Greetings and welcome to the Main Street Capital Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan, of Dennard Lascar, Investor Relations.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's fourth quarter 2021 earnings conference call. Main Street issued a press release yesterday afternoon that details the company's fourth 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 March 4. 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 to 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 25, 2022, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. 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. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. 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 today. We appreciate you taking the time to join us. We hope that everyone is doing well. Joining me today with prepared comments are David Magdol, our President and Chief Investment Officer; and Jesse Morris, our Chief Financial Officer and Chief Operating Officer. Also participating for the Q&A portion of our call is Nick Meserve, our Managing Director and Head of our Private Credit Investment Group. On today's call, I will provide my usual updates regarding our performance in the quarter while also providing updates on our asset management activities, the recent declarations of our supplemental dividend in March and monthly dividends for the second quarter, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy items. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage and our expectations for the first quarter, after which, we'll be happy to take your questions. Main Street delivered very strong fourth quarter results, setting new quarterly records for total investment income, net investment income, and distributable net investment income for the second consecutive quarter, capping off a record year for Main Street across those same key financial metrics. Our lower middle market and private loan strategies both delivered record quarterly and full-year investment activities, resulting in net increases in lower middle market portfolio investments of $210 million for the quarter and $349 million for the year, and net increases in private loan portfolio investments of $290 million for the quarter and $370 million for the year. This record investment activity, together with the continued strong performance of our diversified group of portfolio companies, which generated fair value appreciation in the fourth quarter of over $42 million, which Jesse will cover in more detail, increased the fair value of our total investment portfolio at year-end to $3.6 billion. As further evidence of the strength of our investment portfolio and the benefits of our unique investment strategies, we're very pleased to generate net realized gains in the fourth quarter of $35 million, another Main Street quarterly record. We thank everyone on our Main Street team, including our Main Street employees and the management teams and employees of our portfolio companies for their contributions to these record operating results. As a result of our combined efforts, we generated an annual return on equity of 20% for the year, our highest level since 2012, and distributable net investment income per share which exceeded the monthly dividends paid to our shareholders by approximately 22% for the quarter and 13% for the year. These positive results and the continued momentum in each of our core strategies provided us with the confidence to recommend to our Board of Directors the approval of two sequential quarterly increases in our regular monthly dividends in the fourth quarter of 2021 and first quarter of 2022, and the supplemental dividend payments in December 2021 and March 2022. We continue to believe that the strength of our differentiated investment strategies, including our highly unique lower middle market strategy, combined with our diversified group of portfolio companies and our growing asset management business, will allow us to consistently deliver superior results for our shareholders, and we are very excited about our outlook for the first quarter and full year 2022. The operating performance across most of our portfolio companies has continued to be strong. And this strong performance, combined with ongoing growth activities at several of our high-performing portfolio companies also provides us continued optimism about our ability to generate incremental fair value and net asset value per share increases over the next few quarters. We've also continued to make considerable progress in our asset management business. This includes progress at MSC Income Fund, the nontraded BDC we advise through our external investment manager, which grew its investment portfolio by approximately 7% during the fourth quarter. We also made significant progress in the fourth quarter on our efforts to optimize the mix of the fund's existing investment portfolio. As a result of these activities and the positive performance of MSC Income Fund's existing investment portfolio, the fund generated an increased level of net investment income in the fourth quarter, and this performance allowed us to earn incentive fees in addition to our recurring base management fees. We remain excited about our plans for the fund as we continue to execute on our investment strategies and other strategic initiatives, and we are optimistic with our outlook for the fund's future performance. At MS Private Loan Fund I, we have continued to grow both as capital commitments from investors and its investment portfolio through its co-investment activities with Main Street and MSC Income Fund and our private loan investment strategy and we are excited about the growing benefits we expect to receive from this relationship in 2022. The continued growth and favorable performance of both funds provide us visibility to increase future contributions from our asset management business. The growth of our asset management business has also been significantly beneficial to our ability to execute our private loan strategy and we expect these benefits to increase in the future. We remain excited about our strategy for growing our asset management business within our internally managed structure and increasing the contributions from this unique benefit to our Main Street stakeholders. Based upon our results for the fourth quarter and the positive performance of our existing portfolio companies, combined with our favorable outlook in each of our core investment strategies and for our growing asset management business and the benefits of our efficient operating structure and strong liquidity position, earlier this week our Board declared a supplemental dividend of $0.075 per share payable in March and monthly dividends for the second quarter of 2022 of twenty-one and a half cents per share payable in each of April, May and June with second quarter monthly dividends, representing a 4.9% increase from the second quarter of 2021. The supplemental dividend for March, which is our second consecutive quarter with the supplemental dividend, is due to our favorable performance in the fourth quarter, which resulted in DNII per share that was $0.14 or approximately 22% greater than our monthly dividends paid during the quarter. As a reminder, we currently expect to recommend that our Board declare future supplemental dividends to the extent DNII significantly exceeds monthly dividends paid in future quarters, consistent with our practice for the last two quarters. In addition, our current expectation is to retain capital from realized gains on our equity investments for future reinvestment purposes. As a result of the combination of our first quarter and second quarter monthly dividends, our recent supplemental dividends for December and March, our current plans for future supplemental dividends and our favorable outlook for the year, we currently expect a significant increase in total dividends paid to our shareholders in 2022. Now turning to our current investment pipeline, after our record activities in the fourth quarter, we are pleased to maintain a number of attractive opportunities in our lower middle market strategy. And as of today, I'd characterize our lower middle market investment pipeline as average. We remain excited about the quality of the investment opportunities in our current pipeline and about the prospects for follow-on investments in existing portfolio companies as our companies actively look to execute on various growth strategies. Based upon the combination of these highly attractive opportunities for follow-on investments in some of our top-performing companies and with some of our best management teams, and our position as the industry-leading partner for lower middle market companies and their management teams, we are very confident in our expectations for continued, attractive new lower middle market originations in 2022. We are also very pleased with the significant growth in the capabilities of our private credit team over the last two years and the significant increases they have provided for our private loan portfolio and the related benefits to our asset management business. As of today, I'd characterize our private loan investment pipeline as above average.

Thanks, Dwayne. And good morning, everyone. The year-end provides a good opportunity to look back at our history and recap the benefits of our unique and diversified investment strategy and discuss how these strategies have enabled us to deliver attractive returns to our shareholders over an extended period of time. Since our IPO in 2007, we have increased our monthly dividends per share by 95%, and we have declared cumulative total dividends to our shareholders over $33 per share, or over 2.2 times our IPO price of $15 per share. Our total return to shareholders since our IPO calculated as of December 31 significantly exceeds the returns achieved by the S&P 500 and our BDC peers over the same period of time. As we've previously discussed, we believe that the primary drivers of our long-term success have been and continue to be our focus on investing in both the debt and equity investments in the underserved lower middle market, growing our private credit activities in our asset management business and related economics, which clearly benefits our shareholders, our industry-leading cost structure and the strong alignment of interest that exists between our management team and shareholders through the meaningful stock ownership we have throughout our organization. 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 with our flexible equity ownership positions. In short, we believe that 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. Our long-term historical track record of investing in the lower middle market, coupled with our view that this market continues to be underserved, gives us confidence that we will be able to continue to find attractive new investment opportunities in this important cornerstone of our business. Our ability to provide highly customized capital solutions for the predominantly family-owned businesses that exist in the lower middle market has been and continues to be a strong differentiator for us. In 2021, Main Street invested a record of $561 million in our lower middle market strategy. $352 million of this capital was deployed in 12 new lower middle market platform companies, with the remaining $209 million representing follow-on investments in existing seasoned and well-performing lower middle market companies. Our follow-on investments are used to support multiple objectives, including acquisitions, product expansion and diversification opportunities, and recapitalization transactions. Most importantly, these follow-on investments support proven management teams that intrinsically pose less investment risk when compared to providing capital to new portfolio companies. Since we are significant equity owners in our lower middle market companies, we benefit from participating alongside the proven managers in these businesses as they achieve meaningful equity value creation. As a result of our lower middle market strategy in 2021, we were able to generate a record of $40 million of net realized gains at a record of $45 million in realized gains achieved firm-wide last year. Some notable realized gains on equity investments we achieved in the fourth quarter included a $10 million realized gain in CAI Software, which represented an internal rate of return of approximately 54% on our equity investment and an $11 million realized gain on J&J Services, which represented an internal rate of return of approximately 59% on our equity investment. In addition to both of these notable realized gains on equity investments in the fourth quarter, other significant realized gains during 2021 included a $17 million gain on American Trailer Rental Group, which had an internal rate of return on our equity investment of 61% and realized gain of $9 million in NRI Clinical Research Group, which had an internal rate of return on our equity investment of 39%. Realized gains like this provide an offset against the inevitable credit losses that will be experienced when investing in predominantly non-investment grade debt consistent with the debt investment strategies for BDCs and private credit funds like us. Based upon our historical experience in core portfolio, our expectation is that our future net realized gains on lower middle market equity investments will at least offset our credit losses on our total portfolio of debt investments and will provide us a positive credit loss result on a net basis in the future. 2021 also marked a record year for dividends received from our lower middle market portfolio companies of $64 million. In the fourth quarter, we received $17 million of dividend income, which is the second-largest amount of dividend income received in a single quarter from our lower middle market portfolio companies following the record $20 million of lower middle market dividend income we recognized in the third quarter of 2021. As we've stated in the past, as our lower middle market portfolio companies perform over time, they naturally delever with free cash flow generated from operations. This allows us, along with our lower middle market portfolio management team partners to benefit from distributions received from this cash flow. Given the strength and quality of our lower middle market investment portfolio, we expect dividend income to continue to be a primary contributor to our results in 2022.

Thank you, David. Turning to a summary of our financial results, and echoing Dwayne’s and David’s initial comments, we are very pleased with our operating results for the fourth quarter, which included a number of quarterly records and record annual total investment income, investment activity and distributable net investment income per share, and our highest return on equity in nine years. Our total investment income in the fourth quarter increased by $19.7 million or 31% over the same period in 2020 to a total of $82.2 million, driven by increases in interest, dividend, and fee income. The fourth quarter marks our second consecutive quarter of dividend income above $20 million and represented a quarterly record for interest income, fee income, and total investment income. Of particular note, the combined favorable impact of certain elevated income items in the fourth quarter, including dividends and accelerated prepayment, re-pricing or other activity that are considered less consistent was comparable to the same period in 2020 and approximately $0.9 million below the average of the prior four quarters, which speaks to the overall strength of our earnings in the quarter. Our operating expenses for the fourth quarter, excluding non-cash share-based compensation expense, increased by $7.8 million over the same period of the prior year, driven largely by increases in compensation expense and interest expense in the quarter. The increase in compensation expense is primarily due to higher levels of incentive compensation accruals, which fluctuate based upon our performance and is directly attributable to our record levels of operating performance. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, was 1.5% for the year and continues to be amongst the lowest in our industry. The activities of our external investment manager benefited our net investment income by approximately $4.9 million during the fourth quarter, an increase of $1.7 million from the same period of the prior year through the allocation of $2.6 million of operating expenses for services we provided and $2.3 million of dividend income received, including $0.6 million in incentive fees earned. The external investment manager also ended the fourth quarter of 2021 with total assets under management of over $1.3 billion, an increase of $198 million or over 17% from the end of the third quarter and $403 million or 50% from December 31, 2020. Net investment income increased by $11.6 million or 29% in the fourth quarter of 2021, while distributable net investment income increased by $11.9 million or 28% over the same period last year. Distributable net investment income, or DNII, which is our net investment income, excluding the impact of non-cash share-based compensation expense is a key measure of our performance and represents operating cash flow, which we utilize to determine our dividends for shareholders. We recorded net unrealized appreciation on the investment portfolio of $42.8 million during the fourth quarter, including net appreciation of $33.5 million in our lower middle market portfolio, $6.3 million in our private loan portfolio, and $0.2 million in our other portfolio, offset by unrealized depreciation of $10 million in our middle market portfolio, all before accounting for reversals for net realized gains and losses recognized during the quarter. In addition, our external investment manager also reflected appreciation of $12.3 million, driven by the significant increase in assets under management. Our operating results for the fourth quarter drove an increase in net asset value, or NAV, of $104.5 million and an increase in NAV per share of $1.02 or 4.2% to end the quarter with NAV per share of $25.29. This is after the impact of our $0.10 per share supplemental dividend paid in December. NAV per share for the full year increased by $2.94 or 13%. We ended the fourth quarter with nine investments on non-accrual status, comprising approximately 0.7% of the total investment portfolio at fair value and approximately 3.3% at cost. Our overall capitalization and liquidity remained very strong with total liquidity of $568 million as of December 31. We continue to believe that our conservative leverage, strong liquidity and continued access to capital are significant strengths that have us well positioned for the future. In a matter consistent with our desire to maintain a flexible capital structure, earlier this week, our Board of Directors approved a reduction in our regulatory minimum asset coverage ratio from 200% to 150%, which will go into effect in a year. Our Board also approved the submission of a proposal to our shareholders to adopt the reduced minimum asset coverage ratio at Main Street’s 2022 Annual Meeting in April. If approved by our shareholders, the reduced minimum asset coverage ratio would take effect the day after the annual meeting. Our primary goal in obtaining approval for the reduced minimum asset coverage ratio is to provide us greater operational flexibility during times of significant macro disruptions such as those experienced during the COVID-19 global pandemic. An additional benefit is to provide us with the flexibility to grow our investment portfolio under certain conditions, such as periods of robust net originations when market conditions may not allow us to raise additional equity capital at a pace which keeps up with our investment activity. In either of those cases where we may experience higher leverage, we expect to use proceeds from subsequent repayments and additional equity capital raises to reduce our outstanding leverage while also maintaining liquidity and borrowing capacity for new investment opportunities. The expanded leverage provides us with the operational flexibility to take advantage of new investment activities while we bring our leverage back to our target leverage position over the near to midterm. Despite this request for our shareholders’ approval of expanded leverage, we expect to continue to be prudent in our utilization of leverage. Once the increase in leverage is affected, we initially intend to operate with a regulatory asset coverage ratio target range of 240% to 210%, above our current minimum of 200% and well above the reduced asset coverage ratio requirement of 150%. And the debt-to-equity ratio target range calculated at senior securities, excluding our SBIC debentures divided by net asset value of 0.7 times to 0.9 times. We anticipate incurring any additional leverage through a combination of both long-term and short-term debt, and with floating and fixed interest rates to optimize our cost of capital and the overall nature of our debt obligations and their maturities. Coming back to our operating results. DNII per share for the fourth quarter was a record $0.77 per share, eclipsing our prior record in the third quarter of 2021 of $0.76 per share and an increase of $0.14 or over 22% over the same period last year. Our DNII per share for the quarter also exceeded the monthly dividends per share paid to our shareholders by $0.14 per share or approximately 22%, the fifth consecutive quarter that our DNII per share has exceeded dividends paid during the quarter. Including the December supplemental dividend, dividends paid for the year were $2.575, an increase of 4.7% over dividends paid during 2020. As Dwayne mentioned in his remarks, the strength of our operating results provided our Board with the confidence to approve a supplemental dividend for the second consecutive quarter of $0.075 per share payable in March. As we look forward, given the strength of our underlying portfolio and the robust investment environment in the second half of 2021 that Dwayne and David mentioned in their remarks, we expect another strong earnings quarter in the first quarter of 2022 with expected DNII per share of $0.72 per share or more.

Thank you. We will now begin the question-and-answer session. Our first question is from Robert Dodd with Raymond James. Please go ahead with your question.

Hi, everyone. Congratulations on the quarter and the year. Regarding the leverage and the decision to lower asset coverage, can you explain why this decision was made now? It seems reasonable, but honestly, it seemed reasonable a year or two ago as well. What has changed? Are you seeing something in your pipeline that indicates a greater need for flexibility moving forward compared to 2019 or even during the COVID period?

Yes. Thanks, Robert. What I would say to that is there’s not really a change in our expectations from a leverage standpoint, as you heard Jesse cover in his prepared comments. I think the bigger changes after having been through the impacts of COVID-19 and the influence it had temporarily on our fair value of our investments, particularly our equity investments. As we look back at that, and obviously, we recovered very well. But during those time periods, our leverage did get tighter over time. And when we looked at our ability to go out and obtain expanded leverage, we’ve always talked about it; it would be a nice insurance policy. I think we’ve just decided it makes sense to put that insurance policy in place now after experiencing the impact of the COVID-19 pandemic.

I appreciate that. Do you think it will have any impact on your unsecured financing costs? I don’t mean that negatively; I mean potentially positively, right, giving more cushion. So, do you think it will influence the decision? Was there any pressure, or perhaps a better word is indications, from the rating agencies or the unsecured investors?

Yes. I would say that the primary reason was the insurance policy concept that I talked about earlier. I think that it remains to be seen how the investment-grade investors will view this. As you know, and as I think most people that track the industry know, we’re one of the only BDCs that did not have the expanded leverage. So, we do not expect it will have a negative impact on us, particularly with our guidance that we expect to continue to manage the business in a conservative manner. But I would say it remains to be seen how the investment-grade universe will respond to it. I do think, to your point, we hope that they view it as a positive because it gives us more cushion from a restriction – from a regulatory standpoint that as you can see from the other BDCs, hasn’t really impacted anyone from an actual leverage standpoint, but it’s just a negative in terms of something really bad happened. You could have a footfall from a regulatory compliance standpoint, and we just wanted to take that risk off the table.

Thank you for your response. Shifting to a different topic, I wanted to discuss your lower middle market portfolio. It includes a variety of industries and many smaller businesses, which are not just local corner stores but are still smaller than some of the larger business development companies. Additionally, your private loan portfolio includes middle market businesses. Given the current economic environment, including inflation, are you noticing any differences in the ability of smaller businesses, as defined within your portfolio, compared to medium-sized businesses in terms of passing on price increases? Are there any variations among industries regarding the challenge of passing on these price increases and the rising costs needed to maintain profit margins?

Yes, Robert, I’ll give a quick response to that, and I’ll let David add on. I would say that clearly, the portfolio companies across all of the investment segments that we invest in have been impacted by the issues you’re referring to. I would not say that there has been a consistent pattern where smaller companies or larger companies have been kind of universally or from an overall standpoint, impacted differently. I do think different companies, different industries have been able to respond to inflation. The ability to either just deal with supply chain issues and labor issues and then pass on cost increases to their customers, I’d say it’s been more company-specific and industry-specific as opposed to big companies versus small companies. But I’ll let David add on any additional color that he has.

Yes. Robert, I’d agree with Dwayne. The size – the one benefit we get from our portfolio being smaller with our equity investment is we’re talking to our management teams regularly and there is an ability to be nimble and to move quickly relative to price increases, whereas some of the larger companies have a more challenging time pushing out those price increases. So, it’s top of mind, but with the diverse portfolio as we have, it’s just a different conversation depending on the industry segment and the end market.

I appreciate that. One last question if I may. Regarding the asset manager, it certainly provides a strong risk-adjusted return since you are not putting capital at risk. Do you have a long-term target for what percentage of earnings you would like to derive from asset management compared to direct capital investing?

Yes, Robert. I would say we don’t have a specific target. I do think that we have been kind of indicating or directing that we expect the asset management business to grow both in terms of the amount of assets under management and the contributions to Main Street. That continues to be the case today. And we do expect, as you heard us say in the previous comments or the prepared comments, that we expect the asset management business to be a larger contributor in 2022 than it was in 2021. We have a number of initiatives in place to continue to grow the asset management business. But in terms of setting a specific percentage of Main Street’s overall investment income or net investment income, we don’t have a long-term target on that front. Other than trying to continue to focus on growing the asset management business overall as part of our platform.

Hi, good morning and thanks for taking my question. Wondering if you could talk a little bit more about how potential interest rate increases could impact earnings from Main Street. What kind of benefits do you see over that near term? Thanks.

Sure. Thanks, Ken. What I would say is we expect given the impact or the nature of our current investment portfolio and then our liabilities at Main Street, that the impact from a downside standpoint is minimal. We do think that there’s more opportunity from an upside risk, and I’ll let Jesse give a few more details on that.

Thanks, Dwayne. Kind of tagging on to what Dwayne said, if you look at our Main Street’s obligations, 82% of our outstanding debt obligations at the end of the year had fixed interest rates, Ken. And then if you look at our investment side, conversely, 71% of our investments had floating interest rates, and the majority of which had interest rate floors of on average of about 100 basis points. So as Dwayne mentioned, as interest rates rise, I’d say kind of in that zero basis points to 100 basis points, we would have some impact on our results, probably around $0.01 a share. But as they continue to increase beyond that over the 100 basis point increase, actually, it would be accretive to our earnings over time.

So, Ken, I think when you look at it, we look at it two ways. One is looking at it purely on our income statement as a result of the assets and liabilities that Jesse touched on. I think the long-term answer in relation to both our results and just the marketplace overall would be how portfolio companies would perform. It was a significant rise in rates. When I say significant, something north of 150 basis points or 200 basis point increase. I think that’s where you – it remains to be seen kind of how the overall marketplace would respond to that type of rise in interest rates.

Got you. Very helpful there. And one follow-up, if I may, in the current environment. And it sounds like the private loan pipeline you mentioned was above average. Just wondering if you could talk a little bit more about what’s driving the activity there. And as well, in the current environment, how do you think about the potential risk and return for private loans versus some of the opportunities – other opportunities you might have? Thanks.

Sure, Ken. And so, on the private loan side, I think you heard both David and I say that we’re very pleased at how our private credit team has grown its capabilities over the last two years. The team that we have today is in position to execute on transactions that we honestly just weren’t in position on to execute on three, four years ago. So, they continue to grow their capabilities and their activities. We continue to see more and more opportunities, both from existing sponsors that we’ve transacted with historically, but also with new sponsors that we’re developing relationships with. So, I think our activities there are directly the result of their positive activities, and we’re just continuing to see that business and our position in the marketplace grow over time. When you look at kind of relative attractiveness, I think as you’ve always heard us say the lower middle market has been and will continue to be our primary focus, but we really like the asset class that’s represented by the private loan strategy, and you’ll see us continue to execute on that as a complement to the primary strategy in the lower middle market.

Thanks. Good morning, guys. Wanted to maybe start on yields within the portfolio. It was really encouraging to see yield stability in the lower middle market portfolio and then relative to yield stability in the private loan portfolio despite very heavy volume new volume here in the quarter. So maybe if you could just speak to what you’re seeing from a pricing perspective, from a competitive perspective and how that may kind of play out in terms of what you’re seeing in the pipeline now?

Sure. Thanks, Bryce. What I would say on the lower middle market, and you’ve probably heard us say this in the past, is you do see some movement in lower middle market rates for the long term. We have in the past and continue to expect to see more stability there. When you see our yields overall in the portfolio change quarter-to-quarter or year-to-year, it’s less about the initial investment we’re making because our rates and our expectations from an initial investment standpoint have always been and continue to be very consistent in that kind of low teens type percentage. But as our portfolio companies continue to perform well, grow, and delever, we have increasingly provided decreases in rates that are either an interest rate grid based upon leverage or just discussions with the company where we allow the initial rates to come down as the company continues to perform long term because our view is if we have a good performing lower middle market investment with the management team that we’re having a really good relationship with that it’s worthy of a lower interest rate. So that’s really where you see some movement on lower middle market rates over time. The private loan segment, I'd say that we were very happy with the investments we made in the fourth quarter and the rates that we were able to achieve there. That part of the marketplace is, as I think you would probably expect is more rate-sensitive, and it is more of a challenge to maintain the rates. And to your point, that's why we're very happy to see the rate stability there. I would say, longer term, remains to be seen kind of how rates in the broader market and specifically, our private loan strategy will perform. To date, we're continuing to see good activity and good kind of terms and attractive rates on what we're executing in the first quarter. But longer term that is a part of the marketplace that has been and continues to be more competitive.

Okay. That's helpful, Dwayne. I appreciate it. Maybe want to talk a little bit about the expense side and the employee base side of the house. Obviously, 1.5% expense to assets ratio is best in the industry. Kind of curious how you're thinking about that going forward, especially as the external adviser continues to contribute? And then as it relates to the employee base, I assume there's been some growth within the employee base to support all the portfolio activity that you've seen. Can you speak to maybe any level of growth in your lower middle market teams or in that private credit team and kind of what you expect from an employee growth perspective going forward here?

Sure. So, as you know, Bryce, we've grown our portfolio significantly over the last couple of years, both in the lower middle market and the private loan or private credit categories. And you've seen us invest in additional resources in both of those strategies, and you'll see us continue to do that as we go forward. Both the lower middle market team and the private credit team, when you look at both of those teams and the expectations for 2022, there's definitely expectations to continue to add both junior and mid-level personnel to complement or to support the activities we have across the firm. With that being said, I think as we look at our platform and our ability to grow assets and have the asset management be a big part of our growth strategy, I think we continue to be very comfortable with the long-term target of 1.5% from an expense-to-asset ratio as being a good metric for us and one that we think we can continue to achieve and continue to provide that benefit to our shareholders given the unique nature of our strategies and also the very, very beneficial impact that we have from that asset management business. If you recall, Bryce, when we look at executing that asset management business, one of the things that we've always found very attractive about it whether it's the activities we're performing for MSC Income Fund or for any of the other activities we have, we're not having to go out and hire people specifically for those activities. The nature of the assets that are being invested in through those different vehicles that we manage, they're the exact same assets that we're investing in at Main Street. So, there's co-investment activities across each of the vehicles that we manage. And that approach to the asset management business really gives us a lot of operating leverage from a management standpoint in terms of how we manage not only the assets on Main Street's balance sheet and in our portfolio but also in the investment portfolios of those other vehicles.

Okay. And maybe one related to that, Dwayne, you guys called out the AUM at the external manager. Just curious if the private loan fund contributed to management fees at the external manager here this quarter? And then any update in terms of where AUM is at the private loan fund? And what the timeframe is for the capital commitments to come to a close here?

Sure. Bryce, on the private loan fund, it has been ramping significantly over the balance of 2021. So, we started the year just in fundraising mode with no assets, and then we started deploying some capital towards the end of the first quarter and have been growing that pool over the balance of the year as we went through 2021. We are nearing the end of our capital raise there. So, we continue to add additional capital commitments, both from limit partners. We also put in place a new credit facility that will allow us to continue to grow the assets under management at the private loan fund. And we expect that to be a significant benefit to us as we look at the expectations for the asset management business in 2022. Just to put a number on it, the private loan fund had approximately $85 million of assets under management at year end. That number has continued to grow and will continue to grow in the first quarter. And our goal long term, when we get the fund closed and then have it fully deployed, is to be somewhere in the $200 million to $250 million of assets under management.

Hi, good morning. And congratulations on the way that you made it through the pandemic and the recovery. You guys did a really good job of controlling both the risk and addressing the return opportunity. The question for you is that one of the messaging challenges, I think that BDC managers have is that – if you ask them where to invest, it always happens to be where they have the most capability. And I think you guys are a little unique in that you have the latitude to go up and down the size scale. The large guys keep telling us that EBITDA of $75 million to $100 million is the place to be because there are shifts in out of the BSL into the middle market, and the upper middle market is the place to be because the risk is better. At the same time, the small guys say you get the pricing and the terms in the lower side. And obviously, you guys are shifting and focusing more on the lower middle market and the private loan side. If you could kind of give us a little more detail on the specifics of the risk and the pricing between the two choices that you have, I think it's kind of a unique perspective because you can choose, whereas others are too large to be on the small side or too small to be on the big side?

Sure. So, we appreciate the comments first on kind of the way we performed through the pandemic. It's much appreciated because we know you spend a lot of time tracking the space and investing across different platforms. So, we really appreciate those comments. What I was saying, you've heard us say this before, but I'll just say – repeat some of the views we have in the lower middle market. So, the lower middle market has always been Main Street's primary focus area and kind of the core of what we do, and it always will be. And there's a couple of reasons why that's the case. As you can see from the rates that we achieved there and then the results from our equity investments, we think we're able to return percentages from a return on asset standpoint that are far superior in our opinion, really to anywhere else in the marketplace that you can achieve those returns. We also really like the fact that we think it's even more attractive on a risk-adjusted basis. So, we are not investing with other private equity firms in that lower middle market practice. We're investing directly in and alongside the owner operators of those businesses and the people that run that business day to day. So after having done it for two decades plus, while there are some risks associated with smaller businesses, we really think that the alignment of interest between our interest at Main Street with the individuals that are running that business day to day that are talking to customers, employees, and vendors, we really think that, that alignment of interest is a significant positive for us, and we'll trade the risk of a smaller business for the benefit of that alignment of interest with the people that run the business all day long every day. The issue or the only negative we've seen in the past with the lower middle market strategy is that it can be lumpy from quarter-to-quarter. Obviously, the last two years, when you look at 2020 and 2021, they've been very, very good years for us from an origination standpoint. But if you look at the longer-term history, you will have some volatility or variability in the origination activities from a quarter-to-quarter standpoint. But again, that's really the only negative we have when we look at the lower middle market strategy, and it has been, and as I said earlier, we'll continue to be the primary focus area for us as we look at the Main Street platform from a long-term standpoint. Over time, as you probably know, we've invested in other areas as we've grown our private credit team over the last 10 years or so. We started off spending more time initially kind of in the syndicated middle market segment. Over time, as we kind of experienced that part of the segment and learn more about the evolving kind of private credit, we define it as private loan segment, we just determined on our side and others clearly may have different views, but we determined that the smaller end of kind of the private equity sponsor universe and the ability to be directly originating either just at Main Street or alongside a small group of peers that we have really good relationships to be directly originating, negotiating, diligencing those transactions as opposed to doing that kind of through a third party in the syndicated market was just a better view from our standpoint of the ability to underwrite and provide a better risk-return opportunity for us and for our shareholders in that segment. So, that's why you've seen us over the years really migrate from the syndicated middle market segment into the directly originated private loan segment. And you've seen our portfolio rotation over the last three or four years, which we've tried to do our best job to signal what we were doing over the long term and then explain to people, at least in our opinion, why we thought that was the right approach. So, I don't know if that addressed your comments, but that would be kind of the views of how we look at lower middle market versus private loan. I can't really speak to the broadly syndicated larger middle market because we honestly just don't play in that space. And as we sit here today, really don't have an expectation, too. So, I don't know if that addressed your comments, but that would be kind of the views of how we look at lower middle market versus private loan. I can't really speak to the broadly syndicated larger middle market because we honestly just don't play in that space. And as we sit here today, really don't have an expectation, too. So, I wouldn't be the right person to really talk about the positives or negatives about that part of the marketplace.

This is David. If I can just add one point. On the lower middle market strategy, we're very unique in the sense we did this barbell approach first lien debt, coupled with the equity. So, while it's a riskier credit as far as the size of the investment, we can protect our interest. To the extent that something is challenged, we also get the opportunity for the upside, which is why we – in our prepared remarks, we talked about some of the gains we've booked. They really do provide an offset to some of the losses also on the portfolio that are naturally going to occur over time. So, the approach we talk to our management teams and the family-owned businesses we invest with that they don't like the cost generally of our capital. It is market-based. It's higher rate. But over time, if they perform really well, we're going to be able to reduce our rates and we benefit both on that from an equity perspective. So, it really is a barbell approach. We talk about it a lot with the management teams and family-owned businesses that we partner with. And it does allow them to grow, which is another positive aspect that our companies perform, we're able to put more capital to work that's accretive to both of us on an equity perspective with doing things like expansion and acquisitions within the portfolio.

Hey, David. Unfortunately, there's not a lot to report on the AFFE. We've been pushing this just for a long time as with SBIA and other BDCs. The SEC proposed rules a while back. There's not been much movement since then or past the comment period. I think the general thought is those rules as proposed don't generally work. We don't think funds will include the data that - that we think they'll still include it in the table, which defeats the purpose of the rule. And so, we're still pushing on this with SBI and other BDCs. But to date, there's really not been much over to work.

Thank you. We appreciate the questions. And as always, we greatly appreciate everyone that joined us this morning for the call and for the great questions we had after our prepared remarks, and we'll look forward to speaking to everyone again here in a few months in early May. Thank you.

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