Executive Summary / Key Takeaways

• Strategic Transformation Underway: MidCap Financial Investment Corporation (MFIC) is executing a deliberate strategy to optimize its portfolio post-mergers, significantly reducing its aircraft leasing exposure in Merx to redeploy capital into higher-yielding, core first lien middle-market loans.
• Robust Origination Advantage: Leveraging its affiliation with MidCap Financial, MFIC benefits from a vast, high-quality deal flow and a proven underwriting process, evidenced by an annualized net realized and unrealized loss rate of approximately 6 basis points on MidCap-sourced loans.
• Enhanced Capital Structure & Earnings Power: Recent CLO financings have secured low-cost, long-term debt, strengthening the balance sheet and providing tailwinds for dividend coverage. The Merx redeployment alone is projected to add $0.12 per share in annual net investment income.
• Stable Credit Quality Despite Headwinds: While facing market volatility and company-specific challenges, MFIC's core direct lending portfolio demonstrates stable credit quality, with a focus on granular, covenant-protected, U.S. service-oriented businesses.
• Dividend Sustainability & Growth Potential: Management expresses strong confidence in the $0.38 quarterly dividend, supported by expected earnings accretion from increased leverage and Merx capital rotation, positioning MFIC for sustained shareholder returns.

Setting the Scene: MFIC's Strategic Foundation in Direct Lending

MidCap Financial Investment Corporation (MFIC) operates as a specialized business development company (BDC), focusing primarily on directly originated and privately negotiated first lien senior secured loans to U.S. middle-market companies. This core strategy, established since its inception in 2004, targets companies typically with less than $75 million in EBITDA, emphasizing less cyclical industries and granular position sizes. MFIC's overarching objective is to generate current income, complemented by long-term capital appreciation for its shareholders.

The company's strategic journey has been marked by significant milestones, including its election as a regulated investment company (RIC) for tax purposes and the establishment of a robust co-investment framework with its affiliate, MidCap Financial. This affiliation is not merely a partnership; it represents a foundational strength and a key differentiator in a competitive landscape. MidCap Financial, a prominent middle-market lender, boasts a long track record, having closed over $136 billion in lending commitments since 2013, with a team of nearly 200 investment professionals. This extensive network and deep market intelligence provide MFIC with unparalleled access to high-quality deal flow, a critical advantage in an often-muted M&A environment.

The Power of Proprietary Origination: MFIC's Technological Edge

In the context of direct lending, MFIC's "technological differentiation" lies not in a physical product, but in its sophisticated, data-driven investment process and proprietary origination platform, powered by its affiliation with MidCap Financial. This platform acts as a significant competitive moat, offering tangible and quantifiable benefits. MidCap Financial's vast data set of middle-market company financial information across all industries, accumulated over more than a decade, makes it one of the most informed and experienced lenders in the market.

This expertise translates directly into superior underwriting and risk management for MFIC. The tangible benefit is a remarkably low annualized net realized and unrealized loss rate, consistently around 5-6 basis points on loans sourced by MidCap Financial since mid-2016. This performance metric underscores the effectiveness of their rigorous due diligence and credit selection. Furthermore, MidCap Financial's role as administrative agent on 72% of MFIC's direct lending portfolio at fair value provides enhanced information flow and the ability to detect and address issues early, a critical operational advantage.

The strategic goal of this differentiated approach is to maintain a high-quality, covenant-protected portfolio. Approximately 97% of MFIC's direct origination portfolio (on a cost basis) includes one or more financial covenants, a stark contrast to the often covenant-lite structures prevalent in larger syndicated markets. This focus on strong covenants, combined with a median borrower EBITDA of approximately $50 million and an average funded position of $13.1 million, ensures a granular and resilient portfolio. For investors, this "technological" edge translates into more predictable income streams, lower credit losses, and a stronger competitive position against rivals who may lack such deep, proprietary sourcing and underwriting capabilities.

Strategic Repositioning and Capital Optimization

MFIC is currently undergoing a significant strategic repositioning, catalyzed by its July 2024 mergers with Apollo Senior Floating Rate Fund (AFT) and Apollo Tactical Income Fund (AIF). These mergers were a transformative event, increasing MFIC's net assets by over 40% and generating substantial investment capacity. The immediate post-merger period involved integrating approximately $600 million of investments from the acquired funds. Roughly one-third of these were directly-originated loans aligned with MFIC's core strategy, while the remaining two-thirds consisted of non-directly-originated assets like broadly syndicated loans and high-yield bonds.

The company has been systematically rotating these non-core assets, prioritizing the sale of lower-yielding positions. This process is progressing well, with $234 million of acquired assets already sold or repaid by Q3 2024. Management anticipates completing these sales over the next few quarters, effectively recycling capital into its core direct lending mandate. This strategic rotation is crucial for enhancing MFIC's overall portfolio yield and risk-adjusted returns.

A key component of this repositioning involves the significant reduction of MFIC's investment in Merx Aviation Finance, LLC, an aircraft leasing portfolio company. Historically an "under-yielding asset" with a blended yield of approximately 3.2%, Merx represented 5.6% of MFIC's total portfolio at fair value as of June 30, 2025. Post-quarter end, Merx completed a sales transaction covering the majority of its aircraft, resulting in a modest write-up on the investment. Additionally, in July, Merx received $30.9 million from insurers related to three aircraft detained in Russia, bringing total recoveries to $47.4 million to date. These insurance proceeds and sales transactions exceeded Merx's valuation.

These developments are expected to result in a substantial $90 million net repayment to MFIC in Q3 2025, reducing Merx's pro forma investment to approximately $95 million, or 2.8% of the total portfolio. An additional $30 million is anticipated by year-end 2025 or early 2026. Management projects that reinvesting the initial $90 million alone will generate an estimated $0.06 per share in additional annual net investment income, with the remaining Merx value contributing another $0.06 per share upon realization and redeployment. This strategic exit from a non-core, lower-yielding asset is a powerful driver for MFIC's future earnings.

Financial Performance and Liquidity Profile

MFIC's financial performance reflects its strategic focus and the ongoing market dynamics. For Q2 2025, net investment income (NII) per share was $0.39, translating to an annualized return on equity (ROE) of 10.5%. Total investment income for the quarter reached $81.3 million, a 3.2% increase from the prior quarter, driven primarily by portfolio growth and higher prepayment income, despite a slight decline in fee income and an increase in non-accrual investments. Net expenses rose by $0.5 million to $44.9 million, influenced by higher interest and general & administrative (G&A) expenses, partially offset by a lower incentive fee. Net realized losses of $17.0 million in Q2 2025, primarily from restructures of Renovo and Mitel Network and a partial write-off of Ambrosia Buyer Corp., impacted GAAP net income per share, which stood at $0.19 for the quarter. Net unrealized gains of $1.0 million partially offset these losses, driven by positive revaluations in Renovo, Mitel, and Merx, counteracted by underperformance in other positions.

The company's profitability margins are robust, with a trailing twelve-month (TTM) gross profit margin of 66.23%, an operating profit margin of 50.31%, and a net profit margin of 46.50%. These figures underscore MFIC's ability to generate strong income from its lending activities. However, net realized losses of $17.0 million in Q2 2025, primarily from restructures of Renovo and Mitel Network and a partial write-off of Ambrosia Buyer Corp., impacted GAAP net income per share, which stood at $0.19 for the quarter. Net unrealized gains of $1.0 million partially offset these losses, driven by positive revaluations in Renovo, Mitel, and Merx, counteracted by underperformance in other positions.

MFIC's liquidity and capital resources are robust. Net leverage at the end of Q2 2025 was 1.44x, slightly above its target range, but is expected to normalize to around 1.37x on a pro forma basis after the Merx paydown. The company aims to operate at the lower end of its target leverage of approximately 1.4x. MFIC has actively optimized its capital structure through strategic CLO issuances. The $529 million MFIC Bethesda CLO 2, closed in February 2025, secured approximately $399 million of low-cost secured debt at a blended spread of 161 basis points. This transaction, with a senior AAA spread of 148 basis points (92 basis points tighter than its inaugural CLO in November 2023), highlights MFIC's ability to access attractive financing, strengthening its balance sheet and providing long-term funding with a maturity in January 2037. The proceeds were used to repay $350 million in unsecured notes and reduce its revolving credit facility.

Competitive Landscape and Market Positioning

MFIC operates in the highly competitive direct lending market, primarily targeting U.S. middle-market companies. Its competitive positioning is significantly shaped by its unique affiliation with MidCap Financial and its disciplined investment strategy. While direct competitors like Ares Capital Corporation (ARCC), Golub Capital BDC (GBDC), BlackRock TCP Capital Corporation (TCPC), and Main Street Capital Corporation (MAIN) also provide debt and equity financing to middle-market firms, MFIC differentiates itself through its proprietary origination and underwriting platform.

Compared to larger BDCs like, MFIC may not match in sheer scale, which can sometimes translate to broader deal access. However, MFIC's specialized focus and MidCap Financial's extensive network allow it to consistently source high-quality, granular deals. This is reflected in MFIC's superior underwriting performance, with an annualized net realized and unrealized loss rate of approximately 6 basis points on MidCap-sourced loans, which compares favorably to industry averages. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, the company's strong performance in its core segment suggests effective penetration.

MFIC's investment versatility, encompassing various debt types and equity co-investments, allows it to offer tailored solutions, potentially giving it an edge over more credit-focused rivals like. Its strategic use of CLOs for financing, securing spreads as tight as 148 basis points on senior AAA tranches, demonstrates a competitive advantage in managing its cost of capital, potentially leading to better net interest margins than peers facing higher funding costs. This financial efficiency is crucial in a market experiencing spread compression, where new commitments are now priced at weighted average spreads of 526-538 basis points (excluding outliers), down from previous quarters.

The market environment, characterized by a muted M&A landscape and significant capital supply, has led to borrower-friendly terms and tighter spreads. MFIC, however, leverages its "power of incumbency" with existing portfolio companies, where friction costs allow for slightly better pricing on new commitments. This strategic focus on existing relationships helps mitigate some of the broader market pressures. MFIC's portfolio is also largely insulated from direct tariff impacts, as it primarily lends to U.S. service-oriented businesses, minimizing exposure to import/export dependencies. This strategic positioning, combined with robust underwriting, provides a resilient foundation against economic uncertainties and competitive pressures.

Outlook and Guidance

MFIC's outlook is firmly centered on leveraging its enhanced capital base and strategic focus to drive earnings growth and shareholder value. Management anticipates reaching its target net leverage of approximately 1.4x in the next couple of quarters, a key driver for increasing net investment income. The successful reduction of the Merx investment is a significant tailwind, with expected repayments of $90 million in Q3 2025 and an additional $30 million by year-end 2025 or early 2026. The redeployment of this capital into core direct lending assets is projected to generate an additional $0.12 per share in annual NII, significantly enhancing MFIC's earnings power.

The company expects a pickup in sponsor M&A activity in the latter half of 2025 and into 2026, driven by mounting pressure on financial sponsors to return capital, significant dry powder, and a solid economic backdrop. This anticipated increase in deal flow, coupled with MidCap Financial's robust origination capabilities (closing $6.5 billion in Q1 2025 commitments), ensures MFIC has ample opportunities to deploy capital in a "steady and measured manner," maintaining portfolio diversification and credit discipline.

Management expresses strong confidence in the sustainability of the $0.38 quarterly dividend. This confidence is underpinned by the expected earnings accretion from increased leverage and the Merx capital rotation, which are seen as crucial "tailwinds" for dividend coverage. While acknowledging potential headwinds from spread compression and the possibility of steeper base rate cuts, MFIC's ability to secure low-cost financing through CLOs helps mitigate these pressures, maintaining a favorable net interest margin. The company's focus on granular, covenant-protected, first lien loans to U.S. service-oriented businesses also provides a resilient portfolio against broader economic and geopolitical uncertainties.

Conclusion

MidCap Financial Investment Corporation is executing a well-defined strategy to solidify its position as a leading direct lender to the U.S. middle market. The recent mergers with and have significantly expanded its asset base, while the ongoing, successful reduction of its Merx aviation exposure is strategically reallocating capital from an under-yielding asset to its higher-return core lending business. This transformation, coupled with its unique access to MidCap Financial's robust origination platform and proven underwriting expertise, forms the bedrock of its investment thesis.

The company's financial performance, characterized by strong profitability margins and a disciplined approach to capital deployment, underscores its operational effectiveness. With a clear path to optimize its leverage profile and a commitment to low-cost, long-term financing through CLOs, MFIC is well-positioned to enhance its earnings power. This strategic alignment and financial discipline provide strong support for its $0.38 quarterly dividend, offering investors a compelling opportunity for consistent income and long-term value creation in a dynamic market.