreases in the applicable margin rates, resulting from the amendments of our credit facilities in April 2025.

The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, was 1.4% for the quarter on an annualized basis and 1.3% for the year, continues to be among the lowest in our industry. Our external investment manager contributed $9.3 million to our net investment income during the fourth quarter and $34.6 million for the year, representing a slight increase over the prior year and the third quarter. Our investment manager earned $4.2 million in incentive fees during the fourth quarter and $14.5 million for the year. Our investment manager ended the quarter with total assets under management of $1.7 billion.

During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized depreciation on the investment portfolio of $42.5 million. This increase was primarily driven by net fair value appreciation in our lower middle market, private loan and other portfolio investments, partially offset by net fair value depreciation in our middle market investments and 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 portfolio companies. The net fair value appreciation in our private loan portfolio was primarily driven by several specific portfolio companies and decreases in market spreads.

The net fair value depreciation of our external investment manager was primarily driven by decreases in the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation purposes, partially offset by increased incentive fee income and increased base management fee income. We recognized net realized gains of $50.8 million in the quarter. Additional details on our net realized gain activity are included in the press release we issued yesterday. We ended the fourth quarter with investments on non-accrual status, comprising approximately 1% of the total investment portfolio at fair value and approximately 3.3% at cost.

Net asset value, or NAV, increased by $0.55 per share over the third quarter and by $1.68 per share, or 5.3% when compared to a year ago, to a record NAV per share of $33.33 at year-end. Our regulatory debt-to-equity leverage, calculated as total debt, excluding our SBIC debentures divided by NAV, was 0.71x. Our regulatory asset coverage was 2.41x, and these ratios continue to be more conservative than our long-term target ranges of 0.8x-0.9x and 2.25x-2.1x, respectively. Given our current liquidity position, we continued to be less active during the fourth quarter in our ATM program, raising net proceeds of $8.7 million from equity issuances.

In February of this year, we expanded the total commitments under our corporate facility by $30 million to $1.175 billion. This increase was a result of a new lender relationship, which further diversified our lender group under the corporate facility. After giving effect to the capital activities in 2025 and this February, we enter 2026 with strong liquidity, including cash and unused capacity under our credit facilities, totaling over $1.2 billion, with a near-term debt maturity of $500 million in July 2026. 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.

Because of the market uncertainty, we expect to continue to operate over the next few quarters 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 and year, DNII before taxes per share for the quarter of $1.11 was $0.03 higher per share than the fourth quarter of last year and $0.04 higher per share than the third quarter. Looking forward, we expect first quarter of 2026 DNII before taxes of at least $1.04 per share, with the potential for upside driven by portfolio investment activities during the quarter. I will now turn the call over to the operator so we can take any questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment, please, while we poll for a question. Our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Robert Dodd (Director of Specialty Finance)

Hi, guys. Congratulations on the quarter. I want to ask about the activity level. Obviously, really high level of activity in the fourth quarter, the pipeline is still above average, and I think you said you expect a very strong Q1 as well. I mean, is this just a timing event that just things just happen to be coinciding for the back end of last year and the beginning of this year? Or do you think this is a step change in activity and that could persist in terms of like, you know, more of the type of, you know, more retirement plan, et cetera? I mean, do you feel this is a shift up or a bump in activity, if that makes sense?

Ryan Nelson (CFO)

Sure. good morning, Robert, and thank you for the question.

Robert Dodd (Director of Specialty Finance)

Morning.

Dwayne Hyzak (CEO)

I'll probably give two answers here, and I'll let David and Nick then add on if they have any additional comments they want to add. If you look at the lower middle market side first, I'd say we've been intentional for the last couple of years about trying to grow our activities in the lower middle market. That includes growing our team. We've been, you know, trying to grow our people. We've got a number of individuals that have been at Main Street Capital for a long period of time, executing our consistent lower middle market investment strategy, and we've had a couple of those individuals now be promoted to managing director. That's happened really over the last, you know, kind of 18 months.

I think you're seeing the benefit of having additional people focus on that consistent strategy. That's part of it. I think we've also done some things internally, just to try and do a better job at executing, and I think that has also had a benefit. It's really hard to pinpoint how much benefit, but I am, you know, confident. Maybe I'm biased, but I think it's had a benefit from an execution standpoint. We've also always said, we think our lower middle market investment strategy should be attractive at all times, you know, to individual owner-operators or families that own a business.

I think, when you look at the last couple of years, and it continues to be the case today with the uncertainty in the economy, I would think that our offering would even be more attractive, and I think we're seeing that as well. If you're an individual owner-operator that's looking to get liquidity, probably still not the perfect time to sell your business, given the uncertainty that's out there. It's a great time to bring on an institutional partner like Main Street, with a best-in-class track record, that's got extreme flexibility from an investment standpoint, you know, to help you get some liquidity and then help you grow your business and execute your plan going forward. I'd say those are the three things I would point to you on the lower middle market side.

On the private loan side or private credit side, I would say our team continues to do a really good job there, but I do think some of that is more just the market, you know, the overall investment activity for private equity firms. We saw it building kind of in the end of Q3, maybe halfway through the third quarter. Obviously, that momentum didn't execute or didn't come to fruition until the fourth quarter, but I think we saw it in the fourth quarter, and we've continued to see good activity in the first quarter. I'd say there, it's our team doing a good job, but also just the market, you know, becoming more active. By the way, David, if you want to add anything on lower middle market, or Nick, on the private credit side, you guys add any additional comments?

David Magdol (President and Chief Investment Officer)

I think you covered most all of it, Dwayne. The only thing I'd add is that we are really pleased with the growth of our number of teams that we've seen in the lower middle market. I will say Q4 was a particularly strong originations quarter. In the future, we hope to be able to continue momentum at above average rates. I wouldn't say that Q4 is necessarily a indicative view towards our expectations going forward on the lower middle market origination side. It was particularly strong.

Nick Meserve (Managing Director)

The private credit side, I'd echo Dwayne's comment that it's really, you know, the market volume that's driven the changes from, I'd say, early the first half of 2025 to the third and fourth quarter and the first quarter so far this year.

Dwayne Hyzak (CEO)

Robert, as I thought about my comments earlier, the one other thing I'd add is just the follow-ons. I think we talk about it all the time, both lower middle market and private credit, private loan. We've seen, you know, consistent activity there. We find those investments or those opportunities very attractive because we already know the team, we know the company. It's likely, in both cases, lower middle market and private loan or private credit, likely delevered from our original entry point. If we can have opportunities to fund follow-on investments for acquisitions or other growth activities in both our existing lower middle market and private credit or private loan portfolio companies, we find those really attractive, and we've seen that occur both in Q4 and Q1, and we're hopeful it'll continue to, you know, to occur in 2026.

Robert Dodd (Director of Specialty Finance)

Got it. Got it. An attempt to back you into a corner a little bit more on this. I mean, at what point does this new level become the new average, right? I mean, David, you say, you know, expect it to remain above average for a while. Well, if it's above average for a while, it's the new average. It's like Lake Wobegon, where everybody's above average, right? You know, at what point do you think you recalibrate that this is the new normal rather than it's just the, you know, those teams and everything has reset the normal and reset the average rather than it being above average, so to speak?

Dwayne Hyzak (CEO)

I would, again, focus this comment more on the lower middle market side, you know, Robert, than the private loan. I would say if we're adding people and we're promoting MDs, we should have a different expectation. I do think, you know, when you look at, I think David was just referencing that Q4 was a really, really active quarter. You know, as we add MDs and teams, if we're not having more investments and a bigger portfolio, we shouldn't be adding MDs and teams. I think when you see us completing those activities, one is the individual's got to have the ability to do it, but there's an expectation that we have growth and performance as well. I do think that, you know, from that standpoint, not a massive step change, but over time, you know, we're adding those individuals and those teams for a reason.

Robert Dodd (Director of Specialty Finance)

Got it. Got it. Thank you. One more, if I can. On software, since it's so topical, you don't have a lot of exposure, mid-single digits. What's the view on that, right? I mean, obviously, there might be a different view of what you're willing to do on the software side in the lower middle market or what you do have in the lower middle market versus on the private loan side, because those can be quite different types of businesses in where there is software. What's your kind of view of your exposure and of your outlook regarding software in the different segments?

Dwayne Hyzak (CEO)

I'll give my comments, and then again, more maybe Nick can on the private credit side, if he's got other comments. I'd, you know, reiterate what you just said. You know, we do not have significant software exposure at all. As you've always heard us say, both on the lower middle market side and private credit, you know, we're value-based investors. We love basic industries. A lot of people don't find that attractive. I think in today's environment, it's probably pretty attractive. We've always found it to be very attractive. We don't chase stuff that has high valuations. As a result, if you look at areas that we're underweight, you know, software, and healthcare would be two areas that we would be underweight. I'd say we go into this situation with limited exposure.

I think when you look at the individual names there, you know, as you would expect us to, as any other investment manager, you know, should or would be, you're paying a lot of attention to what's going on there. I think as we sit here today, I think we feel pretty good about the exposure. Obviously, you have to take AI into consideration, not just at Main Street, but much more so at the portfolio company. We're confident in those management teams and their, you know, their business models. As we sit here today, you know, we feel pretty good about the exposure. Nick, if you have anything you want to add on the private credit side?

Nick Meserve (Managing Director)

Yeah, I'd say on a go-forward basis, too, it's finding the right deals that we like. you know, historically, we've not done a lot of, you know, say, high growth or high-level ARR deals. You know, it's really not where we've been focused. We've been focused on cash flow software deals on the few that we do. I think going forward, we'll see even more of that. It'll be more focused on the infrastructure side, versus, I'd say, you know, a growth of a SaaS or a software model.

Robert Dodd (Director of Specialty Finance)

Got it. Thank you.

Dwayne Hyzak (CEO)

Thanks, Robert.

Operator (participant)

Thank you. Our next question comes from the line of Brian McKenna with Citizens. Please proceed with your question.

Brian McKenna (Director of Equity Research)

Great, thanks. Good morning, guys. What continues to stand out to me is the resiliency of your ROE. You know, I think there's a number of things driving this, but when you look at the underlying drivers and trends across your business today, that ultimately impact the trajectory of returns from here, how do all these look today relative to a year ago? I'm just trying to think through some of the puts and takes in the current operating environment and really what all this means for the intermediate-term outlook for ROEs.

Dwayne Hyzak (CEO)

Sure. Good morning, Brian, thanks for the question. I'd say we feel good about, you know, where we are today. Obviously, if you look at 2025 versus 2024, your ROE came down some year-over-year. I think when you look at the current environment, two things will impact our ROE going forward. You know, on the private credit, private loan side, both your floating index rates and spreads, you'll have some impact. Obviously, I'd say that's marginal, but that does have a, you know, negative impact or a headwind. I would say on the lower middle market side, just the overall economy will be a big driver of where our ROE shakes out, both in terms of dividend income and fair value appreciation.

Our companies, as you've heard us say in the past, we think they're really, really good companies. Even more importantly, we think our management teams that we get to partner with at the lower middle market are exceptional. We're confident that no matter what happens in the overall environment, that they're going to outperform, but they're going to outperform what's happening in the overall economy. If the overall economy takes a step back, we're going to have some, you know, some impact from that as well. I think we feel, you know, overall, still feel really good about, where we sit.

The other thing I would say, this is maybe, you know, less significant, but if you have significant growth, particularly in the lower middle market, those investments are not going to be creating the same ROE day one because it's a new investment. It hadn't delevered, it hasn't grown. As you have more growth, just naturally, you know, the new investment is going to be contributing a lower ROE than an investment that's been in the portfolio for five or 10 years. That'd be another thing. Those would be the points that I would, you know, kind of highlight.

Overall, though, I think we feel really good about the expectations for, you know, for ROE across the platform, then specifically, you know, in lower middle market and private credit. The other benefit we have, which you know this, is that we have a very efficient operating structure, which allows us to have additional benefits as we grow our portfolio, just from a, from an OpEx standpoint and what that does to our ROE. Those would be the comments I'd give you, Brian.

Brian McKenna (Director of Equity Research)

Yeah, that's great. Thanks, Dwayne. You know, clearly, you guys are operating from a position of strength here or at a time when most others across the industry are playing quite a bit of defense. Your balance sheet, rock solid. You have a ton of excess capital, liquidity to keep growing and investing across the business, despite what happens in the broader macro and capital markets. You know, periods of volatility are always driven by different things, but history often rhymes. Given your two-decade track record managing the business, you know, what are some of the past experiences you're leaning on today to make sure you prudently manage the business through the current environment? It sounds like pipelines are strong across the board. You know, from a deployment perspective, like, where are you really looking to lean in just from a sector or mix perspective?

Dwayne Hyzak (CEO)

Sure, Brian. A couple of comments. I would say from a sector or mix, I think we feel really good about both the lower middle market and your private, your loan, private credit, your businesses and opportunities. I wouldn't say that we're leaning in to one of those more than the other. It's going to be consistent with what we've done in the past. If I say at the individual industry, you probably heard us say this before, but we're less focused on an individual industry, and we're more focused on, you know, who is the individual that we have the opportunity to partner with on the lower middle market side. We take a very broad-based, you know, kind of industry agnostic approach.

Obviously, once an opportunity comes in, you know, then we're going to figure out if that's an industry and a company, product or service that we find attractive. First and foremost, it's about who is the individual? Is he or she best in class? Is he or she trying to achieve a transaction goal that fits or aligns with our interests? If we can find that, then, you know, we're going to be interested in most, you know, most industries. I think what you'll see us continue to do is just lean on our history. We're value-based investors. We're going to partner with best-in-class managers, then on the capital structure side, you know, we're going to maintain a conservative capital structure and significant liquidity position.

Our ability to issue equity under the ATM is huge, as you guys know, and that we don't use that just to maximize issuing equity at a high stock price. We issue equity as we grow the portfolio, particularly on the low and middle market side. We have, you know, have the tools and the ability to grow the platform, both low and middle market and private loan, and finance it in a way that is very conservative, but also very constructive for us and our shareholders. I don't know if that answers your question, but those would be the views I'd give. If you have anything, David, you want to add to that, feel free to.

David Magdol (President and Chief Investment Officer)

I would just add one quick comment, which is that our philosophy, say, over two decades, has been to be very thoughtful about the underlying credit that we're investing in on the lower middle market side. We know that we're going to see cycles. We assume that we're going to see cycles. We underwrite to that. On the front end, we're assuming that we're going to be through good and tougher times. You know, we talk about that a lot at our investment committee meetings, so that we can, you know, see through stressful times without too much disruption.

Brian McKenna (Director of Equity Research)

All right. I'll leave it there. Thanks so much.

Dwayne Hyzak (CEO)

Thanks, Brian.

Operator (participant)

Thank you. Our next question comes from the line of Arren Cyganovich with Truist Securities. Please proceed with your question.

Arren Cyganovich (Senior Analyst of Specialty Finance)

Thank you. Good morning. Your comments about expanding MDs and, you know, that's kind of helping to increase the level of activity that you're seeing. I know that from meeting with you in the past, you've kind of talked about the larger, you know, proportion of your MDs, or almost all of them, are coming from internally. As you grow them, you don't really get them from outside generally. You know, what's the pipeline of your talent pool, and, you know, how are you managing that in this environment? Is it, you know, continuing to be pretty steady?

Dwayne Hyzak (CEO)

Yeah, I'd say we're first, thanks for the question, Arren. I'd say we feel good about it. I think our group of managing directors, as you said, we've had a few that have gotten promoted here in the last, you know, 18 months or so. We feel good about, you know, those individuals. We also feel really good about the group of directors and VPs, you know, that we have beneath that. You know, the comments I've given were on the lower middle market side. We've had the same thing on the private credit side. We've had, you know, two individuals that have been here for a very long time.

They got promoted recently to managing directors, so that's, we're seeing the same thing from a talent and capability and experience standpoint, you know, both on the lower middle market and private credit. In the case of all those people, you know, they're not people we hired from outside. These are people that have been at Main Street for a long period of time, executing to our strategies, which we think are very unique, and, you know, executing to the way that we've executed for the last 20 years. We, you know, we feel really, really good about, you know, the talent, you know, pipeline and pool that we have, you know, both lower middle market and private credit.

Arren Cyganovich (Senior Analyst of Specialty Finance)

Thanks. In terms of the investment pipelines, are there any common threads in terms of industries or, you know, areas that seem to be a little bit more active than others?

Dwayne Hyzak (CEO)

Yeah, I'd say, you know, just like our portfolio and our history, I'd say it's pretty diverse, pretty broad. We're not seeing any concentration in one industry or one sector.

Arren Cyganovich (Senior Analyst of Specialty Finance)

Great. Thank you.

Dwayne Hyzak (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad in order to join the queue. Our next question comes from the line of Doug Harter with UBS. Please proceed with your question.

Douglas Harter (Equity Research Analyst)

Thanks, and good morning. Just following up on your comment that you underwrite to cycles, can you just talk about what you're seeing and the underlying performance of your companies and any sort of, concentrate or any areas of increased focus as you kind of look at that performance?

Dwayne Hyzak (CEO)

Yeah, I think, Doug, thanks for the question. I'd say we feel good about the portfolio as a whole. I wouldn't say we're seeing any area of, you know, any sector, industry, or specific area that's seeing, you know, more pressure or more underperformance. I do think, as we talked about earlier, just given, you know, AI and, you know, kind of all the noise around that, you know, anything that has software exposure, we're spending more time there. You know, we have a very, very limited exposure in that area. We're, you know, we have been spending more time there. Low-end consumer, you've been here to talk about this probably now for three years. I lose track of time because it seems like we've been doing it forever.

Yeah, that's an area that has been and continues to have, you know, have some challenges. They're another area that, you know, over the years, we've taken most of the pain from a fair value standpoint, and we feel pretty good about where we sit today. Those companies overall are doing fine. It's just another area, just given our experience for the last couple of years, that it has been and continues to get more attention. David or Nick, would you guys say anything different or anything on that?

David Magdol (President and Chief Investment Officer)

Nothing to add.

Douglas Harter (Equity Research Analyst)

Great. Appreciate that. Thank you, Dwayne.

Dwayne Hyzak (CEO)

Thanks, Doug.

Operator (participant)

Thank you. Our next question comes from the line of Brian McKenna with Citizens. Please proceed with your question.

Brian McKenna (Director of Equity Research)

All right. Thanks for the follow-up here. Just a couple quick questions on the RIA. Based on the math that I've done, it looks like the RIA generated about $35 million of NII in 2025. That's roughly flat compared to 2024. I know there's a couple of near-term drivers for AUM growth, should this earnings stream start to inflect higher in 2026? Looking at this business, you know, more broadly, are there any opportunities to create some additional strategies here? I ask this because your performance across Main is quite differentiated, and I'm really just wondering if you can further leverage this performance at the RIA for some newer strategies.

Dwayne Hyzak (CEO)

Sure, Brian. Thanks for the question. I do think when you look at our external investment, you know, manager, we do expect to have growth in the future. Obviously, we have to, you know, have execution and the market has to be cooperative. I do think we expect to have an increase in the base management fees there, primarily as MSC Income Fund, you know, executes just growth opportunity in its strategy. We're expecting some benefit there in 2026. Outside of that, it's really going to come down to our ability to grow outside of MSC Income Fund.

You know, having another private loan fund or some other strategy, you know, that we add to our Asset Management business. I think, you know, we're looking at opportunities and ways to grow there. We look forward to, you know, hopefully having some news over the next month or so about some of our efforts there. You know, those efforts in that news probably doesn't have an immediate impact, but it does, you know, position us for growth over the longer term. We are, you know, working on that. We do think it's a phenomenal, you know, generator of value to Main Street Capital.

We also think there's a tremendous opportunity for us, given, you know, given Main Street Capital's long-term track record and performance, and what we think are very happy investors, both on the public company and the private fund side. We, like you, think it's a great business. We look forward to growing it. We just got to find the, you know, the best avenue or the right avenue to grow it.

Brian McKenna (Director of Equity Research)

All right. Thanks, Dwayne.

Dwayne Hyzak (CEO)

Thank you, Brian.

Operator (participant)

Thank you. We have reached the end of the question and answer session. Therefore, I'll turn the call back over to management for any closing remarks.

Dwayne Hyzak (CEO)

Thank you again to everyone for joining us this morning. We appreciate the continued support of our shareholders, we look forward to our next call in early May after the release of our results for the first quarter. Thank you.

Operator (participant)

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.