Earnings Call Transcript - MAIN Q1 2022

Operator, Operator

Greetings, and welcome to the Main Street Capital Corporation First 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 with Dennard Lascar Investor Relations. Thank you, Zach. You may begin.

Zach Vaughan, Investor Relations

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's first quarter 2022 earnings conference call. 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 13. 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 6, 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. Dwayne?

Dwayne Hyzak, CEO

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, our recent declarations of our supplemental dividend in June and monthly dividends for the third quarter 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, the impact of rising interest rates on our future net investment income and our expectations for the second quarter after which, we'll be happy to take your questions. We are pleased that Main Street delivered very strong first quarter results with net investment income per share and distributable net investment income, or DNII, and per share amounts that matched our quarterly record set in the fourth quarter and with the DNII per share that exceeded the monthly dividends paid to our shareholders during the quarter by over 19%. The continued strong performance of our underlying portfolio of companies resulted in additional fair value appreciation of our investments in these companies. And when combined with our continued success in executing new lower middle market and private loan investments increased the fair value of our total investment portfolio at quarter end to $3.7 billion and resulted in a record net asset value per share of $25.89. These positive results and the continued momentum in each of our core strategies provided us with the confidence to recommend that our Board of Directors approved another supplemental dividend payable in June 2022, representing our third consecutive quarter with the supplemental dividend. Our lower middle market and private loan strategies, which we consider to be our primary investment strategies, both delivered positive investment originations in the quarter, resulting in a net increase in lower middle market investments of $57 million and a net increase in private loan investments of $114 million. 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 remainder of 2022. The operating performance across most of our portfolio companies has continued to be strong, and this strong performance, combined with ongoing organic and acquisition 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 in the future. We've also continued to make considerable progress in our asset management business. This includes progress at MSC Income Fund, the nontraded BDC we advised through our external investment manager, which maintained a fully invested portfolio at the end of the first quarter. 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 future performance of the fund. At MS Private Loan Fund I, we continue to grow both as capital commitments from investors and its investment portfolio through its co-investment activities with Main Street and MSC Income Fund in our private loan investment strategy, and we are excited about the growing benefits we expect to receive from this relationship in 2022. After completing our fundraising activities for the fund, we expect a total portfolio of approximately $200 million when fully invested. The continued growth and favorable performance in both funds provides us confidence that we will receive increased 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. With our fundraising activities for MS Private Loan Fund now complete, we are excited about moving on to the next stage and the growth of our asset management business. 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 first 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 June and monthly dividends for the third quarter of 2022 of $0.215 per share payable in each of July, August and September, representing a 4.9% increase from the third quarter of 2021. The supplemental dividend for June, which is our third consecutive quarter with the supplemental dividend is due to our favorable performance in the first quarter, which resulted in DNII per share that was $0.13 or over 19% greater than our monthly dividends paid during the quarter. As a reminder, we currently expect to recommend that our Board of Directors declare future supplemental dividends to the extent DNII significantly exceeds monthly dividends paid in future quarters, consistent with our practice for the last 3 quarters. As we previously communicated, as a result of the combination of our favorable outlook for the year and our current expectations for future supplemental dividends, we currently expect a significant increase in total dividends paid to shareholders over the next few quarters when compared to the prior year. Now turning to our current investment pipeline. We are pleased to maintain a number of attractive opportunities in our lower middle market and private loan strategies. As of today, I would 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 we and our companies actively look to execute on various growth opportunities. 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, which results from the benefits of our unique combined debt and equity investment offering, and our ability to be a long-term to permanent partner for the companies we invest in. We are confident in our expectations for continued attractive new lower middle market originations in 2022. We are also very pleased with the performance of our private credit team over the last few years, and the significant growth they have provided for our private loan portfolio and our growing asset management business. And as of today, I'll characterize our private loan investment pipeline as above average.

David Magdol, President and CIO

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe our strong first quarter financial results demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We're excited that our performance during the quarter resulted in a record level of interest income earned which is a direct result of our strong lower middle market and private loan originations in the fourth quarter. We're also pleased to report that the overall operating performance for the majority of our portfolio companies continued to be strong in the first quarter resulting in both a significant increase in our NAV per share and attractive dividend income received from our lower middle market portfolio companies during the quarter. As a result of our strong performance, our first quarter operating results achieved a GAAP return on equity or ROE of 14.2% on an annualized basis for the quarter and 19.9% for the TTM period, which we believe is very attractive. Each quarter, we try to highlight key aspects of our differentiated investment strategy and/or discuss relevant trends in our business that we believe our shareholders would be interested in learning more about. We have generally focused these discussions on our lower middle market strategy, which continues to be the largest and most profitable segment of our investment portfolio. For today's call, we thought it would be useful to spend some time on the second largest segment of our investment focus, which is our private loan portfolio. This strategy has grown significantly over the last 5 years and invests primarily in the senior secured debt of private equity-sponsored businesses. Our private loan investments are generally originated either directly by our internal investment professionals or through strategic relationships with other investment funds. Our private loan investments are typically first lien debt investments at attractive yield profiles and favorable terms. As of quarter end, 99% of our private loan secured debt investments are first lien floating rate loans, which have an attractive weighted average yield of 8.2%. Five years ago, we announced our strategic decision to dedicate significant resources towards growing the middle market segment of our business, while deemphasizing our middle market portfolio, which, as a reminder, are typically investments in larger syndicated loans. We set a goal of having our private loan portfolio grow to a greater percentage of our assets than our middle market portfolio, which seemed ambitious at the time since the middle market portfolio is 1.8x the size of our private loan portfolio. During this period of repositioning, we are also purposeful in setting a goal to maintain our emphasis on our lower middle market portfolio and growing our lower middle market portfolio to approximately 50% of our total assets at fair value. From year-end 2016 through the first quarter of this year, we've increased our private loan portfolio from $342 million or 17% of our total portfolio at fair value to $1.26 billion and 34% of our total portfolio at fair value. This represents an increase of 268%. Over the same period of time, we reduced our middle market portfolio from $631 million or 31% of our total portfolio at fair value to $397 million or 11% of our total portfolio at fair value, which represents a 37% decline. We also doubled our cornerstone lower middle market portfolio from $893 million to $1.8 billion. And today, the lower middle market portfolio represents close to 50% of our total assets at fair value and more than the private loan and middle market portfolios combined. Our purposeful and intentional strategic shift to grow our private loan portfolio was primarily driven by our belief that an attractive and growing direct lending environment would exist in the future and that private loan investments provide an attractive risk-adjusted return profile. Today, the weighted average yield in our private loan portfolio is meaningfully higher than in our middle market debt investments, in addition to higher yields, we're confident that the smaller size of our private loans and the negotiated nature of our private loan credit agreements provide better structural protections when compared to larger middle market loans, for which we do not typically have significant input into the underlying credit agreements. Based on the capabilities and relationships of our private credit team, the growth of our private loan platform and the velocity of our deal flow, Main Street has also benefited from our ability to share our private loan investments with other funds' Main Street managers. To our external manager, our private loan strategy effectively allows Main Street to leverage our investment professionals' time and platform, so Main Street can benefit from the attractive fee-based income we received from third-party clients while at the same time providing highly attractive investment opportunities and returns for those clients. Today, we manage portfolios of primarily private loans on behalf of third parties, including the MSC Income Fund and our recently closed MS Private Loan Fund. We look forward to continuing to grow our fee income and opportunities to manage additional third-party clients in the future. Now turning to the overall composition and results from our investment portfolio. The contributions from our lower middle market portfolio continue to be well diversified, with 60% of our lower middle market companies with equity investments having appreciation at quarter end and with 63% of our lower middle market companies contributing to our dividend income over the last 12 months. Our investment activity in the first quarter included total investments in our lower middle market portfolio of approximately $78 million which after aggregate repayments on debt investments and return of invested equity capital resulted in a net increase in our lower middle market portfolio of approximately $57 million. During the quarter, we also made approximately $201 million in total private loan portfolio investments, which after aggregate repayments of debt resulted in a net increase in our private loan portfolio of approximately $114 million. Finally, we had a net increase in our middle market portfolio of approximately $2 million. As of March 31, we had investments in 205 portfolio companies spanning across over 50 different industry segments. Our largest portfolio company represented approximately 2% of our total investment portfolio fair value at quarter end and 3% of our total investment income for the last 12 months. The vast majority of our portfolio investments represented less than 1% of our assets and our income. At quarter end, our lower middle market portfolio included investments in 75 companies representing over $1.8 billion of fair value which is 19% above our cost basis. As of March 31, Main Street's private loan portfolio included total investments of approximately $1.3 billion of fair value across 79 unique companies. In our middle market portfolio, we had investments in 36 companies, representing approximately $397 million of fair value. The total investment portfolio at fair value at quarter end was approximately 109% of the related cost basis. In summary, Main Street's investment portfolio continues to perform at a high level and deliver on our long-term goals.

Jesse Morris, CFO and COO

Thank you, David. And now turning to a summary of Main Street's financial results. As Dwayne and David commented, we're very pleased with our operating results for the first quarter. Total investment income increased by $16.6 million or 26% over the same period in 2021 to a total of $79.4 million driven by increases in interest and fee income, which were partially offset by a decline in dividend income. Interest income for the quarter represents a new quarterly record and is a result of our record investment activity in 2021. Included in the total investment income for the quarter is a reduction of $2.1 million and the net impact of certain income items considered less consistent or nonrecurring when compared to the first quarter of 2021. These items were also $3.9 million lower than the average of the prior 4 quarters, which speaks to the overall strength and quality of the earnings in the quarter. Operating expenses excluding noncash share-based compensation expense increased by $3.6 million or 18% over the same period of the prior year, largely driven by increases in interest expense and compensation expense. The increase in interest expense was driven by higher borrowing levels to support the increase in portfolio investments, partially offset by a lower weighted average interest rate on borrowings as compared to a year ago. The increase in compensation expense is primarily due to increased headcount, higher base compensation and increased incentive accruals. These increases were partially offset by a reduction to compensation expense resulting from changes in the fair value of deferred compensation plan assets and corresponding liabilities. The ratio of total operating expenses, excluding interest expense as a percentage of average total assets was 1.5% for the trailing 12 months and 1.1% for the quarter on an annualized basis, which continues to be amongst the lowest in our industry. As the assets managed by the external investment manager continue to grow, the benefit to our operating results increases. The manager earned $5.7 million of management fee income during the quarter which represents an increase of $1.8 million from the first quarter of 2021. The contribution of the manager to our net investment income was $5.1 million during the first quarter, an increase of $1.5 million from the same period of the prior year through the allocation of $2.8 million of operating expenses for services we provided to and $2.3 million of dividend income received from the external investment manager. The external investment manager ended the first quarter of 2022 with total capital under management of over $1.5 billion. Net investment income increased by $12.5 million or 31%, while distributable net investment income, or DNII, increased by $12.9 million or 31%, both over the same period last year. DNII, which is a net investment income excluding the impact of noncash share-based compensation expense is a key measure of our performance. We recorded net unrealized appreciation on the investment portfolio of $17.0 million during the quarter, including net appreciation of $20.7 million in the lower middle market portfolio, $3.2 million in the private loan portfolio and $1.6 million in the other portfolio. These were partially offset by unrealized depreciation of $7.5 million in the valuation of the external investment manager, $0.6 million in the middle market portfolio and $0.4 million relating to deferred compensation plan assets, all before accounting for reversals of net realized gains and losses recognized during the quarter. The decrease in the fair value of our external investment manager was driven primarily by a reduction in market multiples for its publicly traded peer set partially offset by the growth in the external investment manager's revenues due to increased assets under management. The operating results for the first quarter resulted in an increase in net asset value or NAV of $65.2 million and an increase in NAV per share of $0.60 to end the quarter with NAV of $25.89 per share. There's no changes in the number of investments on nonaccrual status at 9, which comprise 0.6% of the total investment portfolio at fair value and 3.1% on a cost basis. Overall, capitalization and liquidity remained very strong with total liquidity in excess of $535 million as of March 31. We continue to believe that our conservative leverage profile, strong liquidity and continued access to capital are significant strengths that have us well positioned for the future. Earlier this week, our shareholders approved the reduction of our regulatory minimum asset coverage ratio from 200% to 150%, which became effective on May 3. As we stated on our last earnings call, the primary goal in obtaining the approval for the reduced minimum asset coverage ratio is to provide us greater operational flexibility during times of significant macroeconomic disruptions. An additional benefit of the reduced coverage ratio is the flexibility it provides us to protect and grow our investment portfolio under certain market conditions, such as periods of robust net originations when we may not be able to raise additional equity capital at a pace which keeps up with our investment activity. We expect to continue to be prudent in our utilization of leverage and intend to operate with a regulatory asset coverage ratio target range of 240% to 210% and a regulatory debt-to-equity ratio target range of 0.7x to 0.9x. Coming back to our operating results. DNII per share for the first quarter matched the record established in the fourth quarter of 2021 at $0.77 per share, an increase of $0.15 or 24% from the same period last year. In addition, DNII per share for the quarter exceeded the regular monthly dividends per share paid to our shareholders by $0.13 per share or 19%, the sixth consecutive quarter that DNII per share has exceeded the monthly dividends paid during the quarter. Including the marked supplemental dividend of $0.075, dividends paid during the quarter were $0.72, an increase of 8.9% over dividends paid during the same period in the prior year. Our Board also recently approved a supplemental dividend for the third consecutive quarter of $0.075 payable in June of 2022. One additional item that I wanted to touch on is the impact of rising interest rates. With the additional $500 million in low-cost fixed rate notes that we issued in 2021, as of the end of the first quarter, 81% of Main Street's outstanding debt obligations maintain fixed interest rates. This mitigates our exposure to higher interest expense during a rising interest rate environment. On the other hand, as of the end of the first quarter, approximately 73% of our debt investments bear interest at floating rates with the majority subject to contractual interest rate floors with a weighted average fall of approximately 105 basis points. As a result, future increases in interest rates will result in increases to interest income, which will exceed the increases to interest expense. We maintain an interest rate sensitivity table in our quarterly investment presentation, which will be posted on our website today. As an example, an increase in interest rates of 50 basis points from those in effect at quarter end would have a net positive impact to net investment income of approximately $4.9 million or $0.07 per share on an annual basis, while a 100 basis point increase in interest rates from those in effect at quarter end would result in a benefit of approximately $12.5 million or $0.17 per share on an annual basis. It is important to note that the majority of our variable interest rate investments are based on contracts reset quarterly, whereas our credit facility interest rate resets monthly. As a result, we will have a quarterly lag in the realization of benefits from these rate increases in interest income and net investment income until the third quarter with a small increase in interest expense in the second quarter. Lastly, rising interest rates in general can have an unfavorable impact on the fair value of our investments. Finally, as we look forward, given the strength of our underlying portfolio and the investment environment thus far in the first half of 2022 that Dwayne and David mentioned in their remarks, we expect another strong earnings quarter in the second quarter 2022 with expected DNII per share of at least $0.72 per share or more. With that, I will now turn the call back over to the operator so we can take any questions.

Operator, Operator

Our first question is from Robert Dodd with Raymond James.

Robert Dodd, Analyst

Congratulations on the quarter. I guess on dividend income from portfolio companies, obviously, the asset manager was up year-over-year, but it looks like from the lower middle market portfolio companies, the dividend income was down double-digit percentages, that point is still higher than any quarter other than the quarters last year. But is there anything thematic there in terms of, is it just because the quarters of last year were perhaps outsized? Or are there particular industry segments where the dividend income from the lower middle market was down more than others? Any color you can give us there?

Dwayne Hyzak, CEO

Sure, Robert. Thank you for being here again. Regarding the dividend income, it has decreased from the previous quarter, especially when we compare it to the last few quarters where we experienced elevated income levels. We always aim to highlight any unusual or one-time items. In the past couple of quarters, we had higher dividend income in that category, but this quarter, we did not have any of that type of income. Consequently, we are seeing a more stable, recurring level of dividend income. The companies that contributed to this are not surprising; they are our best performers. The top 10 companies in the first quarter align closely with what we observed in the fourth quarter of last year and the entire previous year. Therefore, I wouldn't describe this as a concerning trend. While we would prefer higher dividend income, we consider the level achieved in the first quarter to be healthy. One factor could be the current environment filled with uncertainty, which may lead some of our companies to adopt a more conservative approach. This could explain the slight decline in income in the first quarter compared to recent past quarters. Nonetheless, we are quite pleased with the overall performance of our operating companies and are satisfied with the level of dividend income.

Robert Dodd, Analyst

Got it. Yes. And that relates to the next question. I mean, obviously, you have great relationships with these lower middle market portfolio companies. What are you hearing from them now, say on labor cost, raw material cost? I mean, obviously, we all know the macro. But has anything changed over the last few months or versus 6 months ago in terms of what they're telling you about concerns on the macro front? Or are they just dealing with it and carrying on?

Dwayne Hyzak, CEO

Sure, Robert. I'll give some comments, and I'll let David add on to the extent he has some additional comments that he'd add on. But I'd say just like they have for the last couple of quarters, the portfolio companies are dealing with challenges across the board on each of the items that you touched on labor, cost of material, supplies and then just availability of both of those, and it's not just a cost issue, but it's just actually finding availability of both labor and supplies and materials. So that has continued to be a challenge, and we expect will continue to be a growing challenge going forward. We're fortunate at least to date, that our companies have been able to navigate that. I think you've always heard us say that we really like our position in the lower middle market being partners for individuals that have owned these companies and manage these companies for decades, not years. And we really think they do a great job of managing opportunities as well as challenges. And we continue to see them do a very good job here in the current environment, just like they have for the last couple of quarters and the last couple of years going back to the COVID kind of environment and dealing with those challenges. But I'll let David add on if he has any additional comments there.

David Magdol, President and CIO

No, I think you covered it Dwayne.

Robert Dodd, Analyst

Regarding the asset management side, revenue has increased significantly, with the dividend reaching $2.3 million in the fourth quarter, which is more than double what it was in the first quarter of last year. This figure does not account for the OpEx offset. While I hesitate to label these as expectations, I do have hopes for further growth. The MSC Income Fund and the private fund are contributing positively. Are there any new initiatives you can share about expanding the asset management business? It's clear this area provides a strong return to shareholders without requiring additional capital investment.

Dwayne Hyzak, CEO

Sure, Robert. So what I would say is, obviously, for the last year or so, we've been focused on both the changes we've been implementing at MSC Income Fund after becoming the sole adviser at the end of 2020 and then more recently, on raising and growing MS Private Loan Fund I which, as I've indicated in my comments, we finalized the fundraising process and have been actively investing in that portfolio. So while we don't have an answer for what the next generation of the asset management business growth initiatives will be, it is something that we have now turned our attention to see what is that next evolution? Is it another private fund? Or is there something else in the asset management business, largely focused on our private loan strategy that we can look to execute on? So we're in the stages of working on that, but it's too early to really announce anything. I'll give you much more color than it's in process, and we expect to have success on something in the next kind of 6 to 12 months.

Operator, Operator

Our next question comes from Bryce Rowe with The Hovde Group.

Bryce Rowe, Analyst

I wanted to follow up on one of Robert's questions regarding the impact of the current environment on the lower middle market portfolio and its borrowers. You have a diverse portfolio that includes both larger and smaller companies, which is unique for this space. Are you observing any differences in borrower health between the lower middle market and the larger private loan and middle market companies?

Dwayne Hyzak, CEO

Bryce, I wouldn't say that we've seen a big divergence. I think similar to the lower middle market, the private loan companies in our portfolio have performed well. I think that as you said, we are closer to the lower middle market, just given our position as a significant equity owner versus the primary lending relationship we have in that private loan portfolio, but all the feedback we get both from the companies and the sponsors and then what we see come through from a quarterly and monthly reporting standpoint on their financials has continued to be positive. So I think they are similarly dealing with all the challenges that exist in the marketplace. But to date, we haven't seen anything that was kind of a broad trend across the board. You do, as we always have had in the past, you have certain companies in the portfolio that are performing higher or better than others. And that's always been the case. But I'd say those are more company-specific issues than anything that's more broad-based from an overall economy or kind of supply chain inflation standpoint.

Bryce Rowe, Analyst

Okay. That's helpful, Dwayne. And then maybe just around some of the pipeline comments, you described lower middle market as average. Private loan is above average. On the other side of originations, I guess there's prospects that you'll see slowing repayment activity with higher rates. Just curious if that affects lower middle market and private loan equally. And if that is in fact the case, is there some potential for maybe stronger net portfolio growth as repayments possibly slow?

Dwayne Hyzak, CEO

Yes. Bryce, I would say when you look at the impact of the current rate environment on repayments, if there's going to be an impact, I would say it would be on the private loan segment. With that being said, I would say that so far in the quarter, we've had a couple of our investments pay off. So we haven't seen a significant impact on the repayment expectations purely because of the rate environment. But I do think longer term, as you see rates increase, if there's going to be a bigger impact. It's most likely on that private loan and middle market segments for that matter as opposed to lower middle market. That's always been our view, the lower middle market companies are going to repay us much more based upon just free cash flow from operations or some type of an exit transaction as opposed to a more traditional refinancing where the private loan portfolio would be more based upon market activity trends. And if they see an opportunity to refinance at a lower rate, you could see that refinancing activity happen more in that portfolio than you would in the lower middle market. But we haven't seen that impact happen to date. And as I referenced earlier, did see a couple of our private loan investments repay through a refinancing here in the most recent couple of months.

Bryce Rowe, Analyst

Okay. All right. Maybe one more for me. On the right side of the balance sheet, you've got a debt maturity, notes maturity coming up here in '22. Just curious how you're thinking about that especially with higher base rates and possibly wider spreads in that notes market? Are you comfortable perhaps taking the outstandings on the credit facility a bit higher? Or are you kind of approach that in a different way?

Dwayne Hyzak, CEO

Sure, Bryce. I think what she said is the way we're looking at it. As Jesse mentioned in his comments, we were active in 2021, specifically near the end of 2021. In October, when we went out and raised an additional $200 million of IG debt, obviously, with hindsight, that timing was really good, probably should have done more, but that was kind of all we had capacity for at the time. But that was intentionally done to set us up to make sure we had enough liquidity and kind of flexibility to deal with that pending maturity as well as the very significant growing pipeline that we had seen developing for the fourth quarter. So we feel like we've got our capital structure and balance sheet in good position to deal with that maturity. We also, as you know, have the option to continue to issue equity under the ATM. So as we continue to see good portfolio activity, you'll likely see us utilize the combination of the ATM issuance and the revolver to fund our needs, including the potential needs in December. But obviously, if there is an opportunity where there's an opportunity in the IG market, to take advantage of an issuance, then we'll continue to monitor that. But I think that's the approach that we're taking when we look at that pending maturity.

Operator, Operator

Our next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth Lee, Analyst

Just one on the private loan side. I really appreciate the additional disclosures there. Wonder if you could just give us a little bit more color into what's driving the above-average pipeline there? And how you think about the potential growth there this year?

Dwayne Hyzak, CEO

Sure. I don't know if I can point to anything other than our private credit team has done a great job the last couple of years of forming new relationships across the private equity sponsor universe. And we're seeing their efforts, not just here recently, but over the last couple of years, kind of come to fruition with a number of really attractive recurring opportunities from some of the sponsors I've got it here with me, Nick, if there's anything else that you'd want to add in terms of the pipeline we're seeing.

Nick Meserve, Managing Director

Yes. Our current pipeline is above average. I would say overall, the market does feel softer than last year. But last year was a record-breaking year across the board, both in private credit and M&A. And so I think looking at '22, it still feels above average if you look at the long-term cycle, but it's definitely a little slower than last year.

Kenneth Lee, Analyst

Got you. Very helpful there. And then in terms of a follow-on question, if I may. You mentioned remarks how rising rates could have an impact on valuations and investments. I wonder if you could just further expand upon this. I presume that this is specifically within the equity investments but just wanted to get a little bit more detail on that.

Dwayne Hyzak, CEO

Sure. I think it's hard to give much detail there, Ken, other than when Jesse provided that comment, I think what we're communicating is that all things being equal, a rising rate environment, while it would be good for our income statement will not be good for our balance sheet. And that's purely based upon valuation methodologies, which will include cost of capital as part of the valuation process and as cost of capital goes up, particularly on the debt side, that net-net will be a negative factor for equity valuations. And if you look at our debt investments, if the marketplace today allows the opportunity to invest in new debt investments that have a higher yield on your existing portfolio than just on a relative comparable basis, your existing investments, the value of those investments from a valuation process will be negatively impacted. So that's what Jesse was referring to when we talked about that. But other than kind of those broad-brushed comments, it remains to be seen what the long-term impact is. And then if you look at kind of the rising rate environment and inflation as a whole, if those issues continue to persist and get worse, then it's expected that's not a good thing for the economy, which, again, long-term is not a good thing for equity valuation. So at a macro level, that's what Jesse was referring to in his comments.

Operator, Operator

There are no further questions at this time. This now concludes our question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

Dwayne Hyzak, CEO

Thank you again to everyone for joining us this morning. We appreciate your interest in Main Street, and we'll look forward to talking to you again in early August.

Operator, Operator

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