Executive Summary / Key Takeaways

• New Mountain Finance Corporation (NMFC) employs a differentiated "defensive growth" strategy, leveraging New Mountain Capital's deep private equity expertise to identify resilient middle-market lending opportunities, resulting in a historically low net realized loss rate of approximately 7-12 basis points since its IPO.
• The company is actively optimizing its balance sheet and income quality, evidenced by an increased senior-oriented asset mix (80% in Q3 2025), significant debt refinancing at lower rates, and a strategic focus on reducing PIK income to a target of 10-12%.
• Despite a slight decline in Net Asset Value (NAV) to $12.06 per share in Q3 2025 due to specific portfolio company revaluations, NMFC maintains strong credit quality with approximately 95% of its portfolio rated "green" and low non-accruals at 1.7% of fair value.
• NMFC's current stock trades at a compelling 20% discount to book value, offering an attractive annualized dividend yield exceeding 13%, supported by a dividend protection program through Q4 2026 and a newly authorized $100 million share repurchase program.
• Strategic initiatives, including the exploration of a $500 million portfolio sale and ongoing debt optimization, are poised to enhance portfolio diversification, reduce concentrations, and improve financial flexibility, positioning NMFC for sustained shareholder value creation amidst an anticipated pickup in LBO activity in 2026.

The Foundation of Defensive Growth: NMFC's Differentiated Approach

New Mountain Finance Corporation (NMFC) operates as a business development company (BDC) specializing in direct lending to U.S. upper middle-market companies, predominantly those backed by private equity sponsors. Since its incorporation in June 2010 and subsequent IPO in May 2011, NMFC has consistently pursued an investment objective focused on generating current income and capital appreciation. This is achieved through the careful sourcing and origination of senior secured loans and select junior capital positions. The company's core philosophy centers on "defensive growth" industries, characterized by acyclicality, sustainable secular growth drivers, niche market dominance, recurring revenue, strong free cash flow, flexible cost structures, and seasoned management teams. This disciplined approach aims to insulate the portfolio from the volatility often associated with cyclical or secularly challenged sectors.

NMFC's competitive edge is significantly bolstered by its affiliation with New Mountain Capital (NMC), a global investment firm managing approximately $60 billion in assets. This relationship provides NMFC with a unique "technological differentiator" in its investment process: the direct leverage of NMC's in-house industry executives and private equity personnel for underwriting. This proprietary model allows for a deeper, more informed diligence process, enabling NMFC to identify superior credit opportunities and, if necessary, to actively improve underperforming businesses as an equity owner, drawing on NMC's extensive business-building expertise. The tangible benefits of this approach are evident in NMFC's historical performance, including a conservative portfolio loan-to-value (LTV) of just 45% and a negligible net realized loss rate, which has averaged between 7 and 12 basis points annually since its IPO. This robust underwriting and operational support system forms a critical moat, contributing to consistent returns and effective risk mitigation.

In the competitive landscape of middle-market lending, NMFC distinguishes itself from larger, more diversified BDCs like Ares Capital Corporation (ARCC) and Blue Owl Capital Corporation (OBDC) through its specialized focus on defensive growth sectors. While ARCC's scale allows for broader deal origination and larger transactions, NMFC's targeted approach offers specialized expertise that appeals to companies seeking a hands-on partner, potentially leading to stronger operational influence in portfolio companies. Against niche players like Hercules Capital (HTGC), which focuses on high-growth tech, NMFC's conservative strategy provides greater stability. NMFC's low exposure to tariff-sensitive industries, at just 0.6% of fair value compared to an approximate 13% for the overall BDC sector, further highlights its defensive positioning. This strategic insulation is a key competitive advantage in an environment marked by geopolitical and trade uncertainties.

Strategic Evolution and Portfolio Enhancement

NMFC's historical journey reflects a continuous evolution of its capital structure and portfolio management. The establishment of Small Business Investment Companies (SBICs) like SBIC I, II, and III, starting in 2014 and most recently with SBIC III in July 2025, has provided access to additional leverage and diversified funding sources. The company has also actively managed its debt profile through various unsecured notes issuances and the establishment and refinancing of credit facilities, demonstrating a commitment to optimizing its cost of capital and liquidity.

A central theme in NMFC's ongoing strategy is the relentless pursuit of an enhanced asset base, optimized liabilities, and improved income quality. The company has successfully increased its senior-oriented assets, reaching 80% of the overall portfolio in Q3 2025, up from 78% in the prior quarter. This shift is driven by a focus on first lien and unitranche loans, complemented by investments in its well-performing senior loan funds (SLP III and SLP IV) and its net lease subsidiary (NMNLC). While senior lending forms the bedrock, NMFC selectively invests in high-conviction junior capital positions, leveraging NMC's platform for attractive risk-adjusted returns.

A key strategic priority is to reduce portfolio concentrations, with a long-term goal for individual portfolio companies to represent less than 2% of total assets under management (AUM). The exploration of a potential $500 million portfolio sale to a third party is a direct initiative aimed at accelerating this diversification and reducing exposure to Payment-in-Kind (PIK) income. Management acknowledges that PIK levels have been a factor impacting stock performance and is committed to reducing PIK income to a target range of 10-12%. Recent actions, such as the partial sale of UniTek Global Services in February 2025, which returned $42 million and monetized accrued PIK, and the monetization of Office Ally's common equity in Q2 2025, underscore this commitment. These proceeds are strategically redeployed into cash-yielding loans or used for debt reduction and share repurchases.

Financial Performance and Liquidity Profile

NMFC's financial performance in the third quarter of 2025 reflects both the ongoing execution of its strategic priorities and the impact of broader market dynamics. Adjusted net investment income (NII) for Q3 2025 was $0.32 per share, fully covering the $0.32 per share dividend. This NII was supported by consistent recurring income from the loan portfolio, full utilization of the dividend protection program, and an incremental fee waiver. However, the net asset value (NAV) per share experienced a modest decline of $0.15 from Q2 2025, settling at $12.06, primarily due to unrealized depreciation across four investments, notably TVG-Edmentum Holdings, LLC, ACI Parent Inc., and TMK Hawk Parent, Corp.

Total investment income for Q3 2025 decreased by approximately $14.80 million, or 16%, year-over-year, to $80.53 million. This was mainly attributable to a lower invested asset base and slightly lower portfolio yields. Dividend income also saw a decrease of approximately $1 million, driven by a reduction in equity investments held. Conversely, total net operating expenses decreased by approximately $13.50 million in Q3 2025 compared to the prior year, a result of a lower invested asset base impacting management fees, an incentive fee waiver, and a decrease in total outstanding borrowings. For the nine months ended September 30, 2025, total investment income decreased by approximately $30.80 million, or 11%, compared to the same period in 2024.

NMFC maintains a robust liquidity profile and a well-managed capital structure. As of September 30, 2025, the net debt-to-equity ratio stood at 1.23:1, comfortably within the company's target range of 1:1.25. The company boasts a total borrowing capacity of $2.5 billion, with over $700 million available on its revolving lines, providing substantial flexibility. This liquidity position is critical for managing upcoming debt maturities, with approximately 60% of outstanding debt maturing in or after 2028. Recent actions, such as the repayment of the 7.5% convertible notes in October 2025 and the extension of the Unsecured Management Company Revolver's maturity to December 2030, demonstrate proactive liability management. Furthermore, the Wells Fargo (WFC) credit facility was repriced from SOFR plus 2.15% to SOFR plus 1.95% and its maturity extended to March 2030, reflecting best-in-class execution and strong lender confidence. NMFC's liability mix is also evolving, with 53% floating rate and 47% fixed rate, and a strategic target to shift to approximately 85% floating and 15% fixed to better align with its predominantly floating-rate asset base.

Risks and Outlook

While NMFC's defensive growth strategy provides a strong foundation, certain risks and challenges warrant attention. The slight decline in portfolio risk ratings in Q3 2025, with some names migrating down the scale, highlights ongoing credit monitoring needs. Specific concerns include two healthcare services companies facing lower growth and higher operating costs, and a commercial restoration services company impacted by reduced severe weather activity. A notable downgrade was Notorious Topco, LLC (Beauty Industry Group), moved to non-accrual status in Q3 2025 due to "persistent earnings headwinds due to weaker consumer demand, specific go-to-market challenges and tariffs on its China-oriented supply chain." Management, however, aims to recover at least full principal value on this investment, leveraging NMC's business-building expertise. Overall non-accruals remain low at $51 million, or 1.7% of the portfolio at fair value.

Looking ahead, NMFC's outlook is characterized by strategic optimism and clear execution plans. The company has declared a $0.32 per share dividend for Q4 2025, payable in December, with the dividend protection program firmly in place through Q4 2026. Management anticipates a productive period for LBO activity in 2026, driven by significant private equity dry powder and pressure to return capital to Limited Partners. NMFC is poised to capitalize on this environment, expecting to reduce non-yielding assets and exit more PIK positions in the coming quarters, targeting a PIK income level in the low teens. The exploration of a $500 million portfolio sale is a significant initiative to further diversify the portfolio and reduce PIK. Additionally, the newly authorized $100 million share repurchase program underscores management's belief that NMFC's current stock price, trading at a 20% discount to book value and offering an attractive dividend yield, represents a compelling entry point for investors.

Conclusion

New Mountain Finance Corporation stands as a compelling investment proposition, underpinned by its disciplined "defensive growth" strategy and the formidable backing of New Mountain Capital's operational and underwriting expertise. The company's consistent track record of low credit losses, coupled with proactive balance sheet optimization and a clear roadmap for enhancing income quality, reinforces its resilience in a dynamic market. While specific portfolio challenges and broader economic uncertainties exist, NMFC's strategic initiatives—including significant debt refinancing, targeted asset sales to reduce concentrations and PIK, and an aggressive share repurchase program—are designed to unlock substantial shareholder value. The current valuation, with a notable discount to book value and a robust dividend yield, presents a compelling opportunity for discerning investors seeking stable, consistent returns from a well-managed BDC.