Main Street Capital CORP Q2 FY2024 Earnings Call

Greetings. And welcome to the Main Street Capital Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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. Thank you, Zach. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation’s second quarter 2024 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; and Jesse Morris, Chief Financial Officer and Chief Operating Officer. Also participating for 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 16. 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 9, 2024, 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, 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 non-cash compensation expenses. Management believes that presenting DNII and the related per share amount are useful and appropriate supplemental disclosures for analyzing Main Street’s financial performance since non-cash compensation expenses do not result in a net cash impact to Main Street upon settlement. Please refer to yesterday’s press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call, are net asset value, or NAV, and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per share basis. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net assets. 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's doing well. 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, our recent dividend declarations, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, and our expectations for the third quarter of 2024, after which we'll be happy to take your questions. We are pleased with our second quarter results, which were highlighted by an annualized return on equity of 16.1%, DNII per share, which continues to exceed the dividends paid to our shareholders, and a new record for NAV per share for the eighth consecutive quarter. We believe that these continued strong results demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business, and the continued underlying strength and quality of our portfolio companies. We are also pleased that we generated significant growth in both our low-income market and private loan investment portfolios and ended the quarter with attractive investment pipelines in both investment strategies, which we expect will be beneficial in the future. We remain encouraged by the continued favorable performance of our diversified lower-middle market and private loan investment strategies, and remain confident that these strategies, together with the benefits of our asset management business and our cost-efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future. Additionally, with the continued support of our long-term lender relationships, as evidenced by our recent extension and expansion of our Corporate Facility, and the benefits of our second investment-grade debt offering of the year in June, we continue to maintain strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment and we remain excited about the current opportunities in both our lower middle market and private loan investment strategies. These positive results for the second quarter, combined with our favorable outlook for the third quarter, resulted in our recommendations to our board of directors for our most recent dividend announcements, which I'll discuss in more detail later. Our NAV per share increased in the quarter primarily due to the impact of net fair value increases in our investment portfolio and the accretive impact of our equity issuances, which Jesse will discuss in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant net fair value appreciation in the equity investments in the lower middle market portfolio. We are also excited about the following investments we made to finance strategic acquisitions by two of our high-performing lower middle market portfolio companies, each of which were funded by follow-on debt investments by Main Street for a total of over $36 million of incremental debt investments in these portfolio companies. We expect that these follow-on investments will help drive additional fair value appreciation in these portfolio companies in future quarters, in addition to the highly attractive interest income provided by these incremental debt investments. In the second quarter, we were also pleased to have recognized a meaningful realized gain upon the combination of one of our lower middle market portfolio companies with a strategic acquirer, which resulted in the full exit of our debt investments and a partial exit of our equity investment in the company while retaining an equity investment in the combined company and the related future upside from the strategic combination. We are excited to continue to see increased interest from potential buyers in several of our lower middle market portfolio companies that could lead to favorable realizations over the next few quarters, highlighting the strength and quality of our portfolio companies. We were very pleased with our investment activity in the second quarter. This activity included total lower middle market investments of $155 million, including new investments totaling $88 million, resulting in a net increase in our lower middle market investments of $69 million after repayments and other investment activity. Our private loan investment activities in the quarter included new investments of $324 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $225 million. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio over the next few quarters. We've also continued to produce positive results in our asset management business. The funds we advise through our External Investment Manager continue to experience favorable performance in the second quarter, resulting in significant incentive fee income for our asset management business for the seventh 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 other strategic initiatives. We are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund. We remain optimistic about our strategy for growing our asset management business within our internally managed structure, and are actively working to increase the contributions from this unique benefit to our stakeholders. As a result of these continued efforts, a few weeks ago, MSE Income Fund, a non-listed BDC that is advised by our External Investment Manager, filed a preliminary proxy statement that contains certain proposals intended to position the fund to list shares on a national securities exchange. The preliminary proxy statement also details additional activities and changes at MSE Income Fund, including a transition of the fund's investment strategy to be solely focused on its private loan investment strategy and a potential amendment to the investment advisory agreement between the external investment advisor and the fund, both of which would become effective upon a listing of the fund shares. We're very excited about these potential changes at MSE Income Fund, which we believe represent significant catalysts to the future growth of the fund and the opportunity for significant future benefits to both the MSE Income Fund shareholders and our asset management business. Based upon our results for the second 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 September, representing our 12th consecutive quarterly supplemental dividend to go with the aid increases to our regular monthly dividends since the fourth quarter of 2021. Our board also declared regular monthly dividends for the fourth quarter of 2024, of $0.245 per share, payable in each of October, November, and December, representing a 4% increase from the regular monthly dividends paid in the fourth quarter of 2023. 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 $1.175 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the trailing 12-month period of over $4 per share, and a current total yield we are providing to our shareholders of over 8%. We currently expect to recommend that our board continue 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 the continued favorable performance in the third quarter, we currently anticipate proposing an additional supplemental dividend payable in December 2024. Now turning to our current investment pipeline, as of today, I characterize our lower middle market investment pipeline as well above average. We believe that the unique and flexible financing solutions that we can provide to lower middle market companies and their owners and management teams in our differentiated long-term to permanent holding periods represent an attractive solution to the needs of many lower middle market companies. We are confident in our expectations for strong, new lower middle market investment activity over the next few months. We also continue to be very pleased with the performance of our private credit team and the significant growth that they have provided for our private loan portfolio and our asset management business. As of today, I characterize our private loan investment pipeline as average. My last update relates to our activities to expand and improve our finance accounting and treasury functions to match the growth and investing class performance of our investment teams, investment portfolio, and asset management business. As part of these activities, yesterday we announced several promotions and changes in these areas, including a change in Main Street's CFO position. We are excited about these changes and what they mean for our company and for these specific individuals in the future. In conjunction with these changes, personally and on behalf of our executive management team and our board of directors, I want to thank Jesse for his significant contributions over the last few years as our CFO while also serving as our Chief Operating Officer and managing a lower middle market investment portfolio. We are very excited to have his focus back solely on our investment and operations activities where we know that he will continue to add significant value to our firm, and we appreciate his significant contributions over the last few years as our CFO.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe 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 continued to be positive, which contributed to our attractive second quarter financial results. However, we did experience some continued softness in certain portfolio companies with consumer discretionary-focused products or services, which we have been monitoring for several quarters, and we are actively working to maximize our recoveries on those specific investments. As we have discussed in the past, the largest portion of our investment portfolio and the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market, and specifically our strategy of investing in both the debt and equity in lower middle market companies. Our view on the relative attractiveness of investing in the lower middle market remains unchanged, and we expect that this will continue to be our primary area of focus in the future. As Dwayne noted, we are excited about our current lower middle market investment pipeline. Each quarter, we try to highlight key aspects of our investment strategy and differentiated approach. For today's call, I am going to spend some time discussing our private loan investment strategy, which is the second largest part of our investment portfolio and is the primary driver of our asset management business. We have grown our private loan strategy significantly over the last several years, both on Main Street's balance sheet and for the third-party client funds that we manage through the External Investment Manager. As a reminder, our private loan strategy principally represents investments in the senior secured debt of private equity sponsored businesses. These investments are primarily originated by our internal investment professionals through strategic relationships they cultivate and maintain with a select group of private equity firms and their capital market intermediaries. Our private loan investments are typically first lien debt investments with attractive yield profiles and favorable terms. As of quarter end, 99% of our private loans secured debt investments were first lien loans and 97% had floating rate interest rates, which had an attractive weighted average yield of 12.8%. Over seven years ago, we announced our strategic decision to dedicate significant resources towards growing our private loan strategy while de-emphasizing our middle market strategy. Our desire to make this significant shift was driven by our intention to focus on investing in companies that were smaller than those typically accessing the traditional syndicated loan market. We believe that the opportunity existed to lead or co-lead the vast majority of our private loan investments, whereby we were able to directly manage the due diligence, the loan documentation, and the post-investment process. We believe this approach allows us to maximize our net returns on capital invested in private loans for Main Street and the investment portfolios we manage in our asset management business. While the overall market competition for private credit products has increased over the last few years, we believe our niche focus on the smaller end of the market is less competitive and allows us to earn more attractive risk-adjusted returns for Main Street's investors and the investors in the funds we manage. During the time of our intentional and purposeful repositioning in the market from year-end 2016 through the second quarter of this year, we increased the total fair value of our private loan portfolio at Main Street from 17% of our total portfolio at fair value to 37%. Based on the capabilities and relationships of our private credit team, the overall growth of our private loan platform, and the strength of our investment pipeline, Main Street has also benefited from our ability to utilize our private loan investment strategy to grow our asset management business. Through our External Investment Manager, our private loan strategy effectively allows Main Street to leverage our investment professionals' time and our platform to benefit from the attractive fee-based income we receive from third-party clients, while at the same time providing highly attractive investment opportunities and returns for those clients. We look forward to the continued future benefits to our overall platform as we pursue additional ways to grow our private loan platform and third-party asset management business.

Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the second quarter. Our total investment income for the second quarter was $132.2 million, increasing by $4.6 million, or 3.6% over the second quarter of 2023, and by $0.5 million, or 0.4% from the first quarter of 2024. Our results for the second quarter of 2024 included strong performance across our lower middle market and private loan investment portfolios and our asset management business, resulting in strong levels of investment income, which demonstrates the continued strength of our differentiated investment and asset management strategies. Interest income increased by $2.8 million from a year ago and was comparable to the first quarter. The increase for the prior year was driven primarily by the impact of increase in net investment activity over the last year and increases in benchmark index rates, partially offset by the impact of an increase in investments on non-accrual. When compared to the first quarter, the second quarter benefited from the increase in net investment activity during the first and second quarters offset by an increase in investments on non-accrual. Dividend income increased by $1.1 million or 4.3% when compared to a year ago. With this increase after the impact of a $1.6 million decrease in unusual or non-recurrent dividends, an increase of $3.9 million or 17.1% from the first quarter, including a comparable level of unusual or non-recurrent dividends between the quarters. The continued underlying strength of the majority of our lower middle market portfolio companies, together with the unique benefits of our asset management business, drove the strong level of dividend income in the quarter. Fee income increased by $0.7 million from a year ago and decreased by $3.3 million from the first quarter. The first quarter of this year included elevated levels of refinancing and prepayment fees considered non-recurring. The aggregate amount of these items for the second quarter decreased by $2.7 million from the first quarter and were comparable to the prior year. For the second quarter, the impact of certain income considered less consistent or non-recurring in nature, including dividends from our equity investments and accelerated prepayment, re-pricing and other activity related to our debt investments, as I mentioned earlier, totaled $5.1 million. In the aggregate, these items were consistent with the average of the prior four quarters, and $1.6 million lower than the prior year and $2.5 million lower than the first quarter. Our operating expenses increased by $3 million from a year ago, largely driven by increases in interest expense, share-based compensation expense, and general administrative related expenses. 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 continues to be amongst the lowest in our industry. Our External Investment Manager contributed $9.2 million to our net investment income during the second quarter, an increase of $0.7 million from a year ago and $0.6 million from the first quarter. The manager earned $4.1 million in incentive fees during the quarter, increasing by $0.5 million from the prior year and $0.3 million from the first quarter, primarily as a result of the positive performance of the assets under management. The 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 appreciation on the investment portfolio of $26.5 million. We recorded net fair value appreciation in our lower middle market portfolio, our other portfolio, our middle market portfolio, and in our External Investment Manager, partially offset by net fair value depreciation in our private loan portfolio. The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies. The net fair value appreciation in our other portfolio was driven by positive performance in certain investments. The net fair value appreciation in our middle market portfolio was driven by the exit of a portfolio company at a favorable value compared to its fair value at the end of the first quarter. The fair value appreciation of our External Investment Manager was a result of an increase in the fees generated by the External Investment Manager, driven by the continued strong performance of our asset management business, partially offset by a decrease in the valuation multiples of public trade peers, which we use as one of the benchmarks for valuation purposes. The net fair value depreciation in our private loan portfolio was driven by the net impact of specific portfolio company underperformance, partially offset by the impact of decreases in market spreads. We ended the second quarter with investments on non-accrual comprising approximately 1.2% of the total investment portfolio at fair value and approximately 3.6% of costs. As David indicated, the new investments on non-accrual for the second quarter largely relate to underperforming companies with significant exposure to consumer end markets. Net asset value, or NAV, increased by $0.26 per share over the first quarter and $2.11 or 7.6% when compared to a year ago, to a record NAV per share of $29.80 at the end of the second quarter. Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures divided by net asset value, was 0.74, and our regulatory asset coverage ratio was 2.33; and these ratios continue to be slightly more conservative than our long-term target ranges of 0.8x to 0.9x and 2.1x to 2.25x respectively. We continue to be active this quarter on capital activities aided by our strong relationships. In May, we repaid the $450 million due on our May 2024 notes at maturity. In June, we issued $300 million of unsecured notes maturing in June 2027 with a coupon rate of 6.5%. We also amended our corporate credit facility in June, increasing commitments by $115 million to $1.1 billion with a diversified group of 19 lenders and extended the maturity to June 2029 for $1.035 billion of the commitments. We were also active in our at-the-market or ATM program, raising net proceeds of $42.2 million during the quarter. After giving effect to the investment and capital activities in the first and second quarters of this year, we continue to maintain strong liquidity, including cash and availability under our credit facilities and one of our SBIC funds of approximately $1 billion. 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 also positioned us for the future, allowing us to continue to execute our attractive investment strategy. As we discussed last quarter, with this current level of liquidity, we currently expect to fund our net new investment activity in 2024 through a greater proportion of debt financing, and as such, we would expect leverage to continue to increase during the course of the year to be more in line with our long-term stated targets. Coming back to our operating results, as a result of our strong performance for the quarter, our return on equity for the second quarter and the first six months of the year was 16.1% and 16.6% on an annualized basis, respectively. DNII per share for the quarter of $1.07 was $0.05 or 4.5% lower than the record DNII per share for the second quarter last year and was $0.04 or 3.6% lower than the DNII per share for the first quarter. The combined impact of certain investment income considered less consistent or non-recurring nature on a per share basis was in line with the average of the last four quarters, $0.02 per share lower than the same quarter a year ago, and $0.03 per share lower than the first quarter counting for most of the declines in DNII. Total dividends paid in the second quarter were $1.02 per share, including a supplemental dividend of $0.30 per share and the increase of 13% over our total dividends paid during the same period in the prior year. Given the strength of our operating results and the outlook for the rest of the year, our board approved a supplemental dividend of $0.30 per share payable in September 2024. With a supplemental dividend, total declared dividends for the third quarter of 2024 were our $1.035 per share, representing a 7.3% increase over the total dividends paid in the third quarter of last year. Our board also approved recurring monthly dividends of $0.245 per share for a total of $0.735 per share for the fourth quarter of 2024. Looking forward, given the strength of our underlying portfolio, we expect another strong top line in earnings quarter in the third quarter with expected DNII of at least $1.07 per share, with the potential for upside driven by the actual level of dividend income and portfolio investment activities during the quarter. With that, I will now turn the call back over to the operator so we can take any questions.

Hi guys, congratulations on the quarter. I've got quite a few questions about the pipeline. Dwayne, I'm trying to recall the last time you characterized the lower middle market as well above average. That sounds quite positive. So can you give us any incremental thoughts on what that is? Because it seems like the lower middle market pipeline keeps getting stronger. Are there any common characteristics in that? Obviously, every deal is unique, but anything that's really driving the incremental activity of business owners coming to the table?

Good morning, Robert. Thanks for the question. I don't know if I'd point to anything specific that's driving owners to come to the table. I think our teams here internally at Main Street are doing a better job of proposing what we think is unique to the intermediaries that we deal with, and then eventually to the business owners. I think we're having a lot of success there. We are trying to give you guidance that the lower middle market pipeline is very, very strong. We expect to have good originations this quarter. Some of it may end up moving into the fourth quarter, but we feel really good about the pipeline, which is why we provided the guidance. As you've heard us say in the past, we always have to get through due diligence and legal documentation, so things can always change. The economy can also change; however, right now, we feel really, really good about the pipeline and we expect to have robust lower middle market originations over the next couple of months and quarters. I'll let David add any additional comments that he might have.

I think Dwayne hit on it. We're just resonating quite well with our referral network. The only other observation I'd make is that our incoming deal volume is up, and it's in part due to interest rates having more visibility and not having a rising interest rate outlook like we had a year ago, quite as unclear, leading intermediaries to advise their clients that it's a good time to go to market when we think some were hitting pause a year ago and the like.

Got it. Thank you for that. On the private loan side, can you clarify whether you're seeing an average number of deals or perhaps a better than average number of deals, but with tighter pricing? I've seen a lot of discussion regarding spread compression and the number of BDCs rejecting deals due to pricing being too tight. Is that affecting private loans, or does pricing consideration come in later rather than in the pipeline characteristics?

Yes, Robert, I'll provide a few comments, and I'll let Nick Meserve add any additional commentary he has. Just to be clear, our guidance on the well above average pipeline was for the lower middle market side, and the guidance for private loans was average. We did have a very robust quarter on the private loan side, experiencing success both at the front end of the pipeline and, more importantly, working through the process, due diligence, legal documentation, etc., and getting to a closing. Part of the reason we think the pipeline is average right now is that the second quarter was so robust. I think in the broader market, while we do not see much of this on the lower middle market side, there's typically a seasonal slowdown in August and September. People are on vacation, doing other things apart from focusing on transactions, and we see some of that seasonality. We continue to view our part of the market, as it has been specified in the past, as a different market than most other BDCs participate in. These are smaller segments of the private equity and private credit world. We continue to see what we think are very attractive opportunities.

I think that pretty much covers it. The second quarter was a significant one for us. Some transactions closed at the end of the quarter that could have moved into the third quarter. Overall, the portfolio seems solid. It’s not necessarily a spread question on whether it's average or above average. There has been some compression of spreads, but not as much felt on the smaller market that we play in.

Got it. Thank you. One more question if I can. Dwayne, you mentioned that you've seen headwinds with consumer-facing businesses for some time. Are there any new segments of the economy or emerging signs of credit concern that are maybe not consumer direct?

Yes, Robert, to your point, we've been discussing consumer risk or concerns for quite some time now, not just for a couple of quarters but for much longer. We have been cautious from a new investment standpoint in that area for very specific reasons. While we've been watchful for a while, you're seeing feedback not just in our portfolio but across the U.S. economy and that those headwinds from an overall industry standpoint with challenges these companies have had have culminated in this quarter's increase in non-accruals. However, it shouldn't have been a surprise as we have tried to communicate this over the past several quarters. Regarding the broader economy, we feel good about the rest of the portfolio; by and large, it's performing well. You'll see that in our dividend income from the lower middle market, and the fair value changes reflect that. We continue to say if a portfolio company is struggling, it's likely more related to that specific company rather than broad economic or industry threats outside of the consumer segment.

Thanks much. I have a couple of follow-ups to Robert's questions. Dwayne, regarding the lower middle market pipeline, I agree that I don't recall you guys describing it as well above average before, but it's certainly been a while. Can you discuss the mix within that pipeline in terms of add-ons versus new? So, incumbent relationships versus new?

Yes, Bryce. In the second quarter, we had two significant add-ons from an investment standpoint to existing portfolio companies to finance what we believe are very attractive strategic acquisitions for two of our high-performing portfolio companies. As we look ahead to the current pipeline, it's weighted much more towards new platforms, with perhaps one or two add-ons in the earlier stages; however, those aren't included in the current pipeline guidance. The good news is these new platforms mean that your transactions and mix of debt equity leverage, valuation, pricing, and other considerations are consistent with what we've done historically, which is exciting for our current pipeline's favorability.

Yes, Bryce, it hasn't really changed from where we have been in the last few years. We're still in the range of 3.5x to 4.5x, usually around 3.5x to 4x.

Yes, these are mostly on the lower middle market side. Yes, I'd say, Bryce, we've been de-emphasizing the middle market for a while. If you look at the quarter-to-quarter change, we're down to less than 20 names; it’s about 18 or 19 individual portfolio companies. Movement is going to be lumpy and will come down to either maturity dates or refinancing opportunities. The second quarter was favorable, but it will be lumpy based on ongoing developments. The current environment should be constructive for continued repayments, which we welcome as it allows us to shrink that portfolio and shift capital into lower middle market and private loan strategies. Sure, Bryce. As you've noted, we've been collaborating with the MSC Income Fund Board to find the right long-term answer for the fund. We've concluded that shifting to a solely private loan strategy is an appealing opportunity for both Main Street and MSC Income Fund shareholders. We believe that our private loan strategy can yield very attractive returns and, when coupled with our best-in-class fee structure, is the best way to deliver exceptional long-term outcomes for MSC Income Fund shareholders. Given our focus on different segments of the market, we believe this approach will lead to beneficial outcomes for both Main Street and MSC Income Fund.

Yes, thank you. Good morning. What will be the impact of the listing of the external advisor on the fee income? Will there be any near-term volatility, maybe some increased expenses or reduced fees that may have some flow-through impact, presumably in the short term? I understand it will be immensely profitable long-term.

Sure, Mark. In terms of fees, we are proposing a decrease in the base management fee from 1.75% to 1.5%, so there will be some slight impact. In the long term, if we are positioned well at Main Street and MSC, we should see growth in assets that will help further the catalysts in a positive direction. We anticipate a small drag day one due to the fee reduction; however, we deem it a minimal change that is the right long-term decision, considering the positive potential outcomes in the coming years.

Thank you. And regarding the markdowns related to exposure to consumer issues, if there's a broader rebound of the economy, would you expect to see those markdowns improve, or is it mostly company-specific?

Yes, Mark, that's a good question. I think it depends on both factors. These companies face industry headwinds and also have unique company-specific challenges. So looking at the fair value marks ahead, there won’t be significant improvements in the next quarter. This will be a long-term process involving collaboration with the portfolio companies and their management teams to navigate their future paths and it may take time before we see significant improvements. I just want to say thank you again to everyone for joining us this morning. We look forward to talking to you again after our third quarter earnings release in early November. Thank you.

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