Main Street Capital CORP Q1 FY2026 Earnings Call

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 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. 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 is defined as total assets minus total liabilities and is also reported on a per share basis. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. 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, 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 lower middle 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 two quarters. We believe these results continue to demonstrate the sustainable strength of our overall platform. The benefits of our differentiated and diversified investment strategies and the strength and quality of our portfolio companies, particularly our lower middle market portfolio companies, continue to be evident. 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 two 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 three new portfolio companies and follow-on investments in five 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 advise 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. As a result of the increase to its regulatory debt capacity, which became effective at the end of January 2026, the fund maintained significant capacity to add additional debt to fund future growth of its investment portfolio. The MSC 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. The 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 two quarters will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share representing an additional 39% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continue to declare future supplemental dividends to the extent DNII before taxes significantly exceeds our regular monthly dividends paid or we generate net realized gains, and we maintain a stable to positive NAV in future quarters. Based upon our expectations for continued favorable performance in the 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. As of today, I'd characterize our private loan investment pipeline as 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 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 lower middle market strategy. First, we believe that our permanent capital structure allows us to be the ideal long-term permanent 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 solely 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 permanent 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 results in a diversified portfolio of investments in more mature companies that typically have lower relative leverage profiles since they use free cash flow from operations to deleverage over time. As our companies 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 three 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 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 five 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 five of our portfolio companies with additional capital for growth initiatives, given 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 remains strong, and we welcome the opportunity to make incremental investments in our high-performing lower middle market portfolio companies. In many of 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 opportunities to benefit from the significant equity value creation 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 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 three 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 the 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 four-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 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 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 transactions, 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, 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 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 dividend income, there was a bit of a decline, a relatively big decline in nonrecurring dividends, which obviously are not recurring. 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 companies retain a bit more cash. So is that kind of a driver and do you expect that extra dividend income to be moderate in the near term? Or was that just like a one-off thing in the quarter?

Robert, I would say on 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 it 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 one quarter, and that company had not historically paid dividends, we would call that out as well. I'd say 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; those exits have been companies that have been in the portfolio for a long time, had delevered, and were 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 negative consequence of losing the dividend income of those companies that had 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 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. It would be a combination of both of those.

Got it. And then is it also with respect to the incentive fees, I think there was a fee waiver for MSC Income Fund. Should we expect that to continue in the near term in terms of Main Street being extra supportive of the performance of the asset management side with fee waivers?

Sure, Robert. 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. And then just more generally, you characterized private loan activity as average. It has been slower through much of last year because you thought pricing was unreasonably low. All the indications we're hearing in the market are that pricing maybe is moving higher. Is there a prospect where the private loan activity could ramp up in Q2 and beyond if M&A picks up and pricing turns 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. 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 and aggressive, I do think the current environment from a pricing and general structural terms and conditions perspective is favorable. I think we've talked about our pricing range broadly being in the 500 to 600 basis points 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 one to three quarters and then what that does to pricing. Nick, feel free to add on there.

I think Dwayne nailed it. I think the one thing I would add is 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. I think that dynamic hopefully has changed in the current period and hopefully improves for the rest of the year.

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

Great. So just a 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 able to mark-to-market the portfolio 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. From a fair value standpoint, it was a mixed bag this quarter. The lower middle market continued 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. Then you also had private loan down by a significant amount, about $36 million of depreciation. I would say that was a mix of one specific name that had significant depreciation and then a mixed bag across the rest of the portfolio, both underlying performance and movement in the marketplace from a spread standpoint.

Okay, that's helpful. And then kind of going back to capital and liquidity: you've raised a decent amount of capital year-to-date. I think that's a great example of the underlying strength of the balance sheet and your access to both the debt and equity capital markets. So you raised a meaningful amount of new debt capital and also raised some equity capital through the ATM. You said the pipeline is average, but it seems like you're in a pretty strong position to lean in from a deployment perspective. How should we think about the pace of originations and net portfolio growth over the next few quarters?

Sure, Brian. So to your comments, we had been very active on the lower middle market side in 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 lower middle market strategy and offerings are very attractive and should become even more attractive in this type of environment, and that's what we've seen over the last 20 years. When you look at our capital activities related to lower middle market, 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, and we were planning to catch up a little bit on the equity issuance to support that lower middle market growth. On the debt capital side, our activities were more in anticipation of the July maturity we have: we've got a $500 million maturity in July. So we were building liquidity and capital structure flexibility to make sure that we can address that maturity but also have significant dry powder to continue to grow because we do think we will have good opportunities on the lower middle market side. And as we said earlier, we expect to have good opportunities on the private credit side, but that will largely be dictated by the overall marketplace. 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? 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 meaningfully from all of this. I'm trying to gauge how big of an impact we could see over the next several years and what that ultimately means for shareholder value creation.

Sure, Brian. If you look at our lower middle market portfolio and our private credit portfolio, we're value-based, mostly old-economy investors. We do have some limited technology and software exposure, but it's admittedly a small part of our portfolio. Most of our businesses are traditional industries and companies. That said, all of our companies are looking at AI. It's something 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, and our portfolio managers are speaking with portfolio companies on an ongoing basis in board meetings and periodic catch-ups. AI and what they're doing with it is a consistent ongoing conversation. That being said, I don't expect it to be a huge game changer for us — we think it will be beneficial, but it remains to be seen how beneficial it will be long term. David, any additional comments?

Dwayne covered it. The only thing I'd add is that we do have some companies that are more infrastructure-oriented that could benefit from building infrastructure related to AI, so we'll see some incremental benefit across the portfolio that should continue to accrue 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 of weakening over the past couple of quarters. What are you seeing from your portfolio companies? Are there any particular vintages of originations that might be underperforming?

Thanks, Arren. When we've seen weakness, it's been more company-specific rather than broad across the portfolio or the economy. One thing to note, which we've mentioned in prior quarters and continue to see, is more bifurcation between companies that are doing really well and companies that are not doing as well. So despite uncertainty in the economy, there are certain companies that are performing exceptionally, and you're seeing more of that. On the flip side, if something is underperforming, you're probably seeing more pressure on that underperformance. Those are the comments I would make. David or Nick, if you have anything to add, please do.

Just specific to your comment on vintages in the lower middle market side: our partners transact for a range of personal and strategic reasons in all sorts of market environments, whether it's more prolific or more challenging. They're looking at succession planning and other owner considerations, so we don't really see a major impact relative to vintage on that side of our portfolio, which is the majority of our business.

The only thing I would add would be deals that were done in 2021 and 2022 in a lower-rate environment: they survived the move to higher rates, but if they are struggling, the higher rates over the longer term are pushing more of cash flow to interest versus CapEx, which is harming those businesses. I think we've been seeing that kind of buildup over the past two to three 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 realized gains on equity exits. What's your gauge on the tempo of upcoming equity exits given the general frothiness in the market?

Thanks for the question. With a large portfolio — I think we have 93 lower middle market portfolio companies — a significant portion of which have been in our portfolio for a long period and have performed, those companies consistently attract interest from third parties. A lot of it is unsolicited inbound interest that either sparks a transaction or prompts our management team partners and equity owners to consider an exit. We have a number of companies in different stages of looking at an exit, and we think over the balance of the next couple of quarters we should see one or more exits. When those exits happen, they tend to be good outcomes for us and for our management team partners and other equity owners. Nothing has changed materially today; we continue to see activity across the portfolio that could lead to favorable outcomes if an exit occurs. We'll continue to monitor and pursue those opportunities.

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

Just one on leverage. Wanted to get an updated view on where you think leverage could trend. I think previously you said you could take a little more conservative view, but given the pipeline you're seeing as well as the macro backdrop, what's your latest view?

Thanks for the question, Ken. Just to remind you, our regulatory leverage target 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 at the conservative end of that target range.

One thing I would add is that we value capital flexibility and liquidity more than pushing up leverage to try and eke out some economic returns that way. That view has served us well over the last 20 years, and we expect to continue to maintain it.

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