Main Street Capital Corporation Aktie

Greetings, and welcome to the Main Street Capital First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Zach Vaughan. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's First Quarter 2026 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 first quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until May 15. 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 home page.

Please note that information reported on this call speaks only as of today, May 8, 2026, and therefore, you are advised that any time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call, and there are no guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements as a result of risks uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures, including distributable net investment income, or DNII, and DNII before taxes. The NII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of noncash compensation expenses.

The NII before taxes is NII as determined in accordance with GAAP, excluding the impact of noncash compensation expenses and any tax expenses included in NII. Management believes that presenting DNII and DNII before taxes and the related per share amounts is useful and appropriate supplemental disclosure for analyzing Main Street Capital Corporation's financial performance since noncash compensation expenses do not result in a net cash impact to Main Street upon settlement. And tax expenses included in NII may include excise tax expense which is not solely attributable to NII and deferred taxes, which are not payable in the current period.

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 has 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.

And now I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

Thanks, Zack. 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, we will provide our key quarterly updates, after which we'll be happy to take your questions. We are pleased with our performance in the first quarter particularly given the backdrop of significant economic and geopolitical uncertainties, which resulted in DNII before taxes per share, in line with our expectations and our guidance and strong investment activity in our [indiscernible] market investment strategy, following our very strong investment activity in the fourth quarter of 2025, resulting in significant growth of our lower middle market investment portfolio over the last 2 quarters.

We believe these results continue to demonstrate the sustainable strength of our overall platform. The benefits of our differentiated and diversified investment strategies may continue strength and quality of our portfolio companies, particularly our lower middle market portfolio companies. We're also pleased that we further strengthened our capital structure since the beginning of the year. despite the challenging environment, which Ryan will discuss in more detail.

Given our strong liquidity position and conservative leverage profile, we're very well positioned to continue the growth of our investment portfolio for the foreseeable future, and we're excited about the current opportunities we are seeing. 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 DNII before taxes for the first quarter and net realized gains over the last 2 quarters, combined with our outlook for the second 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 accretive impact of our equity issuances and the impact of a net fair value increase in our lower middle market investment portfolio, partially offset by net fair value decreases in our private loan investment portfolio and our asset management business, which Ryan will discuss in more detail. Continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of favorable dividend income contributions and 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 these favorable contributions to continue. We're also pleased to have exited our investments in a high-performing lower middle market portfolio company, KBK Industries in the first quarter resulting in a material realized gain in addition to the significant dividends received over the life of our equity investment. We continue to see significant interest from potential buyers in several of our lower middle market portfolio companies which we expect to 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're also excited about the new and follow-on investments we made in our lower middle market strategy during the quarter, which included investments in 3 new portfolio companies and follow-on investments in 5 high-performing portfolio companies to support strategic acquisitions, resulting in a net increase in lower middle market investments of $157 million. Our private loan investment activity in the quarter was slower than our expected normal quarterly activity primarily due to lower overall levels of private equity industry investment activity, resulting in a net increase in private loan investments of $37 million.

David will discuss our investment activity in more detail. We also continue to produce positive results in our asset management business. The funds we advised through our external investment manager continued to experience favorable performance in the first quarter, resulting in a meaningful incentive fee 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, and we're 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.

The 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 future growth of its investment portfolio. [indiscernible] the Income Fund's First Quarter 2026 Financial Results Conference Call will be held later this morning for those who would like additional details.

Based upon our results for the first quarter, combined with our favorable outlook for the second quarter, earlier this week, our Board declared a supplemental dividend of $0.30 per share payable in June, representing our 19th consecutive quarterly supplemental dividend and an increase to our regular monthly dividends for the third quarter of 2026 to $0.265 per share. These third quarter regular monthly dividends represent a 3.9% increase from the regular monthly dividends paid in the third quarter of 2025.

Supplemental dividend for June as a result of our favorable level of DNII before taxes in the first quarter and our net realized gains over the last 2 quarters will result in total supplemental dividend 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 second quarter, We currently anticipate proposing an additional significant supplemental dividend payable in September 2026.

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're excited about our expectations for continued growth of our lower middle market investment portfolio.

Similarly, in our private loan investment strategy, we are seeing an improved lending environment and significant opportunities, which we believe position us well to capitalize on new private loan investment opportunities and to generate growth for our private loan investment portfolio and our asset management business. And as of today, I'd characterize our private loan investment pipeline as average.

With that, I will turn the call over to David.

Thanks, Dane, and good morning, everyone. As Dwayne highlighted in his remarks, we believe that our first quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We are pleased to report that the overall operating performance for our portfolio companies continues to be positive, which contributed to our favorable first quarter financial results. .

Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of our portfolio companies to continue to navigate the current environment. Each quarter, we try to highlight a key aspect of our differentiated investment strategy. This quarter, we'd like to revisit reasons why we believe that our structure as a publicly traded company with the significant benefits of permanent capital is a great match within our -- within our lower middle market strategy.

First, we believe that our permanent capital structure allows us to be the ideal long-term deperminent partner for the owner operators and management teams of privately held businesses. One of the challenges for a typical institutional investor in private equity is that they cannot provide a long-term partnership solution for business owners or their management teams due to the finite life of their investment funds.

Our permanent capital structure and long-term to permanent lower middle market investment strategy provides us with the flexibility to provide significantly more beneficial long-term structural considerations as opposed to relying slowly on price as the competitive advantage. As a result, we believe our flexibility results in highly attractive customized investment structures that other investors simply cannot provide. In addition, our ability to be a long-term deperminent partner in the companies we invest in allows the owners of these businesses and their management teams the ability to maintain the identity and independence of their companies while also pursuing the best long-term strategy to achieve attractive outcomes for all of their company stakeholders.

Second, our long-term holding period also result in a diversified portfolio of investments in more mature companies that typically have lower relative leverage profile since they use free cash flow from operations to deleverage over time. As our company's deleverage, we work proactively with our portfolio company executives and individual equity owners to decide how they can continue to generate the best returns for the equity owners of these businesses. This tends to create 3 attractive opportunities through which our high-performing lower middle market portfolio companies can create value.

The opportunity to thoughtfully execute on internal and external growth initiatives to achieve long-term equity capital appreciation, continued deleveraging from internally generated cash flow to achieve equity appreciation and the opportunity to pay significant dividends to shareholders of the business.

We often see our portfolio of companies take advantage of several of these value-creating opportunities. Given our unique strategy, we are well aligned with our portfolio company operating partners to evaluate and pursue the best alternatives to create shareholder value since we share the benefits of equity ownership with them.

Alternatively, should one of our portfolio companies face difficult industry headwinds or economic conditions or other challenges since they have lower relative leverage profiles and the benefits of a long-term institutional partner, they tend to be well positioned to either work through any negative economic cycles as they arise and pursue acquisitions when valuations are most attractive. Either way, our lower middle market portfolio companies have the added benefit of a highly aligned partner in Main Street to help them work through potentially challenging times.

Our lower middle market portfolio currently includes 48 companies that have been in our portfolio for greater than 5 years, including 21 that have been in our portfolio for more than a decade. We are excited about our partnerships with these lower middle market companies and the future opportunities they represent.

The first quarter of 2026 represented another attractive period for add-on investments for our lower middle market companies whereby we supported 5 of our portfolio companies with additional capital for growth initiatives. [indiscernible] Main Street's strong capital availability, long-term investment horizon and ability to provide both debt and equity capital to our portfolio of companies. we are well situated to move quickly to support our portfolio of companies, not only on the initial transaction but also when they identify growth initiatives.

Today, the environment for add-on acquisitions by our portfolio companies remain strong, and we welcome the opportunity to make incremental investments in our high-performing lower middle market portfolio companies. Both these situations, Main Street is pleased to provide most, if not all, of the cash needs for our portfolio companies to complete their highly strategic acquisitions. These acquisitions provide our portfolio companies, their owner operators, and their management teams, the opportunities to benefit from the significant equity value creation opportunities produced through combined economies of scale, cross-selling opportunities and other synergies that are expected to result from add-on acquisitions.

We welcome the opportunity to support our lower middle market portfolio companies as they seek to invest incremental capital in support of both internal and external growth initiatives, and we believe our seasoned lower middle market portfolio will continue to provide attractive follow-on investments investment opportunities in the future.

Now turning to the composition of our investment portfolio. As of March 31, we continue to maintain a highly diversified portfolio with investments in 189 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 4.5% of our total investment income for the trailing 12-month period and 3.4% of our total investment portfolio at fair value at quarter end. The majority of our portfolio investments represented less than 1% of our income and our assets. Our lower middle market investment activity in the first quarter included total investments of approximately $206 million including total investments of $105 million in 3 new lower middle market portfolio companies, which, after aggregate investment activity resulted in a net increase in our lower middle market portfolio of $157 million.

In our private loan strategy, we completed $149 million in total private loan investments, which after aggregate investment activity resulted in a net increase in our private loan portfolio of $37 million. At the end of the first quarter, our lower middle market portfolio included investments in 93 companies representing $3.2 billion of fair value, which was 25% above our related cost basis. and our private loan portfolio included investments in 85 companies, representing $2 billion of fair value.

Total investment portfolio at fair value at quarter end was 115% of the 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 will turn the call over to Ryan to cover our financial results, capital structure and liquidity position.

Thank you, David. To echo Dwayne and David's comments, we are pleased with our operating results for the first quarter, given the current environment. Our total investment income for the first quarter was $140.1 million increasing by $3.1 million or 2.2% over the first quarter of 2025 and decreasing by $5.4 million or 3.7% from the fourth quarter of 2025. Interest income increased by $7.3 million from a year ago and by $2.5 million from the fourth quarter of 2025. The increases from prior year and fourth quarter were principally attributable to the impact of higher levels of income-producing debt investments partially offset by a decrease in interest rates, primarily resulting from decreases in benchmark index rates on our floating rate debt investments and a negative impact from investments on nonaccrual status. .

Dividend income decreased by $7.8 million when compared to a year ago after a $700,000 increase in unusual or nonrecurring dividends and decreased by $7.7 million from the fourth quarter, including a $3.5 million decrease in unusual or nonrecurring dividends. The decreases in dividend income for both comparable periods are primarily a result of the performance of our lower middle market companies and their capital allocation decisions relative to prior periods and the decrease in nonrecurring dividends. Fee income increased by $3.6 million from a year ago and decreased by $300,000 from the fourth quarter. The increase in fee income from prior year is primarily due to higher closing fees on new and follow-on investments and an increase in fee income from the refinancing and prepayment of debt investments and other investment activity.

Fee income considered nonrecurring increased by $1 million from a year ago and by $500,000 from the fourth quarter of 2025. The first quarter included income considered less consistent or nonrecurring in nature primarily related to accelerated fee income and dividends from our equity investments, which totaled $4.1 million. These income items were $1.7 million or $0.02 per share higher than the first quarter of 2025, $3.5 million or $0.04 per share lower than the fourth quarter and $1.5 million or $0.02 per share lower than the prior 4 quarter average. These decreases were primarily due to lower nonrecurring dividends from our lower middle market portfolio companies. Our operating expenses increased by $5 million over the first quarter of 2025 and by $800,000 from the fourth quarter. The increase in operating expenses from the prior year was largely driven by increases in interest expense, cash compensation-related expenses and deferred compensation expense.

The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund the growth of our investment portfolio, partially offset by 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 the -- of our credit facilities in April 2025 and a decrease in the weighted average interest rate on our unsecured debt obligations resulting from early repayment of the 2025 notes and the issuance of the August 2028 notes.

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 the trailing -- in the trailing 12-month period and continues to be among the lowest in our industry. Our external investment manager contributed $8.3 million to our net investment income during the first quarter representing an increase of $500,000 from the same quarter a year ago and a decrease of $900,000 from the fourth quarter.

Our external investment manager earned gross incentive fees of $4 million during the first quarter and waived $1 million in incentive fees from MSC Income fund, resulting in net incentive fees of $3 million. This net result represents an increase of $300,000 in net incentive fees from prior year and a decrease of $1.2 million compared to the fourth quarter of 2025. Our external investment manager ended the quarter with total assets under management of $1.8 billion.

During the quarter, we recorded net fair value depreciation, including net unrealized depreciation and net realized gains on the investment portfolio of $32.6 million. This decrease was primarily driven by net fair value depreciation in our private loan investment portfolio, our external investment manager and our middle market investment portfolio, partially offset by net fair value appreciation in our lower middle market investment portfolio.

The net fair value depreciation in our private loan portfolio was primarily driven by the depreciation on a specific portfolio company and increases 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 partially offset by an increase in valuation multiples for private transaction, both of which we use as benchmarks for valuation purposes and increased fee income.

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. We recognized net realized gains of $18 million in the quarter. Additional details on our net realized fair value activity are included in the press release that we issued yesterday.

We ended the first quarter with investments on nonaccrual status, comprising approximately 1.2% of the total investment portfolio at fair value and approximately 4% at cost. Net asset value, or NAV, increased by $0.13 per share over the fourth quarter and by $1.43 per share or 4.5% when compared to a year ago, to a record NAV per share of $33.46 at quarter end.

Our regulatory debt-to-equity leverage calculated as total debt, excluding our SBIC debentures, divided by NAV and was 0.71x and our regulatory asset coverage ratio was 2.41x, and these ratios continue to be more conservative than our long-term target range of 0.8 to 0.9x and 2.25 to 2.1x, respectively. We continue to be active this quarter on capital activities, aided by our strong relationships as we continue to manage our near-term maturities and overall capital structure diversity.

These activities included an expansion of the total commitments under our corporate facility by $30 million to $1.175 billion in February, the issuance of an additional $200 million of our unsecured investment-grade notes maturing in March 2029, resulting in an effective yield of 6.2% on such issuance and the issuance in April of $150 million of private placement unsecured notes maturing in April 2031 with an interest rate of 6.93%. We were also active in our at-the-market or ATM program, raising net proceeds of $134.1 million from equity issuances, given the significant increase in our net lower middle market investment activity over the last several quarters.

After giving effect to the capital activities in the first quarter of 2026 and the recent issuance of private placement unsecured notes, we entered the second quarter with strong liquidity, including cash and unused capacity under our credit credit facilities totaling approximately $1.4 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.

Coming back to our operating results. DNII before taxes per share for the quarter of $1.04, was $0.03 per share lower than the first quarter of last year and $0.07 per share lower than the fourth quarter. Looking forward, we expect second quarter of 2026 DNII before taxes of at least $1 per share with the potential for upside driven by portfolio investment activities during the quarter.

With that, I will now turn the call over to the operator so we can take any questions.

[Operator Instructions] Your first question comes from the line of Robert Dodd with Raymond James.

On the the dividend income from the -- there was a bit of decline in relatively big decline in nonrecurring dividends, which obviously, they're not recurring. But is there anything thematic behind that? I mean, obviously, there's a lot of volatility and uncertainty out in the economy, et cetera, and we've seen in some instances in the past when that picks up your portfolio of companies retain a bit more cash. So I mean, is that kind of a driver and you expect that kind of extra dividend income to be moderate in the near term? Or was that just like a one-off thing in the quarter?

And Robin, I would say on the the nonrecurring side, those would be items that are either tied to an exit of an investment. Obviously, if we sell a business and historically, had dividend income and there's dividend income in the quarter that we exit, that's going to be called out as nonrecurring. The other would be if there were some transaction, some type of a large distribution that happened in 1 quarter, and that company had not historically paid dividends. We would call that out as well. I'd say the the activity between Q4 and Q1 was more related to exits.

I think we've talked about the fact we've had a couple of really attractive exits were those exits have been companies that have been in the portfolio for a long time, had delevered. We're paying significant dividends or distributions and those dividends or distributions obviously go away with that exit. So we like the exit because it is attractive from a value standpoint. We think it proves out the long-term value of our lower middle market strategy, but it does come with the the negative kind of consequence of losing the dividend income of those companies that they have paid historically.

More broadly, I do think, to your point, there is and has been more uncertainty in the market broadly. So I think our companies in times like this, they do tend to become more conservative from a capital allocation standpoint. So I think if you look at the total dividend income number, both Q1 versus Q4 and then Q1 versus prior year Q1, there would be some impact from those capital allocation decisions as well would be a combination of both of those

Got it. Got it. And then is it also -- the comment, I think there was a few waiver of the incentive fees from [indiscernible], obviously, from the acts a difficult for that. But is that I mean should we expect that to continue in the near term in terms of our main being extra supportive of the performance of AMS in terms of fee waivers.

Sure, Robin. I'd say on the fee waiver for the incentive fee, I think it's going to be based upon what happens in that quarter. So there's no pre-agreed upon expectation or agreement there. We're going to look at what happens in each quarter and then make a decision on whether or not, we think it makes sense to provide that fee waiver. Obviously, in the first quarter, we provided that. And to your point, it was about $1 million of the fee waiver that came through to the benefit of MSC Income Fund and obviously, to the detriment of the Asset Management business on the Main Street side.

Got it. Got it. And then just more generally, obviously, I mean I think the private loan you characterized this average. It has been slower in terms of activity through much of last year because you thought the pricing was unreasonably low. All the indications we're hearing in the market that pricing maybe is moving higher. So is there a prospect where the private loan activity could ramp up the average for Q2, but is there a prospect we could ramp up more if M&A picks up and the pricing may be turning more attractive?

Robert. I'll give a couple of comments, and I'll let Nick add on or clarify. What I would say is that could happen, but it all comes down to the overall private equity industry activities. And I'd say in the current period where there is some uncertainty. The big question mark is what does private equity do? How aggressive will they be from a deployment of capital standpoint. But if they are active, if they are aggressive, I do think the current environment from a pricing and just general structure terms and conditions, it is favorable.

I think we've talked about our pricing range broadly being in the 500 to 600 range from a spread standpoint. I'd say we probably think it's still in that range. within that range, we have probably trended to the bottom end of that range over the last year. So that may have improved a little bit, but I think it remains to be seen how much activity there is over the next kind of 1 or 2 or 3 quarters and then what that does to pricing. But Nick, feel free to add on there.

I think Dwayne nailed it. I think the one thing I would add would I'd say over the last 12 months, we probably lost a few more deals just on straight pricing, where we went lower than we were comfortable with. And I think that dynamic hopefully has changed in the current period and hopefully 6 of us the rest of the year.

Your next question comes from the line of Brian McKenna from Citizens.

Great. So just Quick question on unrealized markdowns in the quarter. It seems like the majority of that was from marking your asset manager given the decline in valuations for the public alts. But was there anything else meaningful within that just in terms of the other drivers? And then if you're -- it might be tough to answer this, but if you were to mark-to-market portfolio in these assets to reflect some of the quarter-to-date recovery, how much of the first quarter markdowns would be reversed?

Sure, Brian. Thanks for the question. I would say a couple of things. From a fair value standpoint, I'd say it was a mixed bag this quarter. The lower middle market continue to have significant appreciation. You probably saw that in the earnings release, but it will also be more detailed in the 10-Q, but we had just under $30 million of depreciation in the quarter. .

On the flip side of that, you hit on the asset management business. It was a fairly significant amount of depreciation, and that was purely based upon the peer evaluations we use as part of the valuation inputs for that valuation process. And then you also had private loan was down by a significant amount, about $36 million of depreciation. And I would say, -- that was a mix of one specific name that had significant depreciation and then kind of a mixed bag across the rest of the portfolio, both kind of underlying performance and just movement in the marketplace from a spread standpoint.

Okay. That's helpful. And then kind of going back to capital and liquidity. I mean, you've raised a decent amount of capital year-to-date. I think that's a great example of just the underlying strength of the balance sheet, the business and really your access to both the debt and equity capital markets and [indiscernible]. So you raised feel like you're million of new debt capital. You also raised some equity capital to the ATM. And I heard the commentary on the pipeline today is average, but it seems like you're in a pretty strong position to lean in from a deployment perspective, but how should we think about the pace of originations and really net portfolio growth over the next few quarters?

Sure, Brian. So to your comments there, we had been very active on the lower middle market side, both Q4 and Q1. I think we're still seeing good opportunities, and we expect to continue to see good opportunities as we move forward, particularly given the current state of the economy, we think our market strategy and offerings are always very attractive. We think they should become even more attractive in this type of environment, and that's what we've seen over the last 20 years. So we would expect that to be the case.

When you look at our capital activities related to lower middle market, I think you've heard us say this in the past, but when we're issuing equity, it's really tied to us growing our lower middle market portfolio. So we've grown the portfolio significantly in Q4 and Q1. So we were planning to catch up a little bit on the equity issuance to to support that lower middle market growth.

On the debt capital side, I would say our activities were more in anticipation of the July maturity we have. So we've got a $500 million maturity in July. So we were building liquidity and capital structure flexibility to make sure that we cannot only address that maturity, but also have significant dry powder to continue to grow because we do think, as you heard us say in our comments and as I said earlier, we do expect to have good opportunities on the [indiscernible] market side. And we -- as we said here today, we expect to have good opportunities on the private credit side, but that will largely be dictated by the overall marketplace. But we do expect to have good opportunities, and we're trying to make sure we're positioned from a capital standpoint to act on that.

Okay. Got it. And then one more, if I may. When you look across your portfolio, what percent of your lower middle market investments will directly or indirectly benefit from everything going on in and around AI and digital infrastructure. And I ask that because it does feel like the old economy is coming back in a big way here, and I suspect many of the businesses you're invested in are set to benefit pretty meaningfully from all of this. So I'm just trying to gauge how big of an impact we could see from all this over the next several years? And what that ultimately means for shareholder value creation.

Sure, Brian. I think to your point, if you look at our lower middle market portfolio, and I'd say also our private credit portfolio, we're value-based investors. We're old economy-based investors. We do have some limited technology software, but it's admittedly a small part of our portfolio. So most of our businesses are pretty kind of basic kind of traditional industries and companies. So when we look at AI, I would say all of our companies are looking at it. It's something that we emphasize as part of our President's meeting each year. We did it in our most recent meeting back in October, and we'll continue to emphasize it going forward in that venue, but also as our portfolio management teams, our portfolio managers on our side are speaking with portfolio companies on an ongoing basis, whether it's in board meetings or just other periodic catch-ups, AI and what they're doing there is a consistent [indiscernible] conversation. .

That being said, I think we don't expect it to be a huge game changer. We think it will be beneficial, but I think it remains to be seen how beneficial it will be long term. happy to let David add on any additional comments he has.

I think Dwayne covered it. The only thing I'd add is that we do have some companies that are kind of more infrastructure oriented on what would be building infrastructure related to AI that should benefit as well. So we'll see some benefit across the portfolio that we think is incremental. We'll continue to appreciate over time.

Your next question comes from the line of Arren Cyganovich with Truth Securities. .

I'd like to talk a little bit about credit quality. We've seen across the BDCs that we cover a bit kind of weakening, I'd say, over the past couple of quarters. What are you seeing from your portfolio companies? And are there any particular vintages of originations that might be underperforming?

Sure, Aaron. Thanks for the question. I'd say when we've seen weakness, I would say, been more specific company weakness as opposed to anything that's more broad across the portfolio. or the economy. The 1 thing that I might add, which is something we may have said in prior quarters, and we've seen it continue to evolve in the more recent periods is you are seeing more bifurcation between the companies that are doing really well versus companies that are not doing as well. I think we've continued to see that bifurcation. So despite some of the uncertainty in the economy, there are certain companies that are just absolutely crushing it. So you're seeing more of that.

But you're also seeing on the flip side, if something is underperforming, you're probably seeing more pressure on that underperformance. Those would be the comments I would make. But David or Nick, if you guys have something else to add, but we add on.

Just specific to your comment on the vintages on the lower middle market side, our partners that we're transacting with are transacting for personal reasons that exist in all sorts of periods of time, whether it's a prolific or more challenging economic environment. they're looking at succession planning or what have you? So we don't really see a major impact relative to vintage in that side of our portfolio, which is obviously the majority of our business.

On the [indiscernible] the only thing I would add would be deals that were done in '21, '22 with -- in a lower rate environment, they survived to the higher rates, but you are starting to see if they are struggling, the longer term with those higher rates and the siting of off of cash flow is more to interest versus CapEx is harming those businesses, and I think we're seeing that kind of buildup over time the past 2, 3 years of higher interest rates.

Your next question comes from the line of Sean Paul Adams with B. Riley Securities.

You've got a long track record of NAV appreciation from those realized gains on those equity exits. What's your gauge on kind of the tempo of upcoming equity exits given just the general frothiness in the market.

Thanks for your question. Thanks for joining us this morning. We -- with a large portfolio, today, we've got, I think it's 93 portfolio companies, a significant portion of which have been in our portfolio for a long period of time and have performed. I would say those companies consistently would get interest from third parties. A lot of it kind of unsolicited inbound interest that either sparks a transaction through that process or at least sparks our management team partners and our equity partners in those businesses to consider an exit. So we have been and continue to have a number of our companies that are in different stages of looking at an exit. And we think that over the balance of the next couple of quarters, we should see 1 or more exits. And when those exits happen, we think that they tend to be good outcomes, both for us and for our management team, partners, the other equity owners and management team members of those companies.

So I'd say nothing has changed today. We haven't seen anything that has been elevated, but we also continue to see some activities across the portfolio that we think will lead to good outcomes if there is an exit. But David, if you want to add anything, [indiscernible] add on there.

Your last question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one on leverage. Just want to get a latest updated view on where you think leverage could trend? I think previously you said you could take a little bit more of a conservative view, but just given the pipeline that you're seeing as well as the macro backdrop. Just wanted to get your latest piece there. .

Thanks for the question, Ken. Just to remind you, the -- our leverage target from a regulatory basis is 0.8 to 0.9x. -- currently, as we sit today, we're at 0.71x, which is consistent with where we were at the end of the quarter. You could see us move closer to our target range, depending on where we are or where we end up from a net origination standpoint. But as we've messaged in the past, we're comfortable being kind of at the conservative end of that target range.

I mean, one thing I would add. I think you've heard us say this in the past, but just make sure it's kind of on top of people's minds. I think we value capital flexibility and liquidity more than pushing up leverage and trying to eke out some economic returns through that process. I know that not everybody has that view, but that's always been a view that has served us well over the last 20 years, and we would expect to continue to maintain that. So that's the only other thing I would add.

I think as the operator said, that was our last question of the day, so we greatly appreciate everybody for joining us this morning, and we look forward to catching up again in August after our second quarter earnings release. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Greetings, and welcome to the Main Street Capital Fourth Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zach Vaughan. Thank you. You may begin.

Thank you, operator, and 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. 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 6. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is be broadcast live through the Internet and can be accessed on the company's home page. Please note that information reported on this call speaks only as of today, February 27, 2026, and 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, and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors including, not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov.

Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income or DNII. DNII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of noncash compensation expenses. Management believes that presenting DNII and the related per share amount [ of ] useful and appropriate supplemental disclosure for analyzing Main Street's financial performance since noncash compensation expenses do not result in a net cash impact [indiscernible] 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, our 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. [ Major ] defined 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.

And now I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone is doing well. On today's call, we will provide you with our key quarterly updates, we'll also providing a few updates on our performance for the full year. Following our comments, we'll be happy to take 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 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 and 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 aluminum market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value [ appreciation ] and our lower middle market equity investments.

Based upon our current views of these investments and feedback from our portfolio company management teams, we expect 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 or [indiscernible] 1 high-performing lower middle market portfolio company, Mystic Logistics in the fourth quarter and our events in another high-performing company, KBC Industries in the first quarter 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 is 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 best-in-class turns 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 5 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 2021.

Consistent with our prior guidance, our private loan investment activity in the fourth quarter returned to our expected NOR level of quarterly equity 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 2 private 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, and we are excited about the current opportunities we are seeing. We also continue to produce positive results in our asset management business. Funds we advised through our external investment manager continued to experience favorable performance in the fourth quarter, resulting in significant incentive fee 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 [indiscernible]. 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 owned investment strategy with respect to new [indiscernible] company investments. The 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 as 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 more 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.

Now turning to our current [indiscernible] 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 are 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, and we're confident in our expectations for strong lower middle market investment activity in the first quarter.

In addition, 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.

[indiscernible] in the first quarter 2026, we have made follow-on investments in 4 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. And as of today, I would characterize our private loan investment pipeline as above average.

With that, I will turn the call over to David.

Thanks, Dwayne, and 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%, and we have declared cumulative total dividends to our shareholders of more than $49 per share or approximately 3.3 tons 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 with 17x [ money investing]. 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 those 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 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 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.

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 a 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 noninvestment-grade asset classes.

As our lower middle market equity investments performed, 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 [ at $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 [ at ] 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 [indiscernible], this exit provides evidence of the potential benefits of our private loan equity co-investment strategy. As of December 31, we had investments in 189 portfolio companies spanning across numerous industries and end markets. Our largest portfolio of 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 at fair value at year-end.

Majority of our portfolio investments represented less than 1% of our income [indiscernible] 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 5 new lower middle market portfolio companies with [ 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 [indiscernible] 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.

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 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 3 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 nonaccrual 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 nonaccrual 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 nonrecurring dividends an increase by $4.6 million from the third quarter, including a $4.2 million increase in unusual or nonrecurring 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 nonrecurring 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 nonrecurring in nature in comparison to the comparable period, 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 and 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 investment in 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 nonaccrual 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 [indiscernible] divided by NAV was 0.71x and our regulatory asset coverage was 2.4x, and these ratios continue to be more conservative than our long-term target ranges of 0.8 to 0.9x and 2.25 to 2.1x, respectively.

Given our current liquidity position, we continue 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 entered 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 per share higher 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.

With that, I will now turn the call over to the operator so we can take any questions.

[Operator Instructions] Our first question comes from the line of Robert Dodd with Raymond James.

Congratulations on the quarter. I want to ask about the activity level. Obviously, [indiscernible] high level of activity in the fourth quarter. Then 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 that could persist in terms of like more of the type of retirement plan, et cetera. I mean do you feel this is a shift up or a bump in activity if that make sense.

Sure. Thank you for the question. I'll probably give 2 answers here, and I'll let David and Nick then add on if they have additional comments they want to add. But 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 lower market, that includes growing our team. So we've been trying to grow our people. We've got a number of individuals that have been at Main Street for a long period of time, executing our consistent lower middle market investment strategy, and we've had a couple of individuals now be promoted to Managing Director.

So that's happened really over the last kind of 18 months. So I think you're seeing the benefit of having additional people focused on that consistent strategy. So that's part of it. I think we've also done some things internally, just to trying to do a better job at executing. And I think that is also had a benefit. It's really hard to pinpoint how much benefit, but I am 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 to individual owner operators or families that own a business. But 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. So if you're an individual owner operator is looking to get liquidity, probably still not the perfect time to sell your business given the uncertainty that's out there, but it's a great time to bring on an institutional partner like [indiscernible] with a best-in-class track record that's got extreme flexibility from an investment standpoint to help you get some liquidity and then help you grow your business and execute your plan going forward.

So I'd say those are the the 3 things I would point to on the lower middle market side, 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, 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. So I'd say, they [indiscernible] our team doing a good job, but also just the market becoming more active. I'll let David, if you want add anything on lower middle market or Nick, on the private credit side, you guys add any additional comments.

I think you covered most all but 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, but I wouldn't say that Q4 is necessarily an indicative view towards our expectations going forward on the lower middle market origination side, it was particularly strong.

On the private credit side, I go to Dwayne's comment that it's really the market volume that's driven the changes from, I'd say, early the first half of '25 to fourth quarters and the first quarter so far this year.

And 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, but lower market [indiscernible] private loan, we've seen 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, it's likely delevered from our original entry point. So 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, our private loan portfolio companies, we found that was really attractive. We've seen that occur both in Q4 and Q1, and we're hopeful it will continue to occur in 2026.

Got it. Got it. And intent to back you into a corner a little bit more on the [indiscernible]. I mean at what point does this new level becomes the new average, right? I mean, David just said, you expect it to remain above average for a while. Well, if it's a [indiscernible] for a while, it's the new average, it's like [indiscernible] over gone where everybody is [indiscernible]. So at what point do you think you recalibrate that this is the new normal rather than it's just those teams and everything has reset the normal when we set the average rather than it being above average, so to speak?

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

Got it. Got it. One more, if I can. On software since -- 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 and where there is software. So what's your kind of view of your exposure and of your outlook regarding software in the different segments?

Sure. I'll give my comments, and then again, more maybe Nick and on the private credit side, if he's had other comments. But I'd reiterate what you just said, 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. We're value-based investors. We love [ basic ] industries. A lot of people don't find that attractive. I think in today's environment is probably pretty attractive. We've always found it to be very attractive. So we don't chase stuff that has high valuations.

As a result, if you look at areas that we're underweight, software and health care would be 2 areas that we would be underweight. So I'd say, we go into this situation with limited exposure. I think when you look at the individual names there, as you would expect us to, as any other investment manager you should or would be, you're paying a lot of attention to what's going on there. And 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, but we're confident in those management teams and their business models. And as we sit here today, we feel pretty good about the exposure. But Nick, if you have anything you want to add on the private credit side.

Yes, on a go-forward basis, so it's finding the right deals that we like. Historically, we've not done a lot of, I'd say, high growth or high-level AAR deals. It's really not what we're going to focus. We've been focused on cash flow software deals on the few that we do, do. I think going forward, we'll see even more of that -- and so it will be more focused on the infrastructure side versus, I'd say, a growth of a SaaS or software model.

Our next question comes from the line of [ Brian Mckenna ] with Citizens.

So I continue to stand out to me is the resiliency of your ROE. I think there's a number of things driving this. But when you look 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? And I'm just trying to think through some of the puts and takes in the current operating environment and really what all just means for the intermediate term outlook for ROEs?

Sure. thanks for the question. I'd say we feel good about where we are today. Obviously, if you look at 2025 versus 2024, ROE came down some year-over-year. I think when you look at the current environment, 2 things will impact our ROE going forward on the private credit, private loan side, both floating index rates and spreads, you'll have some impact.

Obviously, that's -- I'd say that's marginal, but that does have a negative impact or a headwind. I would say on 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.

So 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. So if the overall economy takes a step back, we're going to have some some impact from that as well. But I think feel -- overall, still feel really good about where we sit. The other thing I would say, and this is maybe 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 1 because it's a new investment, hadn't delevered, it hasn't grown.

So as you have more growth, just naturally, the new investment is going to be contributing a lower ROE than an investment that's been in the portal for 5 or 10 years. So that would be another thing. But those would be the points that I would kind of highlight. Overall, though, I think we feel really good about the expectations for ROE across the platform. And then specifically, 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. So those would be the comments I'd give you, Brian.

Yes. That's great. And then clearly, you guys are operating from a position of strength here 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. Periods of volatility are always driven by different things, but history often [indiscernible]. So given your 2-decade track record managing the business, what are some of the past experiences you're leaning on today to make sure you prudently manage the business through the current environment? And then it sounds like lines are strong across the board. So from a deployment perspective, like where are you really looking to lean in just from a sector or a mix perspective?

Sure, Brian, a couple of comments. I would say from a sector mix, I think we feel really good about both lowe middle market and private -- loan private credit 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. And then as I say, the individual industry, you've probably heard us say this before, but we're less focused on an individual industry, and we're more focused on who is the individual that we have the opportunity to partner with on the lower middle market side.

So we take a very broad-based kind of industry agnostic approach. Obviously, once an opportunity comes in, then we're going to figure out if that's an industry and a company product or service that we find attractive. But first and foremost, it's about who is the individual, is he or she best-in-class, is he or she tried to achieve a transaction goal that fits or aligns with our interest. And if we can find that, then we're going to be interested in most 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. And then on the capital structure side, 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's something 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 lower middle market side. So we have had the tools and the ability to continue to grow the platform, both lower middle market and private loan and finance it in a way that is very conservative, but also very constructive for us and our shareholders. So I don't know if that answers your question, but those would be the views I give. If you have anything, David, do you want to add to that, feel free to...

I would just add one quick comment, which is that our philosophy, say, over 2 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. So on the front end, we're assuming that we're going to be through good and tougher times. And so we talk about that a lot of our investment committee meetings that we can see through a stressful time without too much disruption. .

Our next question comes from the line of Arren Cyganovich with Truist Securities.

Your comments about expanding MDs and 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 higher the larger 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. What's the pipeline of your talent pool? And how are you managing that in this environment? Is it continuing to be pretty steady?

Yes. I'd say we're -- first, thanks for the question, Arren. But I 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 18 months or so. So we feel good about those individuals. But we also feel really good about the group of directors and [ DPs ] that we have beneath that.

And the comments I've given were on the lower middle market side, we had the same thing on the private credit side. We've had 2 individuals that have been here for a very long time. They got promoted recently to [indiscernible] directors. So that's -- we're seeing the same thing from a talent and capability and experience standpoint, both on the lower middle market and private credit. In the case of all those people, they are 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 executing to the way that we've executed for the last 20 years.

So we feel really good about the talent pipeline and pool that we have, both lower middle market and private credit.

And then in terms of the investment pipeline, are there any common threads in terms of industries or areas that seem to be a little bit more active than others?

I'd say just like our portfolio and our strategy, it's pretty diverse, pretty broad. We're not seeing any concentration in 1 industry or 1 sector.

[Operator Instructions] Our next question comes from the line of Doug Harter with UBS.

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 company and any sort of concentrate -- or any areas of increased focus as you kind of look at that performance?

Yes. I think -- Doug, thanks for the question. I'd say we feel good about the portfolio [indiscernible]. I wouldn't say we're seeing any area of any sector industry or specific area that's seeing more pressure, more underperformance. I do think, as we talked about earlier, just given AI and kind of all the noise around that. We -- anything that has software exposure, we're spending more time there. But we have a very, very limited exposure in that area, but we have been spending more time there. Low-end consumer. You even hear us talk about this probably now for 3 years. I'll lose track of time because it seems like you have been doing it forever, but that's an area that has been and continues to have some challenges, but there another area that 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 and those companies overall are doing fine, but it's just another area just given our experience for the last couple of years that has been and continues to get more attention. David or Nick, would you guys say anything different or anything on that?

Nothing to add. .

Our next question comes from the line of [ Brian McKenna ] with Citizens.

Just a couple of 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, and that's roughly flat compared to 2024. I know there's a couple of near-term drivers for AUM growth, but should this earnings stream start to inflect higher in 2026. And then looking at this business more broadly, are there any opportunities to create some additional strategies here? And 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.

Sure, Brian. Thanks for the question. I do think when you look at our external investment manager. We do expect to have growth in the future. Obviously, we have to have execution and the market had to be cooperative, but I do think we expect to have an increase in the base management fees there primarily as MC Income Fund executes just growth opportunity and its strategy. So 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, having another private loan fund or some other strategy that we add to our asset management business. So I think we're looking at opportunities in ways to grow there. We look forward to hopefully having some news over the next month or so about some of our efforts there. Those efforts in that news probably doesn't have an immediate impact, but it does position us for growth over the longer term.

So we are working on that. We do think it's a [ phenomenal ] generator of value to Main Street. We also think there's a tremendous opportunity for us, given Main Street'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. So we like you think it's a great business. We look forward to growing it. We just got to find the best [indiscernible] the right avenue to grow it.

And we have reached the end of the question-and-answer session. And therefore, I'll turn the call back over to management for any closing remarks.

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

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Main Street Capital Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zach Vaughan. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's Third 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 third quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 14. 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 home page.

Please note that information reported on this call speaks only as of today, November 7, 2025. And therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay letting or transcript reading. Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call, and there are no guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors, including but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov.

Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income or DNII. NII is net investment income or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of noncash compensation expenses. Management believes that presenting DNII and the related per share amount are useful and appropriate supplemental disclosures for Main Street's financial performance since noncash 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 our 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 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.

And now I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

Thanks, Zack. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone is doing well. On today's call, David, Ryan and I will provide you with our key quarterly updates, after which we'll be happy to take your questions. We are pleased with our performance in the third quarter, which resulted in a quarter of strong operating results, highlighted by an annualized return on equity of 17%, favorable levels of DNII per share and new record for NAV per share for the 13th consecutive quarter.

We believe that these continued strong results demonstrate the sustained 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 depth and quality of our portfolio companies, particularly our existing lower middle market portfolio companies. We are also pleased that we further strengthened our capital structure during the quarter, which Ryan will discuss in more detail. We continue to maintain a very strong liquidity position and conservative leverage profile, and we are well positioned for the continued growth of our investment portfolio.

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 for the third quarter, combined with our positive outlook for the fourth 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 net fair value increases in both our lower middle market and private loan investment portfolios, 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 these contributions to continue to be strong for the next few quarters. 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 and which we believe further highlights the strength and quality of our portfolio companies and their exceptional leadership teams.

We're also excited about the new and follow-on investments we made in our lower middle market portfolio companies during the quarter, which resulted in the addition of 3 new portfolio companies a net increase in lower middle market investments of $61 million. Consistent with our guidance last quarter, our private loan investment activity in the quarter continue to be slower than our expected normal quarterly activity resulting in a net decrease in private loan investments of $69 million.

In addition to the potential for favorable investment realizations in our lower middle market portfolio, we also recently exited 1 of our private loan portfolio company equity investments and have a second exit in process, subject to customary closing conditions and regulatory approvals with these activities representing total realized gains of at least $35 million, both at meaningful premiums to our quarter end 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, and we are excited about the current opportunities we are seeing. We also continue to produce positive results in our asset management business.

The funds we advised through our external investment manager continued to experience favorable performance in the third quarter resulting in significant incentive fee income for our asset management business for the 12th consecutive quarter 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.

We also remain excited 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 of publicly traded BDC advised by our external investment manager and our largest asset management business in , which maintains meaningful current liquidity and will benefit from a significant increase to its regulatory debt capacity at end of January 2026. In addition to deploying the fund's current liquidity into new private loan investments, we also continue to focus on maximizing the benefits of the fund's legacy lower middle market investment portfolio and are excited about the near-term expectations for additional realized value creation over the next few quarters.

But on our results for the third quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, earlier this week, our Board declared a supplemental dividend of $0.30 per share payable in December, representing our 17th consecutive quarterly supplemental dividend and an increase to our regular monthly dividends for the first quarter of 2026 to $0.26 per share. These first quarter regular monthly dividends represent a 4% increase from the regular monthly dividends paid in the first quarter of 2025.

The supplemental dividend for December is a result of our strong performance in the third quarter our term expectations for additional net realized gains and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 40% 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 fourth quarter, we currently anticipate proposing an additional significant supplemental dividend payable in March 2026.

Now turning to our current investment pipeline. As of today, I would characterize our lower middle market investment pipeline as above average. -- consists of 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, and we are confident in our expectations for strong lower middle market investment activity in the fourth quarter.

In addition, we continue to have an incised 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 and significant value creation opportunities for these portfolio companies in the longer term, consistent with the successes we demonstrated and experienced with other 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. Our investment pipeline has increased significantly since our last conference call. And as of today, I would characterize our private loan investment pipeline as above average.

With that, I will turn the call over to David.

Thanks, Dwayne, and good in, everyone. As Dwayne highlighted in his remarks, we believe our strong third quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We are very pleased to report that the overall operating performance for most of our portfolio companies continues to be positive, which contributed to our attractive third quarter financial results.

Despite the continued heightened level of concern and uncertainty in the overall economy, we remain confident in the ability of our portfolio companies to continue to navigate the current climate. Each quarter, we try to highlight a key aspect of our investment strategy and differentiated approach. For today's call, we thought it would be useful to spend some time discussing the support we provide to our lower middle market portfolio companies. In addition to our ongoing investment management activities and the managerial systems we offer our lower middle market portfolio companies, we are also happy to host an annual event for the leaders of our lower middle market portfolio companies called the Main Street President's meeting, which we recently hosted the ninth time.

For those of you who are not familiar, our President's meeting is an annual event that we host for our lower middle market portfolio company leaders to net build relationships share best practices, learn from each other and from third-party speakers and benefit from being a part of Main Street's family of portfolio companies. Based on post-event feedback from our lower middle market portfolio company executives, the event is highly valued by the participants and the event improves each year as we refine our agenda based on the feedback we receive.

Topics covered at our most recent event included artificial intelligence, use cases and best practices disaster recovery planning and enterprise risk management, adding value through executing add-on acquisitions, linking incentive compensation to performance and succession planning. As a result of this annual event, our portfolio companies have increasingly worked together, referred business to each other, utilize each other's operational loses and form long-term relationships that we believe are invaluable.

As an example, 1 valuable topic we covered this year was best practices utilizing artificial intelligence in lower middle market businesses. Based on our surveying as part of the event, the vast majority of our portfolio companies are engaged in utilizing AI and are actively seeking additional ways to use AI tools in their businesses. This topic was enhanced by breakout sessions led by several of our portfolio companies' CEOs who shared specific examples of AI tools they use and the benefits they are achieving from utilizing AI in their businesses.

Q&A from the audience was robust, and we are highly encouraged about the benefits that our lower middle market portfolio companies can achieve in the future from their continued adoption of AI. Another panel we received very positive feedback on this year was focused on executing proprietary strategic add-on acquisitions. The panel was comprised of another peer group of our portfolio company CEOs with extensive experience in this area, who led a discussion on the benefits of pursuing add-on acquisitions, developing and executing a successful acquisition plan, strategies for creating shareholder value through these transactions and lessons learned while sourcing and executing an acquisition growth strategy.

We are highly confident that the lessons learned shared by the panelists will be very helpful for other portfolio company executives to consider as they execute their own acquisition strategies in the future. The engagement from the audience during both sessions was robust and led to several post-event discussions, including the sharing of key third-party resources and best practices that we believe will ultimately improve the future financial results and operating performance for our portfolio companies.

Given our primary focus on our lower middle market investment strategy and the unique benefits it can provide both to us and our management team partners at our portfolio companies, we are excited to bring together the key leadership from our lower middle market portfolio companies at our Annual Presidents' Day. We always lead 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 a mutual benefit in the future. We left this year's event added to never.

Now turning to the overall composition of results from our investment portfolio as of September 30, we continue to maintain a highly diversified portfolio with investments in 185 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 4.8% of our total investment income for trailing 12-month period and 3.6% of our total investment portfolio at fair value at quarter end.

The majority of our portfolio investments represented less than 1% of our income and our assets. Our investment activity in the third quarter included total investments in our lower middle market portfolio of $100 million, including total investments of $69 million in 3 new lower middle market portfolio companies which after aggregate repayments, return of invested equity capital and a decrease in cost basis due to realized losses resulted in a net increase in our lower middle market portfolio of $61 million.

Since quarter end, we have closed an additional lower middle market platform investment, representing an additional $81 million of invested capital, and we have several other expected near-term investments. Driven by the capabilities and relationships of our private credit team, we also completed $113 million in total private loan investments during the third quarter which after aggregate repayments and a decrease in cost basis due to realized losses resulted in a net decrease in our private loan portfolio of $69 million.

At the end of the third quarter, our lower middle market portfolio included investments in 88 companies representing $2.8 billion of fair value, which is over 28% above our cost basis. We had 86 companies in our private loan portfolio, representing $1.9 billion of fair value. The total investment portfolio at fair value at quarter end was 18% above the related cost basis. In summary, Main Street's investment portfolio continues to perform at a high level and deliver on our long-term results and goals. Additional details on our investment portfolio 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.

Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the third quarter which included favorable levels of NII per share and DNII per share and another increase in NAV per share. Our total investment income for the third quarter was $139.8 million, increasing by $3 million or 2.2% over the third quarter of 2024 and decreasing by $4.1 million or 2.9% from the second quarter of 2025. Interest income decreased by $7.3 million from a year ago and increased by $2.4 million from the second quarter of 2025. The decrease from prior year was principally attributable to a decrease in interest rates, primarily resulting from decreases in benchmark index rates on our floating rate debt investments and decreases in interest rate spreads on existing debt investments and an increase in investments on nonaccrual status, partially offset by the impact of increased net investment activity.

The increase from prior quarter was driven primarily by the impact of increased net investment activity and a decrease in investments on nonaccrual status. Dividend income increased by $8 million when compared to a year ago, including a $600,000 increase in unusual or nonrecurring dividends and decreased by $6.6 million from the second quarter including a $4.2 million decrease in unusual or nonrecurring dividends. The increase in dividend income from prior year is primarily a result of the continued underlying positive performance of our lower middle market portfolio companies.

The decrease in dividend income from the second quarter is primarily due to nonrecurring dividends received from 1 of our lower middle market portfolio companies in the second quarter. Fee income increased by $2.2 million from a year ago and was consistent with fee income from the second quarter. The increase from prior year was primarily due to higher closing fees on new and follow-on investments and an increase in exit and prepayment fees from investment activity. Fee income considered nonrecurring increased by $900,000 from a year ago and by $500,000 from the second quarter of 2025.

This quarter included higher levels of income considered less consistent or nonrecurring in nature in comparison to the prior year, including interest income from accelerated prepayment repricing and other activity, accelerated fee income and dividends from our equity investments. In the aggregate, these items totaled $4.3 million and were $2.1 million or $0.02 per share higher in the third quarter of 2024. We Income considered less consistent or nonrecurring in nature decreased from the second quarter by $3.8 million or $0.04 per share, primarily due to a decrease in dividends from 1 of our lower middle market portfolio companies.

The current quarter's less consistent or nonrecurring income was in line with the prior 4-year average. Our operating expenses increased by $1.1 million over the third quarter of 2024 decreased by $300,000 from the second quarter. The increase in operating expenses from the prior year was largely driven by increases in cash compensation related expenses and share-based compensation expense, partially offset by a decrease in interest expense. The decrease in interest expense from a year ago was primarily driven by a decrease in the weighted average interest rate on our credit facilities resulting from decreases in the benchmark index interest rates and a decrease in the applicable margin rates resulting from the amendment of our credit facilities in April 2025, partially offset by an increase in average borrowings to fund the growth of our investment portfolio.

The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, was 1.4% for the quarter on an annualized basis and 1.3% for the trailing 12-month period and continues to be among the lowest in our industry. Our external investment manager contributed $8.8 million to our net investment income during the third quarter representing an increase of $900,000 from the same quarter a year ago and was consistent with the contribution to our net investment income in the second quarter. Our investment manager ended the quarter with total assets under management of $1.6 billion.

During the quarter, we recorded net fair value appreciation, including net realized losses and net unrealized depreciation on the investment portfolio of $43.9 million. 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 external investment manager. The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance certain of our 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 evaluation multiples of publicly traded peers, which we use as 1 of the benchmarks for valuation purposes, partially offset by increased incentive fee income. We recognized net losses of $19.1 million in the quarter. The realized losses recognized were primarily the result of the restructures of 2 private loan investments and the full exits of 2 lower middle market investments. which were partially offset by a realized gain on the full exit of a lower middle market investment and the partial exit of another portfolio investment. We ended the quarter with investments on nonaccrual status comprising approximately 1.2% of the total investment portfolio at fair value and approximately 3.6% at cost.

Net asset value, or NAV, increased by $0.48 per share over the second quarter and by $2.21 per share or 7.2% when compared to a year ago to a record NAV per share of $32.78 at quarter end. Our regulatory debt-to-equity leverage calculated as total debt, excluding SBIC debentures divided by NAV was 0.62x and our regulatory asset coverage ratio was 2.61x, and these ratios continue to be more conservative than our long-term target ranges of 0.8 to 0.9x and 2.25 to 2.1x, respectively. We continue to be active this quarter on capital activities, aided by our strong relationships as we continue to manage our near-term maturities and overall capital structure diversity and efficiency.

In August 2025, we issued $350 million of unsecured investment-grade notes maturing in August 2028 with an interest rate of 5.4%. In September 2025, we repaid the $150 million due on our December 2025 notes prior to their maturity and without any fees or penalties. Given our current liquidity position and recent investment activity, we continue to be less active during the third quarter in our ATM program, raising net proceeds of $6.7 million from equity issuances. After giving effect to the capital activities in the third quarter of 2025, we entered the fourth quarter of 2025 with strong liquidity, including cash and unused capacity under our credit facilities totaling over $1.5 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.

DNII before taxes per share for the quarter of $1.07 was $0.01 higher than DNII before taxes per share for the third quarter of last year. and $0.04 lower than DNII before taxes per share for the second quarter. Looking forward, we expect fourth quarter of 2025 DNII before taxes of at least $1.05 per share with the potential for upside driven by portfolio investment activities during the quarter.

With that, I will now turn the call over to the operator so we can take any questions.

[Operator Instructions]

Our first question comes from Arren Cyganovich with Truth Securities.

On your prepared remarks, you indicated that the pipeline for investment activity is actually above average for both and a notable change for the private loan portfolio. pipeline from last quarter. Maybe just talk a little bit about the sustainability of that and what necessarily kind of changed in the private loan part of the focus of the middle market?

Sure, Arren, I'll give a few comments, and I'll let Nick add on if he has anything he wants to add. But I'd say this quarter, we've just seen the pipeline grow significantly. I think overall, from a market standpoint, from our perspective, you've seen an increase in overall activity, and we've seen that come in both at the front end of the funnel.

And in transactions that we're working on that we expect to close either in the fourth quarter or the first quarter. So overall, I think it's been driven by more market activity. I think the quality of the transaction is consistency of the transactions with what we've done historically continues to be the same. So I think it's really driven more by market activity. But I'll let Nick add any additional color.

Yes. I think what I would add there is it probably started the week after the last earnings call. So it's been picked up for a decent amount of time now. I think we expect it to continue you ended 26. And I'd say it's both in volume and the number of deals and the overall deal sizes in each transaction, it just overall the pipeline feels like it's more live and actually going to close and get to a finish line versus, I'd say, over the last year, a lot of deals felt like they weren't get anywhere, and we were kind of just performing back and forth on LOIs. But you don't really feel your going to go to a closed transaction.

Got it. You had an improvement in credit quality in the quarter, at least from a statistical standpoint, maybe you could talk a little bit to give us a little bit more color about what was driving that.

Yes, Arren, I wouldn't say there's anything specific. I think overall, both the lower middle market and private loan portfolios. The companies are doing well. There's always some outliers both in terms of companies doing exceptionally well and some underperforming when you've got a large diversified portfolio we have. But I wouldn't say there's anything specific quarter-over-quarter that changed. It's just overall the portfolio continues to perform at a high level.

Our next question comes from [indiscernible] with Raymond James.

Going back to the private loan portfolio, -- can you talk a little bit more about what was driving the $69 million net decrease? Was it primarily driven by elevated repayments, the slowing deal flow or just less attractive opportunities in the current market environment? Any like additional color you can provide there?

Sure. I'd say it was a combination probably of all 3. I think in general, as we had communicated on the last call, for the third quarter, our investment activity was a little bit below our expectations. We also had more than expected or more than normal repayment or prepayment activity. So I'd say it was a combination of those 2 factors that drove the decrease. I think as Nick said, we feel good about the pipeline today in addition to the new origination activity being higher from an expectation standpoint. I think some of the prepayment activity is a little bit lighter.

So I think it's just kind of a point in time in the third quarter, you had both the lower originations and higher repayments that both occurred in the same quarter. going out there is there's probably a handful of deals that we expected to close late in the quarter that really got pushed in the fourth quarter, and they're still going to close. It just got pushed into this quarter versus third quarter. Overall, it was a lighter origination, but some of it is just timing.

Okay. And do you see any of these like trends shifting going into 4Q? Or is it more of the same?

I think overall, as Nick said, I think we feel good about the new investment expectations for Q4. I think we also feel pretty good about expectations for Q1 just given the strength of the pipeline, both in the early stages and in the more developed stages. Looking out longer than that, it really is going to come down to how active the private equity industry as a whole is. But I think for the near term, I think we feel pretty good about it.

[Operator Instructions] Our next question comes from Doug Harter with UBS.

This is Cory Johnson on for Doug. The compensation expense was a little bit higher this quarter. And in the press release part of what you attributed to that was an increase in head count to support the portfolio and asset management activities. Can you talk a little bit about what type of roles those are and I guess what -- should we expect the headcount to continue to grow into this year and the end of this year and also into next?

Sure, Cory. Thanks for the question. Thanks for joining this morning. I'd say that across the platform on the investment side, both lower middle market and private loans, we have been and continue to look for ways to grow our teams and our investment professionals. I think we view both market opportunities to be very attractive. The lower middle market is very people heavier people intensive, just to the nature of the activities, more of a private equity type investment strategy.

So we are always looking to add resources there, and we continue to be in that position today. So some of that headcount and comp increase would be concentrated there. But we've also grown our private loan team significantly, not just for Main Street's portfolio and balance sheet. But as you know, we've got an asset management business that we have been and we expect to continue to grow going forward. That growth is going to be almost exclusively focused on the prolonged private credit side. So we've also been working -- Nick and his team have been working to grow our team there. So I'd say it's on both sides.

All right. And then I guess do you happen to have any targets for your RIA in terms of like AUM for 2026 that you could possibly share? Is there a range or anything at all that you're looking to hit?

Yes. We haven't shared any specific guidance, Cory. I think our goal and our expectation is that we will grow AUM. We'll grow at 2 ways right now, likely recall -- we have our largest asset management business client, MSC Income Fund, which is a publicly traded BDC, it has the opportunity at the end of January 2026 to have a significant increase in its regulatory leverage capacity. We would expect to expand the leverage capacity there. Those -- that capital or those proceeds would be invested in the private loan private credit space.

So we think that will be the biggest catalyst going forward into 2026. We also have our second private fund MS Private Loan Fund II that's still kind of in the earlier stages of its investment deployment activities that should ramp up significantly in 2026 as well. But outside of giving guidance, those are the 2 catalysts to give a specific guidance for how much we expect the AUM to grow in 2026.

And if I could just ask 1 more. You spoke about how LMM companies are sort of talking about AI and sort of how to integrate that -- have you seen, I guess, in those conversations that have companies in mentioning that AI is making significant efficiency gains are they showing up at all and like the valuations that perhaps that you might be able to realize either now? Or do you expect that to possibly make the difference in upcoming quarters, something similar?

I'd say it's more forward-looking. I don't think we mean significant benefit from AI from a historical standpoint or any of the valuations that we have today. I do think we're excited as our portfolio companies and their management teams are that there's a lot of opportunities through the implementation of AI. So I think we're excited about that, but it would be more forward-looking as opposed to historical.

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

I just want to say thank you again to everyone for joining us this morning. I think it will be a few months before we talk to you again. So hopefully, everyone has a happy holidays, and we look forward to talking to you again with our next update call in February after the results for the fourth quarter and the year-end for Main Street. Thank you.

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

Greetings. Welcome to Main Street Capital's second quarter earnings conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zach Vaughan. Please, Mr. Vaughan, proceed.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's Second 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 second quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 15. 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, August 8, 2025, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures, including distributable net investment income, or DNII. DNII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding the impact of noncash 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 noncash 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 average quarterly NAV.

Please note that information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified.

And now I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

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, David, Ryan and I will provide you with our key quarterly updates, after which we'll be happy to take your questions.

We are pleased with our performance in the second quarter, which resulted in another quarter of strong operating results, highlighted by an annualized return on equity of 17.1%, DNII per share that continue to exceed the dividends paid to our shareholders, a new record for NAV per share for the 12th consecutive quarter and our largest realized gain in Main Street's history.

We believe these continued strong results demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business and the continued underlying strength and quality of our portfolio of companies, particularly those in our highly unique lower middle market investment strategy.

We remain confident that our unique investment income and value creation drivers, together with our cost-efficient operations and conservative capital structure, allow us to continue to deliver superior results for our shareholders in the future. Our favorable results for the second quarter, combined with our current expectations for the third quarter, resulted in our recommendations to our Board of Directors for 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 net fair value increases in our asset management business and our lower middle market investment portfolio and the accretive impact of our equity issuances in the quarter, which Ryan will discuss in more detail. The majority of our lower middle market portfolio companies continued their favorable performance resulting in another quarter of strong dividend income contributions and continued net fair value appreciation in our lower middle market equity investments.

As discussed on our call last quarter, and as David will discuss in more detail, we are pleased to have closed the partial exit of our investments in Heritage Vet Partners in the second quarter along the company's majority recapitalization with a new financial sponsor, resulting in the largest realized gain in Main Street's history and at a meaningful premium to our March 31 fair value.

As noted in prior quarters, we have experienced underperformance in certain of our private loan portfolio companies, particularly those with direct consumer discretionary spending exposure, and this is having a negative impact on the contributions from our private loan portfolio. We continue to actively monitor these investments and are working with the portfolio of companies to achieve the best possible outcome for each investment.

Now turning to our investment activity. We are excited about the new and follow-on investments we made in our lower middle market portfolio companies during the quarter, which resulted in a net increase in lower middle market investments of $108 million. Our private loan investment activity in the quarter was slower than our expected normal quarterly activity, primarily due to lower overall levels of private equity industry investment activity, resulting in a net decrease in private loan investments of $35 million. David will discuss our investment activity for the quarter in more detail.

Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the future growth of our investment portfolio, and we are excited about the current opportunities we are seeing, particularly those in our lower middle market investment strategy. We have also continued to produce positive results in our asset management business.

The funds we advised through our external investment manager continued to experience favorable performance in the second quarter resulting in significant incentive fee income for our asset management business for the 11th consecutive quarter 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 and our largest asset management business client. Through the increased current liquidity and path to additional debt capacity obtained through the fund's successful listing on the New York Stock Exchange and the related equity offering in January.

In addition to deploying the fund's current liquidity into new private loan investments, we also continue to focus on maximizing the benefits of the fund's legacy lower middle market investment portfolio. We remain excited about the opportunity for significant future benefits to both the fund's shareholders and our asset management business as the fund executes its growth plans.

Based upon our results for the second quarter, combined with our current 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 September, representing our 16th consecutive quarterly supplemental dividend,and regular monthly dividends for the fourth quarter of 2025 of $0.255 per share. The fourth quarter regular monthly dividends are payable in each of October, November and December,and represent a 4% increase from the regular monthly dividend paid in the fourth quarter of 2024.

The supplemental dividend for September is a result of our strong performance in the second quarter and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 40% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continues to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV. Based upon our expectations for continued favorable performance in the third quarter, we currently anticipate proposing an additional significant supplemental dividend payable in December 2025.

Now turning to our current investment pipeline. As of today, I characterize our lower middle market investment pipeline as above average. Consistent with our experience in prior periods of broad economic uncertainty, we believe that the unique and flexible financing solutions that we can provide to lower middle market companies and their owners and management teams and our differentiated long term to permanent holding periods represent an even more attractive solution to the needs of many lower middle market companies in the current economic environment, and we are confident in our expectations for strong lower middle market investment activity over the remainder of 2025.

In addition, we have an increased number of existing portfolio companies that are actively executing on acquisition growth strategies that we hope 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 experienced with other 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, given the continued slower overall private equity industry investment activities, I would characterize our private loan investment pipeline as slightly below average.

With that, I will turn the call over to David.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe that our strong second quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continues to be positive, which contributed to our attractive second quarter financial results.

Despite the continued heightened level of concern and uncertainty in the overall economy, we remain confident in the ability of our portfolio companies to continue to navigate in the current climate. As we've previously discussed, we believe that one of the primary drivers of our long-term success has been and will continue to be our focus on investing in both debt and equity investments in the underserved lower middle market.

Most notably and uniquely, our lower middle market strategy provides attractive leverage points and yields on our first lien debt investments while also creating a true partnership with the management teams of our portfolio companies through our flexible equity ownership positions. In short, we believe this approach provides significant downside protection through our first lien debt investments while still providing the benefits of alignment and significant upside potential with our equity investments.

Each quarter, we try to highlight different key aspects of our investment strategy and differentiated approach that allow us to consistently produce best-in-class results. For today's call, I'm going to spend some time discussing the benefits we received from the equity investments in our lower middle market strategy. As a result of our lower middle market equity investments in the fourth quarter of 2024 and the second quarter of 2025, we were able to generate approximately $109 million of realized gains from the exit of our equity investments in two lower middle market portfolio companies.

These two realizations included a $53.7 million realized gain on Pearl Meyer, which represents an annualized internal rate of return of 69% and a 7.7x money invested on our equity investment; and a $55.5 million realized gain in Heritage Vet Partners, which represented an annualized internal rate of return of 72% and at 10x money invested in our equity investment. Realized gains like these provide an offset against the inevitable credit losses that will be experienced when investing primarily in noninvestment-grade debt, consistent with the debt investments executed by other BDCs and private credit funds.

Based upon our historical experience in current portfolio, our expectation is that our future net realized gains on lower middle market equity investments will exceed the expected credit losses which may result from our current investment strategies.

Another advantage of having equity ownership positions in our lower middle market portfolio companies is our ability to provide additional growth capital to our companies as they find opportunities to expand both organically and through acquisitions. Both Pearl Meyer and Heritage Vet Partners executed multiple value-creating acquisitions almost exclusively with additional debt capital that we provided. Similar to our experiences with Pearl Meyer and Heritage Vet Partners, a meaningful portion of our lower middle market portfolio companies also provide us the opportunity to invest additional capital in our highest-performing proven portfolio companies as they work to grow through acquisitions or other growth strategies.

As a result of these follow-on investments, both we and our portfolio company management team partners are able to benefit from the significant value creation achieved by these acquisitions. We have multiple examples in which we have greatly increased our initial investment sizes in our highest-performing lower middle market portfolio companies, and we look forward to continuing to execute this as part of our strategy in the future.

In addition to the benefits received from net realized gains and net unrealized depreciation, we also benefit from dividends received from our lower middle market equity investments. As we have stated in the past, as our lower middle market portfolio companies perform over time, they naturally deleverage the free cash flow generated from operations, which provides the opportunity for those companies to pay dividends to their equity owners. Additionally, our stated long-term permanent holding period for many of our lower middle market portfolio companies enhances our ability to benefit from the long-term free cash flow generation and resulting dividends received from these companies.

We are pleased to report that in the second quarter, we continue to receive the benefit of significant dividends from our lower middle market equity investments. While our dividend income can be lumpy on a quarter-to-quarter basis, given changes in our portfolio company's cash flow and capital allocation decisions, given the strength and quality of our existing lower middle market investment portfolio, we expect dividend income to continue to be a significant contributor to our results in the future.

Now turning to the overall composition results of our investment portfolio as of June 30. We continue to maintain a highly diversified portfolio with investments in 187 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 3.9% of our total investment income for the trailing 12-month period and 3.7% of our total investment portfolio fair value at quarter end. The majority of our portfolio investments represented less than 1% of our income and our assets.

Our investment activity in the second quarter included total investments in our lower middle market portfolio of approximately $209 million, including total investments of $110 million in three new lower middle market portfolio companies which, after aggregate repayments on debt investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of $108 million. Driven by the capabilities and relationships of our private credit team, we also made $189 million in total private loan investments which, after aggregate repayments and other private loan investment activities, resulted in a net decrease in our private loan portfolio of $35 million.

At the end of the second quarter, our lower middle market portfolio included investments in 88 companies representing $2.7 billion of fair value, which is 27% above our related cost basis. We had investments in 87 companies in our private loan portfolio representing $1.9 billion of fair value. The total investment portfolio at fair value at quarter end was 17% above our related cost basis.

In summary, main Street's investment portfolio continues to perform at a high level and deliver on our long-term goals. Additional details on our investment portfolio at quarter 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.

Thank you, David. To echo Dwayne and David's comments, we are pleased with our operating results for the second quarter, which included favorable levels of NII per share and DNII per share and another increase in NAV per share.

Our total investment income for the second quarter was $144 million, increasing by $11.8 million or 8.9% over the second quarter of 2024 and by $6.9 million or 5.1% from the first quarter of 2025. Interest income increased by $800,000 from a year ago and by $2.8 million from the first quarter of 2025. The increase from prior year and prior quarter were both driven primarily by the impact of increased net investment activity, partially offset by an increase in investments on nonaccrual status with the increase from prior year also partially offset by a decrease in interest rates on our floating rate debt investments, primarily resulting from decreases in benchmark index rates.

Dividend income increased by $11.2 million when compared to a year ago, including a $3 million increase in unusual or nonrecurring dividends increased by $1.8 million from the first quarter, including a $4.2 million increase in unusual or nonrecurring dividends. The increases in dividend income are primarily the result of the continued underlying positive performance of our lower middle market portfolio companies.

Fee income decreased by $200,000 from a year ago and by $2.3 million from the first quarter. The increase from the first quarter was primarily due to higher closing fees on new and follow-on investments and an increase from exit, prepayment and amendment fees from investment activity. Fee income considered nonrecurring decreased by $700,000 from a year ago and increased by $200,000 from the first quarter of 2025.

Second quarter included elevated levels of income considered less consistent or nonrecurring in nature in comparison to the comparable period, including dividends from our equity investments and accelerated prepayment, repricing and other activity related to our debt investments. In the aggregate, these items totaled $8.1 million and were $4.8 million or $0.05 per share higher compared to the average of the prior 4 quarters, $3 million or $0.03 higher than the second quarter of 2024 and $5.7 million or $0.06 higher than the first quarter of 2025.

Our operating expenses increased by $5.8 million over the second quarter of 2024 and increased by $3.4 million from the first quarter. The increases in operating expense from the prior year and from the first quarter of 2025 were largely driven by increases in interest expense, cash compensated-related expenses, general and administrative expenses and share-based compensation expense.

The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund the growth of our investment portfolio and an increase in the weighted average rate on our unsecured debt obligations, partially offset by a decrease in the weighted average interest rate on our credit facilities, resulting from decreases in the benchmark index rates and a decrease in the applicable margin rates related to the amendments of our credit facilities in April 2025.

Increase in interest expense from the first quarter was primarily driven by an increase in average borrowings to fund the growth of our investment portfolio. The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets was 1.4% for the quarter on an annualized basis and 1.3% for the trailing 12-month period and continues to be among the lowest in our industry.

Our external investment manager contributed $8.7 million to our net investment income during the first quarter, a decrease of $500,000 from the same quarter a year ago and an increase of $900,000 from the first quarter of 2025. Our investment manager ended the quarter with total assets under management of $1.6 billion.

During the quarter, we recorded net fair value appreciation, including net realized gains and net unrealized depreciation, on the investment portfolio of $33.5 million. This increase was primarily driven by net fair value appreciation in our external investment manager and our lower middle market investment portfolio, partially offset by net fair value depreciation in our private loan investment portfolio.

The net fair value appreciation of our external investment manager was primarily driven by increases and the valuation multiples of publicly traded peers, which we use as one of the benchmarks for valuation purposes, and by increased fee income. 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. Net fair value depreciation in our private loan portfolio was driven by specific portfolio company performance, partially offset by decreases in market spreads.

We recognized net realized gains of $52.4 million in the quarter. The realized gains recognized were primarily a result of a full exit of a lower middle market investment, as discussed by Dwayne and David, partial exits of other two portfolio investments and the exit of one private loan investment, partially offset by realized losses on the full exit of a private loan investment and the restructure of a private loan investment. We ended the second quarter with investments on nonaccrual status comprising approximately 2.1% of the total investment portfolio at fair value and approximately 5% at cost.

NAV increased by $0.27 per share over the first quarter and by $2.50 per share or 8.4% when compared to a year ago to a record NAV per share of $32.30 at quarter end. Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures divided by net asset value, was 0.65x, and our regulatory asset coverage ratio was 2.53x. And these ratios continue to be more conservative than our long-term target ranges of 0.8 to 0.9x and 2.25 to 2.1x, respectively.

Given our current liquidity position and recent investment activity, we were less active during the second quarter in our ATM program, raising net proceeds of $10.7 million from equity issuances. After giving effect to the capital activities in the second quarter of 2025, we entered the third quarter of 2025 with strong liquidity, including cash and availability under our credit facilities totaling over $1.3 billion with two near-term debt maturities of $150 million and $500 million in December 2025 and July 2026, respectively.

We continue to believe that our conservative leverage, strong liquidity and continued access to capital are significant strengths that are 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. 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, DNII per share for the quarter of $1.06 exceeded DNII per share for the second quarter of last year by $0.03 and exceeded the DNII per share for the first quarter by $0.04. Looking forward, we expect third quarter of 2025 DNII per share of at least $1 with the potential for upside driven by portfolio investment activities during the quarter.

With that, I will now turn the call over to the operator so we can take any questions.

[Operator Instructions] Our first question is from Robert Dodd with Raymond James.

Congrats on the quarter and the performance in the lower middle market portfolio. But I want to focus on the private loan. So I mean, it shrank this quarter. Can you give a indication? I mean was that a reduction in deal flow? Or was it kind of an increase in -- I mean, obviously, you originated a lot, but had a lot of repayments, right? So are the trends like deal flow slowing? Or you're seeing less attractive opportunities and that's the driver behind it shrinking a little bit? I mean any color you can give me there?

Sure, Robert. And thanks for the comments there. I'll give a couple of comments. I'll let Nick who, as you know, leads our private credit team, let him add on. But I'd say it was a combination of both. The investment activity, which we think is largely attributable just to the overall private equity industry still being slow given the uncertainty in the economy, the new investment or origination activity and follow-ons were on a combined basis lower than what we would want them to be. And I think I said in my comments, we're still viewing the pipeline as slightly below average.

We haven't seen that change significantly. But you also had in the quarter your higher-than-expected repayments. So it's a combination of the two. In terms of quality, I think we still view the quality of the investments as being very, very attractive. Terms, conditions, leverage, the type of companies, I think, we're positive across the board, but there's just less of it out there in the marketplace. But I'll let Nick add on or give additional color.

Yes, I'd agree with Dwayne. The only thing I would add is we probably missed on pricing a little bit in the second quarter. And so pricing has probably come in, call it, 25 to 50 basis points in '25. And we were probably a little bit wide on a few deals that we would have liked to have won and held our pricing and those deals went away from us. If we lowered it down, call it, 25 to 50 basis points, we might have won those deals and the net origination would have been much higher for 2Q.

Okay. Got it. Appreciate that color. Then on the comments where you have seen some underperformance within the portfolio, and I think, basically, it boils down to like consumer businesses seeming to struggle a little bit more than others, which makes a lot of sense. But I mean, is there any theme within that? Like is it particular types of consumer business? Obviously, I can look through the portfolio later. But also like, is that making you more inclined to maybe avoid some consumer businesses for additional deployments? Or how are you thinking about that?

Yes, Robert. I would say we have been expecting or sensing some weakness really probably for the last 2 years, I have to think back to how long we've been making that commentary. So I'd say on the new investment side, we have been risked off on companies that have direct significant consumer exposure. So I think we've been doing that. I think we just have some longer-term legacy investments that had more consumer exposure that have continued to struggle.

I would say that in the current quarter, when you look at the nonaccrual movement, it was not just consumer. We also had another company that's outside of the consumer space that had some underperformance that resulted in that company being put on nonaccrual status. But I still think when you look at the nonaccruals as a whole, there still is more of a concentration in the consumer side. And I think if we were to pick where the consumer is feeling more pain, it's the lower end of the consumer. I think we've been saying that for a while. That continues to be the case today.

Overall, I think there's parts of the consumer segment that continue to hold up pretty well in the upper end. But you're definitely, from our perspective at least, seeing continued pain at the lower end, and you see that in our companies.

The other comment I would provide is when you look at the portfolio as a whole, I do think in the current environment, you're probably seeing more separation between the companies that are performing really, really well versus the companies that are performing below expectations. And I think that's a trend we've seen for the last couple of quarters, and I think we continue to see it in the current quarter. So I just think you're seeing more bifurcation across the portfolio. Some of that's just attributable to the quality of the strength of the management teams and their operations. Some of it also is just kind of how impacted are those companies by some of the uncertainty in the marketplace.

Got it, got it. I appreciate that. And if I could have one more and kind of flipping to lower middle market. I mean, you've now -- to your point, I think you've set two records in the last roughly 9 months, I think, for exit gains with Pearl Meyer and Heritage. I mean would you say the gain opportunities is cycled near term, right? Are we in an elevated period where you could maybe expect more gains? I mean, not identifying individual assets, obviously. Or do you think that's going to be moderated for a little bit before some of your younger assets age into the point where the gains are potentially there? Any thoughts on that?

Sure, Robert. I'll give you a couple of comments. One is we think we have a very mature portfolio. We think one of our biggest benefits, as you've heard us say repeatedly, is our -- as a public company having permanent capital, we can and will be a long term to permanent investor. So we have a very mature portfolio when you look at the existing lower middle market assets. Clearly, both Pearl Meyer and Heritage Vet were fantastic companies, fantastic management teams. And between us and our partners at the management team level, we had great transaction outcomes there.

Despite that, I think as we sit here today, I think we still have a number of companies that are having some inbound interest and having discussions about potential exits that could lead to additional realizations over the next 3 to 9 months. You never know exactly what's going to happen. But I do think you could see some additional realized gain exit activities in the near term. And I would say what we're seeing in the marketplace is when you take a very high-quality company like Pearl Meyer and Heritage Vet Partners to market, because there is a lack of overall deal flow, those premium assets get premium pricing.

So I think we've seen that in the marketplace with these two recent transactions. And I think if we're successful with any of the potential realization activities that we're having discussions on with the lower middle market portfolio companies, I think you would see a premium outcome. But obviously, a lot of things have to happen to get there, but we continue to see some kind of elevated or more than normal activity on the exit or realization side.

[Operator Instructions] Our next question is from Arren Cyganovich with Truist Securities.

Congratulations on those realizations. The commentary about private loan pipe being below average, I guess, mixed with the 20 to 50 basis points of spread tightening that came in, are those areas that are somewhat related? I would think that if the spread tightening was happening, then you'd probably see more deal activity. Maybe just talk a little bit about that.

Yes. I'll let Nick kind of add on to his comments from earlier.

Yes. I think the deal activity being a little softer is really just M&A being down on the private equity side. We've seen that for the past probably 2 or 3 years. I think every quarter, every year, we expect that to pick back up again as private equity is natural deal makers and they want to spend their new funds. It just hasn't come to fruition yet. We still expect that in the next 6, 12 months. But so far this year, we've not seen it. Spreads coming in, I think it's somewhat related to slightly less deal flow, pushing a little more competition for everyone to [ find ] paper to spend on new deals.

Got it. Okay. That makes sense. And then, Ryan, you had mentioned there's a couple of debt maturities coming up over in the next year. Maybe you could talk a little bit about what your funding options are for this.

Sure. As we mentioned in the prepared remarks, we do have ample liquidity as we look to the back half of the year. Outside of that, we also will be looking at the market and what pricing is in the debt market over the back half of the year. I think we have the benefit of not having to execute if pricing isn't favorable given where we are from a liquidity perspective. But also, we'll also be thinking about our $500 million maturity next July in ways to kind of derisk that with capital market activity through the end of the year.

Yes. I think just adding on to that. I think you've always heard us say this, but we view our capital structure and liquidity position to be two of our significant strengths, one we should be able to have 100% control over that side of what we execute. So to Ryan's point, I think if the market is available, we're going to continue to look at it and be opportunistic when we can and really focus on maintaining just what we think is a very, very attractive, very conservative capital structure and significant liquidity. So that continues to be a key focus for us on our capital structure side.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

We just want to say thank you again to everyone for joining us this morning. We appreciate the continued support of our shareholders and we'll look forward to talking again after our earnings release for the third quarter. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.