Executive Summary / Key Takeaways

• Main Street Capital's internally managed structure and differentiated investment strategies, particularly in the underserved Lower Middle Market (LMM) and growing Private Loan segments, form the core of its sustainable platform and drive consistent shareholder returns.
• The company achieved a record NAV per share of $32.03 in Q1 2025, fueled by net fair value appreciation in the investment portfolio and accretive equity issuances, demonstrating resilience despite market uncertainties.
• Strong dividend income from the LMM portfolio and contributions from the Asset Management Business remain key drivers of Net Investment Income (NII) and Distributable Net Investment Income (DNII), supporting a robust dividend policy including supplemental distributions.
• Strategic capital structure enhancements, including recent credit facility amendments, provide significant liquidity ($1.3B+ available) and flexibility to fund future investment growth, primarily through debt, while maintaining conservative leverage.
• While facing macroeconomic headwinds, including potential tariff impacts and softness in consumer discretionary sectors leading to increased non-accruals, management expresses confidence in portfolio companies' ability to mitigate risks and projects Q2 2025 DNII of at least $1.03 per share.

The Main Street Model: A Differentiated Approach to Private Credit

Main Street Capital Corporation, established in March 2007, operates as a unique internally managed business development company (BDC). This structure, where the executive team and employees are direct employees of MSCC, is a foundational element of the company's strategy, fostering strong alignment of interests with shareholders and enabling a cost-efficient operating model that stands apart from many externally managed peers. Main Street's core business revolves around providing customized, long-term debt and equity capital solutions, primarily targeting the underserved Lower Middle Market (LMM) in the United States. This strategy focuses on partnering directly with entrepreneurs and management teams, offering "one-stop" financing solutions that span the capital structure, from secured debt to equity investments.

Complementing its LMM focus, Main Street has strategically grown its Private Loan investment strategy over the past seven years. This segment provides senior secured debt capital to private equity-sponsored businesses, often through direct origination or participation in "club deals." This intentional shift has seen the Private Loan portfolio's fair value increase significantly, while the legacy Middle Market portfolio, generally comprising syndicated debt investments in larger companies, is being de-emphasized and is expected to continue declining. A limited portfolio of Other investments rounds out the investment activities, including interests in unaffiliated funds.

Main Street's competitive positioning is heavily influenced by its chosen market segments and operational structure. In the Private Loan space, the company intentionally targets the smaller end of the market, believing this niche is less competitive than the larger upper-middle market favored by many BDC peers. This focus allows Main Street's private credit team to often lead or co-lead transactions, directly managing due diligence, documentation, and post-investment interactions, which is seen as a key differentiator enabling more attractive risk-adjusted returns. While the overall market for private credit has seen increased competition, Main Street believes its specific niche experiences less pressure. However, the company has observed instances of regional and local commercial banks occasionally offering significantly lower spreads, particularly in refinancing situations, though this is viewed as sporadic rather than a systemic shift.

In the LMM, Main Street's competitive advantage stems from its ability to provide flexible, one-stop debt and equity financing and its long-term investment horizon. This approach resonates with the predominantly family-owned businesses in this market. Compared to larger BDCs like Ares Capital (ARCC) or Prospect Capital (PSEC) that operate across broader middle-market segments, Main Street's LMM focus allows for deeper relationships and tailored solutions. While some competitors, like Blue Owl Capital (OBDC), leverage technology for potentially faster and more efficient deal processing, Main Street's differentiation lies more in its relationship-based model and integrated capital offerings rather than proprietary lending technology. The company acknowledges that technological gaps, particularly compared to tech-driven lenders, could pose a vulnerability, potentially impacting efficiency and market share capture in certain areas. However, the strategic intent remains centered on leveraging its operational structure and deal-making expertise. Discussions around technology within the company's operations include exploring the effective use of artificial intelligence and focusing on cybersecurity best practices, as highlighted in recent portfolio company meetings, but these are presented as operational considerations rather than core technological differentiators in its lending approach.

Performance and Portfolio Dynamics

Main Street's financial performance in the first quarter of 2025 demonstrated the continued strength of its model, particularly the contributions from its core strategies. Total investment income grew by 4% year-over-year to $137.0 million. While interest income saw a slight decrease, primarily due to an increase in non-accrual investments and lower floating rates, this was more than offset by a significant 58% increase in dividend income, largely driven by strong performance within the LMM portfolio. Fee income experienced a decline, reflecting reduced transaction activity compared to the prior year.

Operating expenses increased by 13%, primarily influenced by higher interest expense resulting from increased borrowings and higher rates on unsecured debt, as well as increases in general and administrative and share-based compensation costs. Despite this, Net Investment Income remained stable year-over-year at $89.8 million, though NII per share decreased slightly due to a higher weighted-average share count. Distributable Net Investment Income (DNII) per share also saw a modest decrease, impacted by the increased share count and lower contributions from less consistent income sources.

The company's balance sheet reflected continued growth and stability. Net Asset Value (NAV) per share reached a new record of $32.03 as of March 31, 2025, marking the eleventh consecutive quarter of NAV per share growth. This increase was primarily driven by net fair value appreciation across the investment portfolio, particularly in the LMM segment, and the accretive impact of equity issuances. The LMM portfolio, valued at $2.611 billion at fair value (31% above cost), and the Private Loan portfolio, valued at $1.9422 billion, represent the core of the investment base. The Private Loan portfolio maintains a high concentration of first-lien secured debt (99.9% at cost) with an attractive weighted-average effective yield of 11.4% (10.8% including non-accruals).

Portfolio quality remains a key focus. While the majority of the portfolio continues to perform favorably, the company noted an increase in investments on non-accrual status, rising to 1.7% of the total portfolio at fair value (4.5% at cost) in Q1 2025, up from 0.9% (3.5% at cost) at the end of 2024. This increase was linked to continued softness in certain portfolio companies with exposure to consumer discretionary end markets. Management is actively working to maximize recoveries on these specific investments.

The Asset Management Business, conducted through the External Investment Manager, continues to be a valuable contributor to Main Street's NII, contributing $7.8 million in Q1 2025. The External Investment Manager oversees $1.6 billion in assets under management. Recent developments, such as the NYSE listing and strategic shift of MSC Income Fund to focus solely on Private Loan co-investing, are expected to be significant catalysts for future growth in this segment, benefiting both MSC Income Fund shareholders and Main Street through increased asset management fees.

Capital Structure and Outlook

Main Street maintains a robust capital structure and significant liquidity, which management views as critical in the current economic climate. As of March 31, 2025, the company commanded over $1.3 billion in cash and available capacity under its Credit Facilities. Recent amendments to both the Corporate Facility and the SPV Credit Facility in April 2025 further strengthened this position, extending maturities and, notably, decreasing interest rates and increasing commitments. The Corporate Facility now stands at $1.145 billion in total commitments maturing in April 2030, while the SPV Facility's maturity was extended to September 2030 with decreased interest rates.

The company's regulatory debt-to-equity leverage was 0.67x at the end of Q1 2025, and its regulatory asset coverage was 2.48x, both remaining more conservative than the long-term target ranges of 0.8x-0.9x and 2.1x-2.25x, respectively. Management intends to utilize a greater proportion of debt financing to fund new net investment activity in 2025, expecting leverage to increase towards their target range while remaining conservative. The successful repayment of the $450 million May 2024 Notes at maturity further highlights the company's access to capital markets and prudent debt management.

Looking ahead, Main Street expects favorable earnings in the second quarter of 2025, projecting DNII of at least $1.03 per share. This outlook is based on the anticipated continued strong performance of the underlying portfolio, contributions from the Asset Management Business, and expectations for favorable investment activity. Potential upside to this guidance is linked to the actual level of dividend income received and the pace of portfolio investment activities. While acknowledging potential headwinds from decreasing floating rates and tariff impacts, management expresses confidence in the portfolio's ability to navigate these challenges. The company's commitment to shareholder returns is underscored by the declaration of a $0.30 per share supplemental dividend payable in June 2025 and an increase in the regular monthly dividends for Q3 2025 to $0.255 per share, representing a 4.1% increase year-over-year. Management anticipates recommending another supplemental dividend payable in September 2025, contingent on DNII significantly exceeding regular dividends and maintaining a stable to positive NAV.

Key risks to the outlook include the potential impacts of macroeconomic factors, such as the risk of recession, inflation, supply chain issues, and geopolitical disruptions, which could affect portfolio company performance and valuations. Changes in U.S. tariff and trade policies are also noted as a risk, particularly for companies involved in importing finished goods or those in industrial sectors. While management is actively engaged with portfolio companies to mitigate these risks, prolonged or intensified headwinds could negatively impact financial results and investment valuations. The increase in non-accruals, particularly in consumer discretionary sectors, is a specific area requiring continued monitoring and active management to maximize recoveries.

Conclusion

Main Street Capital's investment thesis remains firmly rooted in its differentiated, internally managed platform and its strategic focus on the underserved LMM and growing Private Loan markets. The company's ability to generate strong investment income, supported by consistent dividend contributions from its LMM equity portfolio and fees from its Asset Management Business, underpins its robust dividend policy and track record of increasing shareholder distributions. The achievement of a record NAV per share in Q1 2025 highlights the underlying quality and performance of the investment portfolio, despite facing macroeconomic uncertainties and specific challenges in certain sectors. With a strong liquidity position, a conservative capital structure, and a clear strategy for funding future growth, Main Street appears well-positioned to continue executing its investment strategies. While risks related to the broader economic environment and specific portfolio company performance warrant careful consideration, management's proactive approach to risk mitigation and a favorable outlook for the upcoming quarter suggest a continued path of delivering value to shareholders. The strategic evolution of the Asset Management Business, particularly the potential listing and strategy refinement of MSC Income Fund, adds another layer of potential future benefit to the Main Street platform.