Msc Income Fund Inc Stock

Greetings, and welcome to the MSC Income Fund Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's second quarter 2026 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; Nick Meserve, Managing Director and Head of the Private Credit Investment Group; David Magdol, President and Chief Investment Officer; and Cory Gilbert, Chief Financial Officer.

MSC Income Fund issued a press release yesterday afternoon that details the Fund's second quarter financial and operating results. This document is available on the investor relations section of the Fund's website at mscincomefund.com. The replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 14. Information on how to access the replay was included in yesterday's earnings release.

We also advise you that this conference call is being broadcast live through the internet and can be accessed on the Fund's homepage. Please note that information reported on this call speaks only as of today, August 7, 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 may contain forward-looking statements. Any 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, are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance.

The 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 Fund's filings with the Securities and Exchange Commission, which can be found on the Fund's website or at sec.gov.

MSC Income Fund 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 adjusted net investment income, or ANII, and ANII before taxes. ANII is Net Investment Income, or NII, as determined in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, excluding the impact of capital gains incentive fee.

ANII before taxes is NII, as determined in accordance with GAAP, excluding the impact of the capital gains incentive fee and any tax expenses included in NII. MSC Income believes that presenting ANII and ANII before taxes and the related per share amounts is a useful and appropriate supplemental disclosure for analyzing the Fund's financial performance, since the calculation of the capital gains incentive fee is based on realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in NII. 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 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. MSC Income Fund 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. Now I'll turn the call over to MSC Income Fund 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's doing well. Today's call will provide you with the Fund's key quarterly updates, after which we'll be happy to take your questions.

Before we provide our normal quarterly updates, I want to start by congratulating Nick Meserve on the recent announcement of his planned transition to Chief Executive Officer of the Fund in the fourth quarter of this year. Nick is uniquely qualified to assume the role of the Fund's CEO.

He has led the Fund's private loan investment strategy since the inception of the Fund and has been part of Main Street's private loan investment strategy and activities since he joined the Main Street investment team in 2012.

Nick has been a highly valuable member of our organization as we have grown the Fund historically, taken it public in 2025, and focused its investment strategy on private loans. I look forward to continuing to work closely with Nick in my planned future role as the Fund's Executive Chairman.

Now turning to the Fund's most recent operating results, we are pleased with the Fund's performance in the second quarter, which resulted in an annualized return on equity of 15.9% and a significant net fair value appreciation in the Fund's investment portfolio.

Based upon the quality of the Fund's existing investment portfolio, together with the favorable liquidity position and the current investment pipeline, we remain excited about our future expectations for the Fund. The Fund generated adjusted net investment income, or ANII, of $0.33 per share on the quarter, or $0.36 per share on a before-taxes basis. These results, combined with our positive outlook for the future, resulted in the Fund's most recent dividend announcements, which I will discuss in more detail later. The Fund finished the quarter with an NAV per share of $16.51, a 4.0% increase from prior quarter, and we continue to be pleased with the performance of the Fund's investment portfolio.

Cory will discuss our financial results in more detail.

The Fund's private loan investment activity improved significantly in the second quarter, but the Fund also experienced increased levels of repayments, resulting in a net increase in private loan investments of $10 million. The Fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments as we work to grow the Fund's investment portfolio.

This Fund is also focused on maximizing the benefits from its legacy lower middle market investment portfolio and eventually recycling this capital into private loan investments as investments are exited or repaid. Reflecting on this priority, we're pleased that the Fund exited its investments in one high-performing lower middle market portfolio company, Centre Technologies, in the second quarter at a realized gain of over $11 million and a meaningful premium to its March 31 fair value.

The Fund also continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation on those existing investments.

Nick and David will cover the Fund's investment activity in more detail. Based upon the Fund's results for the second quarter, the Fund's Board of Directors declared regular monthly dividends for the fourth quarter of $0.11 per share, payable in each of October, November, and December. And a supplemental dividend of $0.03 per share, payable in September, resulting in total dividends payable in the fourth quarter of $0.36 per share, consistent with the Fund's total quarterly dividends for each quarter since the Fund's listing in January 2025.

Going forward, the Fund expects to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include regular monthly dividends and a supplemental dividend to be set at a level generally consistent with the Fund's ANII before taxes per share.

Based upon the total dividends payable for the fourth quarter and the current stock price, the Fund is providing shareholders a current dividend yield of over 12%. As we look forward to the Fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as average.

We're excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies, and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the Fund's investment portfolio over the next several quarters. Now turning to other opportunities intended to add value to the Fund shareholders, we're pleased to announce that the Fund's Board of Directors recently authorized a new open market share repurchase plan under which the Fund may repurchase up to $20 million of Fund shares beginning in September 2026 and ending in February 2027 at times when the Fund shares are trading at predetermined levels below the Fund's NAV per share.

As I noted earlier, we have a high level of comfort about the quality of the Fund's investment portfolio and as a result believe that this repurchase plan can be used to create additional value for the Fund's shareholders. My last few comments are reminders of the continued support the Fund has received from Main Street Capital Corporation.

Since Main Street's wholly owned subsidiary was appointed the sole advisor to the Fund in October 2020, Main Street has purchased over $30 million of the Fund's common stock. In conjunction with the Fund's new repurchase plan, Main Street also authorized a new share purchase plan to purchase up to $20 million of the Fund's shares, with the terms of such plan being identical to the Fund's new open market share repurchase plan, resulting in a total of $40 million of potential purchases between the Fund and Main Street under such plans, and with any open market share purchases being split by the Fund and Main Street on a pro rata basis.

In addition, to show support for the Fund, Main Street, through its wholly owned investment advisor, voluntarily agreed to permanently waive approximately $260,000 of incentive fees earned for the second quarter to support the Fund's resulting ANII before taxes per share, resulting in total incentive fee waivers of $1.4 million over the last year.

We believe these actions demonstrate Main Street's commitment to the future success of the Fund and reinforce Main Street's confidence in the strength and quality of the Fund's investment portfolio and investment strategy. With that, I will turn the call over to Nick.

Thanks, Dwayne, and good morning, everyone. We are pleased with the performance of the Fund's private loan investment portfolio in the second quarter, which represents the largest portion of the Fund's investment portfolio and, as a reminder, is the Fund's sole focus with respect to new portfolio company investments.

The overall operating performance for most of the Fund's private loan portfolio companies continue to be positive, which contributed to the Fund's second quarter financial results. The Fund also benefited in the quarter from meaningful net fair value appreciation, based upon the positive performance and outlook for certain private loan portfolio companies where the Fund has an equity investment.

Given the current economic uncertainty that exists across certain parts of the economy, we are diligently working to stay in front of the Fund's portfolio companies to understand their exposures to changing environments. To date, based upon those ever-evolving discussions, we are comfortable with the future outlook for the portfolio. At quarter end, 93% of the private loan portfolio was comprised of secured debt investments, over 99% of which were first lien and 95% of which were floating rate loans.

The portfolio had an attractive weighted average yield of 10.4%, relatively consistent with the prior quarter end. During the second quarter, the Fund invested $62 million (sic) [ $62.2 million ] in the private loan portfolio, which after aggregate investment activity resulted in a net increase of $10 million.

The Fund ended with the second quarter with investments in 81 private loan portfolio companies, totaling $848 million (sic) [ $848.5 million ] of fair value, representing 61% of the Fund's total investment portfolio at fair value. As Dwayne mentioned, our current private loan pipeline is average. At the end of the second quarter, we have closed three new private loan portfolio companies. We expect M&A activity will be higher in the second half of the year, and expect that activity to continue to grow our pipeline. With that, I will turn the call over to David.

Thanks, Nick. Good morning, everyone. In addition to the private loan portfolio that Nick covered, the Fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the Fund partnered directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation, utilizing the customized one-stop debt and equity financing solutions provided by Main Street's lower middle market investment strategy.

After the listing of the Fund shares on the New York Stock Exchange in January 2025, the Fund no longer makes investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies.

I'm pleased to report that the overall operating performance for most of the Fund's lower middle market portfolio companies continues to be positive, which contributed to the Fund's second quarter results. Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of these lower middle market portfolio companies to continue to successfully navigate the current environment.

During the second quarter, the Fund completed $13 million in total lower middle market portfolio follow-on investments, which after aggregate investment activity resulted in a decrease in the lower middle market portfolio of $2 million.

Quarter end, the lower middle market portfolio had investments in 55 portfolio companies, totaling $504 million of fair value and representing 36% of the Fund's total investment portfolio. The lower middle market portfolio at fair value is comprised of 54% debt investments and 46% equity investments.

99% of these debt investments were first lien loans, and they had an attractive weighted average yield of 12.7%. Fund had equity ownership positions in all of its lower middle market portfolio companies, representing an 8% average ownership position. We expect that these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation, and eventually meaningful realized gains upon the future exit of these lower middle market investments.

A great recent example of the benefits that these portfolio companies can provide is the recent exit of the Fund's investments in Centre Technologies in the second quarter, which resulted in a realized gain of $11.6 million.

Finally, and as Dwayne mentioned, we continue to see interest from potential buyers in some of the Fund's lower middle market portfolio companies, which we expect will lead to favorable outcomes over the next few quarters.

Turning the Fund's total investment portfolio as of June 30, the Fund continues to maintain a highly diversified portfolio with investments in 144 portfolio companies spanning across numerous industries and end markets. The Fund's largest portfolio companies represented less than 4% of the total investment portfolio fair value quarter end and less than 4% of the total investment income for the trailing 12-month period, with most portfolio investments representing less than 1% of the Fund's income and assets. With that, I'll turn the call over to Cory.

Thank you, David, and thank you to everyone who has joined us today. The Fund's total investment income for the second quarter was $35.7 million, consistent with Q2 2025 and an increase of $1.6 million, or 4.7%, from the first quarter. Interest income for the second quarter increased by $0.7 million from a year ago and from the first quarter.

The increase in interest income from the prior year was principally attributable to higher average levels of income-producing investment portfolio debt investments, partially offset by a decrease in interest rates, primarily resulting from decreases in benchmark index rates on floating rate debt investments, and the negative impact from debt investments on non-accrual status. The increase in interest income from the first quarter was principally attributable to higher average levels of income-producing investment portfolio debt investments partially offset by the negative impact from debt investments on non-accrual status.

Fee income for the second quarter increased by $0.5 million from a year ago and by $0.7 million from the first quarter. The increase in fee income from both the prior year and the first quarter was primarily due to an increase in fees related to increased investment activity.

Dividend income for the second quarter decreased by $1.1 million from a year ago and increased by $0.3 million from the first quarter. The decrease in dividend income from the prior year was primarily due to a decrease in dividends from lower middle market and private loan equity investments.

The increase in dividend income from the first quarter was primarily due to an increase in dividends from lower middle market equity investments. In the second quarter of 2026, dividend included $0.5 million of non-recurring items. As we previously discussed, dividend income will fluctuate quarter to quarter based on the underlying performance, cash flows, and capital allocation activities of the Fund's portfolio companies and certain non-recurring items.

The second quarter included income considered less consistent or non-recurring in nature of $2.2 million. As we previously discussed, these non-recurring items vary quarter to quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment, repricing, and other activity related to debt investments.

These items were $1.4 million higher than the second quarter of 2025, and $1.6 million higher than the first quarter, and $1 million higher than the average of the prior four quarters.

The Fund's expenses net of waivers for the second quarter increased by $4.0 million from the second quarter of 2025 and increased by $5.5 million from the first quarter. The increase from the prior year was principally attributable to a $2.9 million increase in the capital gains incentive fee accrual, a $1.2 million increase in interest expense, and a $0.4 million increase in base management fees, partially offset by a $0.6 million decrease in incentive fee on income, net of waivers.

The capital gains incentive fee accrual increased by $2.9 million in the second quarter compared to no accrual a year ago due to the net fair value appreciation of the Fund's investments in the second quarter of 2026.

The increase in interest expense from a year ago was largely driven by an increase in average borrowings outstanding used to fund a portion of the growth of the Fund's investment portfolio and an increased weighted average interest rate on the Fund's unsecured debt obligations driven by the issuance of the May 2029 notes in the first quarter of 2026, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates.

The increase in base management fees from a year ago is a result of the Fund's increased average total assets. The $0.6 million decrease in the incentive fee on income, net of waivers, is the result of a decrease in the gross calculated incentive fee on income of $0.3 million and a $0.3 million voluntary permanent waiver of incentive fee on income by the Fund's Investment Advisor.

Decrease in the gross calculated incentive fee on income is a result of a decrease in pre-incentive fee NII.

The $5.5 million increase from the first quarter in the Fund's expenses net of waivers was primarily driven by increases of $3.6 million in the capital gains incentive fee accrual, $0.9 million in interest expense, and $0.7 million in incentive fee on income, net of waivers.

The $3.6 million increase in the capital gains incentive fee accrual from the first quarter reflects the $2.9 million increase to the accrual recorded in the second quarter of 2026 compared to the $0.6 million reduction in the first quarter. The accrual increase was the result of the net fair value appreciation of the Fund's investments in the second quarter. The increase in interest expense was primarily driven by an increase in weighted average balance of debt outstanding and an increase in effective interest rates on existing debt outstanding.

Increase in the net incentive fee on income was primarily due to the $0.7 million decrease in the voluntary waiver of incentive fee on income.

The Fund's expense ratio, calculated as the ratio of total non-interest operating expenses, excluding incentives, net of waivers, as a percentage of the Fund's average total assets, was 1.9% on an annualized basis for the second quarter, consistent with the prior year, and an increase from 1.8% in the first quarter.

The Fund's adjusted NII before taxes in the second quarter was $16.3 million, or $0.36 per share, decreasing from $17.3 million, or $0.37 per share, from the prior year. During the quarter, the Fund recorded a net increase in the fair value of its investments of $19 million, representing the impact of $9.9 million of net realized gains and $9.1 million of net unrealized appreciation. The net fair value increase was primarily attributable to an increase of $10.7 million in the private loan portfolio and $10 million in the lower middle market portfolio, partially offset by a decrease of $1.6 million in the residual middle market portfolio.

Overall, the Fund's operating results for the second quarter resulted in a net increase in net assets of $29.3 million, or $0.65 per share. The Fund's NAV per share was $16.51, a $0.64 increase from the first quarter and $0.98 above the Fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January 2025.

As of quarter end, the Fund had investments on non-accrual status comprising 1.9% of the total investment portfolio at fair value and 5.8% at cost. As of quarter end, the Fund's regulatory asset coverage ratio was 2.13 and its net debt to NAV ratio was 0.85.

As we look ahead, our $150 million of October 2026 notes mature on October 30, and we are actively evaluating our options for addressing that maturity ahead of the October date. We're confident in our ability to manage this maturity in a way that continues to support the Fund's growth and reflects our conservative approach to the Fund's capital structure. With that, I will now turn the call back over to the operator so we can take any questions.

[Operator Instructions] Our first question comes from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your question.

One around leverage, wondering if you could just give any updated outlook in terms of timeframes as you continue to ramp up to the targeted leverage ranges.

Sure, Ken. Good morning. Thanks for the question. I'd say the timing of that's hard to predict or difficult to predict. It's really going to come down to the pipeline and pace of investment activity on the private loan side. As you know, the Fund's sole investment strategy for new companies is focused on private loans.

It's going to be concentrated in that pipeline and those activities. I think we feel good about it today, but it's really hard to predict how long it'll take us to ramp. If you were to kind of use a best guess, I'd say the next 3 or 4 quarters.

I think we expect to have fairly significant investment activity and growth of the portfolio. You could also continue to have some accelerated repayments. So that'll be another governor that we just have to manage or navigate. But Nick, if you have any other color you want to add on the pipeline? I think it'll be the goal of the next three or four quarters to get back to the target leverage.

Okay, great. And one follow-up, if I may, just in terms of the private loans pipeline that you're seeing there, any particular attractive segments or opportunities that you're seeing within the pipeline? And maybe you could just also talk about some of the terms, pricing that you've been seeing on some of the more recent transactions?

Yes, I'd say from the target side of it, you know, I'd say the industries fit our existing portfolio. So not focused in any one industry or any one space. I think deals and portfolio companies that we've seen in the portfolio in the past are what we're targeting and what we're seeing in our pipeline.

Second question there on the terms. I'd say we're probably around the same spot we've been for the last quarter or so. Spreads have come wider since January, but we're probably in the same spot we were last time we talked about it last call.

Thank you. Our next question comes from the line of Arren Cyganovich with Truist Securities. Please proceed with your question.

What are you seeing from the competitive environment today in the part of the market? The pipeline's kind of average. Sometimes a little bit more of a competitive environment if it's not a ton of supply.

Yes, I do think that, you know, we talked about the last few quarters and really the last few years is the overall M&A activity in the space has been lower, especially on the private equity side. And so that has, I'd say, kept competition pretty strong. I think if we see that volume pick up, I think the overall competition level and potentially spreads and terms go a little wider as there's less capacity for the overall deals. But to date, in the last few years, we've really just seen a kind of muted M&A market. So if that does pick up, I'd see competition getting less going forward if that's the case.

Non-accruals ticked up a little bit this quarter. It does bounce around a decent amount from quarter to quarter. Where do you see your more of an average level of non-accruals, maybe on a cost basis? Your segment of the market, it seems just to be a tad higher than maybe in the upper.

I think what you said there, Arren, is correct. I think when we look at the non-accruals, at the end of the quarter, you know, they are a little elevated above where we've been historically. Obviously, you'd like that number to be as low as possible. It's never going to be zero, just given the nature of what we do.

But I think you're probably looking at something that's 2% on a cost basis, kind of 2% higher than where kind of more of a long-term average would be. So it's slightly elevated versus where it was on a longer-term historical average. But Nick, if you have a different view.

Yes, I think that's about where we'd like to target it at. I do think some of the times, look through our cost basis, we've got some names that have been on there for a long period of time. On the smaller end, some of it makes more sense to leave.

As we're working through restructuring or recovery on a deal, it makes sense to keep the debt outstanding, and we'll recover that over multiple years, in a liquidation scenario. And so some of those deals have been on there for a long period of time. It will be out there as we collect cash flow on an annual basis on it.

Thank you. Our next question comes from the line of Heli Sheth with Raymond James.

In terms of leverage, being that you're ramping up over the next few quarters, how are you weighing redeploying cash into new investments versus just taking advantage of current market discounts in order to repurchase stock?

I think we're taking what we think is a balanced approach. I think we're actively looking at taking both steps to create value. As you should have seen in the earnings release and as we talked about in our prepared comments, we are putting in place a share repurchase plan to take advantage of the discount that the stock has been trading at.

We think that's a good use of capital. We think it's a productive way to create value for the shareholder, but we also want to continue to deploy capital. We think it continues to be an attractive market on the private loan side for new investments and on the lower middle market side as we have follow-on opportunities. We view those opportunities to be very attractive, so we'll continue to deploy capital in those opportunities as well.

But I'd say we're trying to take a balanced approach between continue to deploy, grow the portfolio, diversify it, but also look at opportunities to redeem shares if the stock continues to trade at a significant discount.

Got it. That's helpful. And then switching gears a little bit to software, we've kind of seen pricing on software, pricing and spreads, over the past quarter based on what your peers are saying. And I think we've also noticed that a lot of other BDCs are sort of shifting the sectors they're investing in, in order to reduce their software exposure. Being that MSIF is sort of relatively underexposed to software, are you seeing any opportunities there?

Yes, I think software has never been a focus area for us. That's why our exposure there has been and continues to be very, you know, small or minor compared to most of the space. The types of companies we've always preferred are more basic, mature businesses, so nothing's changed there. And, you know, the fact that spreads may get a little bit wider there, I still don't think that's an area that we would expect to be active in.

[Operator Instructions] Our next question comes from the line of Melissa Wedel with UBS.

I have one more follow-up on the share repurchase authorization that you described in your press release. I'm curious, given how much capacity you have to increase leverage within the portfolio, how do you come to the size of that particular authorization at $20 million directly in the Fund and the timing of it through February 2027? It seems like sometimes when BDCs will put these into place, they can be perhaps larger, not necessarily fully used, and usually extend for a full year. Just like to understand that, thanks.

Thanks for joining us and thanks for the question. I'd say we don't have a super scientific analysis we went through. I think we sized the $20 million at a level that for 6 months we thought was a reasonable amount. We also took into consideration the continued support that Main Street Capital Corporation, the owner of the advisor, the fact that they were also going to participate in a purchase plan alongside the Fund for $20 million.

So we really look at the sizing of the plan at $40 million and given the market cap of the Fund and the fact that it's a 6-month time period, we just thought that was an adequate amount. But I wouldn't say it was super scientific. We took a number of different factors or data points into consideration and got to a number that we thought and the board thought was a reasonable amount to have as our repurchase activities.

Okay, thanks for that. And then a follow-up, just trying to get behind the NAV growth quarter over quarter. I mean, obviously you called out the $11 million-plus realized gain from exiting Centre Technologies. Does that imply that you've realized an exit value that was substantially above the prior quarter end mark? Just want to understand that. Thanks.

Yes, so in the case of Centre specifically, as you said, it was an attractive realized gain off the top of my head, it was an $11 million realized gain. And that realized gain was at a premium. I want to say it was a [ $1.5 million or $2 million ]. It was a [ $1.5 million ] higher than the fair value at 3/31. So it was meaningful, but it's not the sole driver of the increase in NAV. We had a number of other companies, both lower middle market and private credit, that contributed to our fair value appreciation in the quarter.

Just as a reminder for everyone, while the equity investment strategy for private loans is a small piece of the strategy, we do seek to make equity investments alongside our debt investments in a number of our private loans. Sometimes the private equity sponsor doesn't give us that opportunity because they want to keep all the equity, but certain situations they will allow us to be a small equity co-investor.

And we've had a couple of those companies where the company has performed exceptionally well and we're seeing the benefits of that performance come through in our fair value appreciation for the private loan portfolio. So it'd be a combination of those two on the fair value appreciation.

Okay, I appreciate that and apologies. I'm going to sneak in 1 more follow-up following along that line. When you see appreciation in some of the equity pieces like that, does that portend any, you know, increase in deal activity, is that a potentially attractive transaction for your private equity partners? Thanks.

It could be. I'd say the movement in fair value will primarily be driven, and this is both lower middle market and private loan. Primarily, it's going to be driven by fundamental performance of the company. EBITDA is growing. They're using free cash flow to de-lever, and typically it's a combination of both of those two. That's initially going to be the primary driver.

If you do get into investments where they start either getting inbound interest from third parties that want to acquire the company, or if we and our partners in the company start looking at strategic opportunities where there may be an interest in seeking an exit, as you get into that phase, then you'll see both the benefit of the performance plus you'll likely see some fair value appreciation if the market deems that to be an attractive investment.

So I'd say in the case of something like Centre, you would have seen, over the life of the investments, you would have, life of the investment, you would have seen both of those for the first, you know, 75% of our investment period would have been driven by fundamental EBITDA growth, deleveraging, had an acquisition plan that was very accretive and executed at a very high level by our management team partners there.

So you saw that drive fair value. And then probably 9 or 12 months prior to exit, as they started getting a lot of inbound interest, then you started seeing the valuation multiple increase as you started getting data points pointing to a higher valuation multiple than what we had at market, which once you start seeing that and it's credible, you can't ignore it as part of our valuation process.

Okay, great. Thanks for that context.

Thank you, and thanks for the questions.

Thank you. And we have reached the end of the question-and-answer session and therefore I would like to turn the call back over to management for closing remarks.

We just want to say thank you again, everyone, for joining us this morning. We appreciate the continued support of the Fund shareholders and we look forward to our next call in early November after we release our results for the third quarter.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Greetings, and welcome to the MSC Income Fund First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Zach Vaughan. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund'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; Nick Meserve, Managing Director and Head of Private Credit Investment Group; and Cory Gilbert, Chief Financial Officer.

MSC Income Fund issued a press release yesterday afternoon that details the fund's first quarter financial and operating results. This document is available on the Investor Relations section of the fund's website at mscincomefund.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 earnings release.

We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the fund's homepage. Please note that information reported on this call speaks only as of today, May 8, 2026, 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 may 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 fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. MSC Income Fund 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 adjusted net investment income, or ANII, and ANII before taxes. ANII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of capital gains incentive fee. ANII before taxes is NII, as determined in accordance with GAAP, excluding the impact of any tax expenses included in NII and the capital gains incentive fee.

MSC Income believes that presenting ANII and ANII before taxes and the related per share amounts is useful and appropriate supplemental disclosure for analyzing the fund's financial performance since the calculation of the capital gains incentive fee is based on the realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in the NII. 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. An additional key financial metric that management will be discussing on this call is net asset value, or NAV. NAV is defined as total assets minus total liabilities and is also reported on a per share basis.

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 MSC Income Fund'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 you with the fund's key quarterly updates, after which we'll be happy to take your questions.

We are pleased with the fund's performance in the first quarter given the backdrop of significant economic and geopolitical uncertainties. Despite these ongoing uncertainties, we're seeing an improved lending environment and increased opportunities in the fund's private loan investment strategy, and we believe the fund is well positioned to capitalize on and generate attractive returns on those opportunities.

Based upon the quality of the fund's existing investment portfolio, together with a favorable liquidity position and expanded regulatory leverage capacity, which became effective at the end of January 2026 and the current investment pipeline, we remain excited about our future expectations for the fund.

We are also confident of the fund's sole focus on its private loan strategy with respect to new portfolio company investments and the growth of recurring interest income from such debt investments, together with the fund's contractual future base management fee reductions as the fund's lower middle market investments decrease as a percentage of its total investment portfolio, which strengthen the fund's ability to deliver attractive recurring dividends and favorable total returns to the fund's shareholders in the future.

The fund generated adjusted net investment income, or ANII, of $0.34 per share in the quarter or $0.36 per share on an ANII before taxes basis. These results, combined with our positive outlook for the future resulted in our most recent dividend announcements, which I will discuss in more detail later. The fund finished the quarter with an NAV per share of $15.87, a $0.02 increase from the prior quarter, and we continue to be pleased with the performance of the fund's investment portfolio. Cory will discuss our financial results in more detail.

The fund's private loan investment activity in the first quarter was slower than our expected normal quarterly activity, primarily due to lower overall levels of private equity industry investment activity, and resulted in a net increase in private loan investments of $17 million. Despite this slower investment activity, the fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments, as we work to grow the fund's investment portfolio.

The fund is also focused on maximizing the benefits from its legacy lower middle market investment portfolio and eventually recycling this capital into private loan investments as investments are exited or repaid. As part of this focus, the fund continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation on those existing investments.

We also continue to see significant interest from potential buyers in several of the fund's lower middle market portfolio companies, which we expect will lead to favorable realizations over the next few quarters. Nick and David will cover the fund's investment activity in more detail.

Earlier this week, the fund announced a change to its regular dividend payment frequency from quarterly to monthly beginning in July 2026, which we believe is more shareholder friendly and is responsive to specific shareholder feedback. Based upon the fund's results for the first quarter, the fund's Board of Directors declared regular monthly dividends for the third quarter of $0.11 per share payable in each of July, August and September and a supplemental dividend of $0.03 per share payable in September, resulting in total dividends payable in the third quarter of $0.36 per share, consistent with the fund's total quarterly dividends for each quarter since the fund's listing in January 2025.

Going forward, the fund expects to continue to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include regular monthly dividends and a supplemental dividend to be set at a level generally consistent with the fund's ANII before taxes per share.

Based upon the total dividends payable for the third quarter and the current stock price, the fund is currently providing its shareholders a dividend yield of 11%. As we look forward to the fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as average.

We are excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies, and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters.

My last few comments are reminders of the continued support the fund has received from Main Street Capital Corporation. Since Main Street's wholly owned subsidiary was appointed the sole adviser to the fund in October 2020, Main Street has purchased over $30 million of the fund's common stock. In conjunction with the fund's equity offering in January 2025, Main Street entered into an open market share purchase plan to purchase fund shares at times when the fund shares were trading at predetermined levels below the fund's NAV per share with the terms of such plan being identical to the fund's open market share repurchase plan and with any share purchases being split by the fund and Main Street on a pro rata basis.

Under these plans, each of which expired at the end of March, Main Street purchased over $8 million and the fund repurchased over $27 million of the fund stock. As an additional show of support for the fund, Main Street through its wholly owned investment adviser voluntarily agreed to permanently waive $1 million of the incentive fees earned for the first quarter to support the fund's resulting ANII before taxes per share. We believe these actions demonstrate the fund's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy.

With that, I will turn the call over to Nick.

Thanks, Dwayne, and good morning, everyone. We are pleased with the performance of the fund's private loan investment portfolio in the first quarter, which represents the largest portion of the fund's investment portfolio and which, as a reminder, is now the fund's sole focus with respect to new portfolio company investments. The overall operating performance for most of the fund's private loan portfolio companies continued to be positive, which contributed to fund's first quarter financial results.

The fund benefited from a realized gain of $3.1 million from the exit of one of its equity investments in a private loan portfolio company in the first quarter, which illustrates for the second quarter in a row the opportunity that can be available from these equity co-investments. Given the current economic uncertainty that exists across certain parts of the economy, we are diligently working to stay in front of the fund's portfolio companies to understand their exposures to changing environments.

To date, based upon these ever-evolving discussions, we are comfortable with the future outlook for the portfolio. At quarter end, 93% of the private loan portfolio was comprised of secured debt investments, over 99% of which were first lien and 96% of which were floating rate loans. Portfolio had an attractive weighted average yield of 10.5%, which was down 20 basis points from the end of 2025, as a result of decreases in the SOFR rates for these floating rate debt investments and tighter spreads on new investments over the past year.

During the first quarter, the fund invested $55 million in the private loan portfolio, which after aggregate investment activity resulted in a net increase of $17 million. Fund ended the first quarter investments in 80 private loan portfolio companies, totaling $823 million of fair value and representing 60% of the fund's total investment portfolio at fair value.

As Dwayne mentioned, our private loan pipeline is average. While we began the year seeing increased private equity activity, the current backdrop of economic and geopolitical uncertainties has slowed the pace of new deal processes that were launched in the second half of the first quarter.

While the volume of deal flow has softened, we do believe the overall spread environment has widened, and we expect overall terms to be more lender-friendly the rest of the year, and we continue to see what we believe are attractive opportunities.

With that, I'll turn the call over to David.

Thanks, Nick, and good morning, everyone. In addition to the private loan portfolio that Nick covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the fund partnered directly with the company's existing business owners and management team through co-investments at Main Street Capital Corporation utilizing the customized one-stop debt and equity financing solutions provided in Main Street's lower middle market investment strategy.

After the listing of the fund's shares on New York Stock Exchange in January 2025, the fund no longer makes investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies. We are pleased to report that the overall operating performance for the fund's lower middle market portfolio companies continues to be positive, which contributed to the fund's first quarter results.

Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of these lower middle market portfolio companies to continue to successfully navigate the current environment. During the first quarter, the fund completed $19 million in total lower middle market follow-on investments, which after aggregate investment activity resulted in a net increase in the lower middle market portfolio of $15 million.

At quarter end, the lower middle market portfolio had investments in 55 portfolio companies totaling $508 million of fair value and representing 37% of the fund's total investment portfolio. The lower middle market portfolio at fair value is comprised of 54% debt investments and 46% equity investments, 99% of these debt investments were first lien loans, and they had an attractive weighted average yield of 12.6%.

The fund had equity ownership positions in all of its lower middle market portfolio companies, representing an average 8% ownership position. We expect that these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation and eventually meaningful realized gains upon the future exit of these lower middle market investments. As Dwayne mentioned, we continue to see interest from potential buyers in some of the fund's lower middle market portfolio companies, which we expect will lead to favorable outcomes over the next few quarters.

Turning to the fund's total investment portfolio as of March 31, the fund continued to maintain a highly diversified portfolio with investments in 143 portfolio companies spanning across numerous industries and end markets. Fund's largest portfolio companies represented less than 4% of the total investment portfolio at fair value at quarter end and less than 4% of the total investment income for the trailing 12-month period, with most portfolio investments representing less than 1% of the fund's income and assets.

With that, I will turn the call over to Cory.

Thank you, David, and thank you to everyone who has joined us today. The fund's total investment income for the first quarter was $34.1 million, an increase of $0.9 million or 2.6% from the first quarter of 2025 and a decrease of $0.8 million or 2.4% from the fourth quarter. Interest income for the first quarter increased by $2 million from a year ago and by $0.5 million from the fourth quarter.

The increase in interest income from the prior year and from the fourth quarter was principally attributable to higher average levels of income-producing investment portfolio debt investments, partially offset by a decrease in interest rates, primarily resulting from decreases in benchmark index rates on floating rate debt investments.

Fee income for the first quarter increased by $0.5 million from a year ago and by $0.4 million from the fourth quarter. The increase in fee income from both the prior year and the fourth quarter was primarily due to an increase in fees related to increased investment activity. Dividend income for the first quarter decreased by $1.6 million from a year ago and by $1.8 million from the fourth quarter.

The decrease in dividend income from both the prior year and the fourth quarter was primarily due to a decrease in dividends from the lower middle market equity investments and included decreases related to certain nonrecurring items of $0.2 million from a year ago and $1.2 million from the fourth quarter.

As we previously discussed, dividend income will fluctuate quarter-to-quarter based on the underlying performance, cash flows and capital allocation activities of the fund's portfolio companies and certain nonrecurring items. The first quarter included income considered less consistent or nonrecurring in nature of $0.6 million.

As we previously discussed, these nonrecurring items vary quarter-to-quarter and can include dividend income from equity investments and interest and fee incomes from accelerated prepayment, repricing and other activity related to debt investments. These items were $0.2 million lower than the first quarter of 2025 and $1.3 million lower than the fourth quarter and $0.6 million lower than the average of the prior 4 quarters.

The fund's expenses net of waivers for the first quarter increased by $0.4 million from the first quarter of 2025 and decreased by $3.7 million from the fourth quarter. The increase from prior year was principally attributable to increases of $0.7 million in interest expense, $0.3 million in base management fee and $0.1 million in the incentive fee, net of waivers, partially offset by a decrease of $0.6 million in the capital gains incentive fee accrual.

The increase in interest expense from a year ago was largely driven by an increase in average borrowings outstanding used to fund a portion of the growth of the fund's investment portfolio, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates and decrease to the applicable spread resulting from the amendment on the SPV Facility in March of 2025.

The decrease in base management fees from a year ago is primarily the result of increased average total assets, partially offset by the full quarter benefit of the lower base management fee percentage under the amended advisory agreement compared to a partial quarter benefit in the first quarter of 2025. $0.1 million increase in incentive fee on income net of waivers is a result of an increase in the gross calculated incentive fee on income of $1.1 million, partially offset by a $1 million voluntary waiver of incentive fee on income by the fund's investment adviser.

The increase in the gross calculated incentive fee on income is the result of the amended advisory agreement. The capital gains incentive fee accrual was reduced by $0.6 million in the first quarter compared to no accrual a year ago due to the net fair value depreciation of the fund's investments in the first quarter of 2026. The $3.7 million decrease from the fourth quarter in the fund's expenses net of waivers was primarily driven by decreases of $3.4 million in the capital gains incentive fee and $1.3 million in the incentive fee on income, net of waivers, partially offset by a $0.8 million increase in interest expense and base management fees.

$3.4 million decrease in the capital gains incentive fee accrual from the fourth quarter reflects a $0.6 million reduction to the accrual recorded in the first quarter of 2026, compared to the $2.8 million accrual in the fourth quarter. The accrual reduction was the result of the net fair value depreciation of the fund's investments in the first quarter.

Increase in interest expense was primarily driven by an increase in average borrowings outstanding, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates. The decrease in incentive fee on income was primarily due to the voluntary incentive fee waiver by the adviser.

The fund's expense ratio calculated as the ratio of total noninterest operating expenses, excluding incentive fees, net of waivers, as a percentage of the fund's average total assets was 1.8% on an annualized basis for the first quarter, a decrease from 1.9% in the prior year and was consistent with the fourth quarter. The fund's adjusted NII before taxes in the first quarter was $16.6 million, or $0.36 per share, decreasing from $16.8 million, or $0.38 per share, from the prior year.

During the quarter, the fund recorded a net decrease in the fair value of its investments of $2.9 million, representing the impact of $0.2 million of net realized losses and $2.6 million of net unrealized depreciation. The net fair value decrease was attributable to a decrease of $7.5 million in the private loan portfolio, $0.8 million in the residual middle market portfolio, partially offset by an increase of $5.1 million in the lower middle market portfolio.

Overall, the fund's operating results from the first quarter resulted in a net increase in net assets of $13.2 million. After giving effect to the capital transactions, including dividends to shareholders and the repurchase of $16 million of the fund's common stock at prices below net asset value, the fund's NAV per share was $15.87, a $0.02 increase from the fourth quarter and $0.34 above the fund's public offering -- price per share in the public offering and listing on the New York Stock Exchange in January of 2025.

Share repurchases were accretive to NAV per share, contributing approximately $0.08 per share to the fund's NAV per share during the quarter. As of quarter end, the fund had investments on nonaccrual status, comprising 1.1% of the total investment portfolio at fair value and 4.2% at cost.

As of quarter end, the fund's regulatory asset coverage ratio was 2.11, and its net debt to NAV ratio was 0.88. During the first quarter, we strengthened our capital structure by issuing $150 million of privately placed unsecured notes in March at a 6.34% rate, maturing in May of 2029, as we continue to address near-term maturities and improve the fund's capital structure.

With that, I will now turn the call back over to the operator so we can take any questions.

[Operator Instructions] Our first question is from Robert Dodd with Raymond James.

Just -- I sort of asked this on the other call earlier, but just looking at the forward outlook, I mean, over the -- this was obviously on the private loan side, a slower quarter, but there's been several of those in and above when we talked about it before. Actually, there's a sort of pricing activity levels. I mean, what's the confidence, especially now that you have the higher leverage limit? What's the confidence you can actually really increase the size of the private loan book to kind of optimize ROE of this? I mean, obviously, more short, medium term rather than -- obviously, you can get there long term, but what's the confidence that, that can meaningfully grow this year?

Sure, Robert. I think it's going to be somewhat dictated by the market opportunity. The fund, as you know, is solely focused on private loan for new investments. So the pace in the amount of growth that the fund has is going to be subject to what we see in the broader market. So I think we have confidence. We do think that the overall environment has improved. But a lot of the pace is going to be dictated by how active private equity sponsors are in this environment. I think right now, we think there will be activity, but that will play out over the next couple of quarters. So I think there is some you kind of uncertain nature of that activity because it is going to be dictated by the sponsors.

Nick, I don't know if you want to add anything to that?

No, I think that pretty much covers it. Like we said earlier, I think it's going to be a -- the pricing has come towards us. And so I think there were some pricing in the last 6, 12 months that just didn't fit us, and we thought it was too low for the risk, and we pass on those deals of lowering our pricing. I think that's come in to us now. And now, we seem to have the deal volume pick up to match the overall origination.

Our next question is from Brian McKenna with Citizens.

So somewhat related, but just trying to think through the trajectory of ROEs over the next year or so. So I think you're in a great position to deploy capital, I think it'll be pretty prudent, but that's been running the ROE on a net NII basis. It's been running about 8.5% the last couple of quarters. I mean, should we start -- should we expect that will start to expand here back to 9% plus just as leverage is optimized? Like, I'm just trying to think through the trajectory from here for that.

Sure, Brian. You mentioned kind of the concept of NII ROE. I think that's going to be dictated by 2 things: one, you and Robert hit on is that the pace of growth and deployments and how much new activity we have there that could drive some incremental net investment income ROE. The other piece will be any movement in nonaccruals, whether it's an existing nonaccrual going back on accrual or something that's on accrual today going the other direction. Those would be the big drivers. I don't think that's a surprise when you look at the drivers there, but those are the 2 big catalysts.

I think on the net income ROE, which is the number we typically spend more time on, that will be dictated also by the performance of the private loans, but we still have about 1/3 of the portfolio invested in lower middle market assets. And to the extent we have good outcomes on any of those equity investments, that will be -- continue to be a catalyst or a positive driver on net income ROE. I think that's the way we would look at it, Brian.

Got it. All right. That's helpful. And then just in terms of the lower middle market equity portfolio, David, I think you mentioned there's still a pipeline there for some additional realization markup events. Is there any way just to kind of quantify that? And then, just thinking through the overall mix of the book, private loans versus the lower middle market, like when does that ultimately kind of hit that next threshold that will start to lower the fee to the adviser? I'm just trying to think through the mix here over the next couple of years for the portfolio.

Yes, Brian. I would say when you look at the catalyst to get it -- get the portfolio to where the lower middle market is less than 20%, there has to be a lot of turnover. The good news for the portfolio is that it's very diversified. The bad news is that it's very diversified. So even if you have 2, 3 or 4 lower middle market investments exit in the near term, while they will move that 33% plus or minus number down, it's going to take a while before it moves down below 20%. So the real catalyst will be more the growth of the portfolio, deployment of private loans and continued access to capital. We have to continue to raise additional capital to make sure we can have access to the full leverage capacity. You have to have each of those things get addressed, but it's really going to be a driver -- it's going to be driven more by the deployment of new private loans and less at least near term by the turnover of the lower middle market portfolio.

Our next question is from Arren Cyganovich with Truist Securities.

Just following up on the last question about the lower middle market potential sales of those loans. What type of buyers are these? Are these institutional buyers that you're looking to potentially sell these investments to?

Yes. So just to kind of clarify that, Arren, we -- if we have exits there, it's not us selling our investment, selling the loan to a third party, this would be a result of the portfolio company going through a change of control transaction. And as a result of that change of control, our debt is repaid and then our equity is also sold. So that would be the driver of the activity. And those buyers would typically be 1 of 2 sets of buyers, either a traditional private equity firm that is the buyer or it's a strategic that may or may not be backed by a private equity firm, but it would be more of a traditional private company buyer.

But David, feel free to add on.

One thing I'd add is that we have companies that get tracked for a long time by various buyers. The management teams take incoming calls, and it's a really powerful position for us to be in, where we're not necessarily actively managing or the company is not actively marketing the company. But as buyers come in both financial and strategic, we're monitoring them and developing relationships at the portfolio company level over a number of years.

And when you hear us giving guidance, it's when the portfolio company execs have come to the conclusion that they can maximize their value, either through a process or through an incoming phone call. So it's very much dictated by them and their sense of how the windshield looks versus the rearview mirror when they can maximize value. But it is not -- it's different than institutional investors looking at private loan portfolios like Dwayne said for the majority of the industry.

Okay. Sorry, I just misheard whenever you were discussing it. So that makes much more sense to me. That's all I have.

[Operator Instructions] Our next question is from Cory Johnson with UBS.

Yes. So I just want to talk a little bit about like, I guess, the competition in the lower middle market. I have been hearing that there is sort of an increased competition there, but your yield sort of held up, and it seems like your term you're saying are, if anything, strengthening. So I guess, are you seeing any increased competition? And then also, is there -- given your platform and low leverage that you currently have and maybe a little bit of hampered competition from some of the other players, are you seeing any opportunity to possibly move upmarket and do deals? And is that something you would actually look to do?

Yes, Cory, maybe I'll -- thanks for the question, maybe I'll address that a couple of ways, and I'll let Nick or David add on here. So I think when we look at Main Street's description of our strategies, lower middle market is very different than what you would hear from other BDCs. Other BDCs use the term lower middle market. And I think they're referring purely to size.

In the case of the Main Street platform, we're referencing more of a strategy where we are partnering just like we have for the last 20-plus years with the existing owner-operator and their management team to provide a structured transaction, where the Main Street platform is an investor in both the debt and the equity. So again, something that's very different than what you would see at other BDCs execute from an investment strategy standpoint.

If you look at the lower middle market strategy, again, which is not private -- it's not the MSC Income Fund's strategy going forward, they do have an existing portfolio. About 1/3 of the portfolio is in lower middle market, and we do see follow-on opportunities in those companies. And when we see those, the fund will continue to participate in that, and we think those are great opportunities to create value, both from an interest income standpoint and a long-term equity value creation standpoint. But the sole strategy from a new portfolio company standpoint is in private loan, which is also lower middle market from a size standpoint.

The size of those companies at initial investment are broadly between kind of 7.5% and [ 50% ] is where most of them fit. Most of it would be on the bottom 1/3 of that range. I'd say that's where we do compete with other BDCs or other private credit firms. And I think we've long been in that space, just like we have in our lower middle market strategy, and we haven't seen a lot of changes, kind of new entrants into that space. And I'd say we haven't seen a lot in the current environment. It is a market or a part of the segment that does have competition. So it's not something that Main Street is the only party that's providing debt financing or debt capital to those private equity sponsors. So it is -- it does have competition. But I'd say we continue to view it as a market that's attractive, both from a spread standpoint and a structure standpoint relative to the upper -- kind of upper middle market.

And as a result, we do not have plans today across the Main Street platform, MSC Income Fund, Main Street or private loan kind of private funds that are focused on the private loan strategy. We don't have an expectation to move upmarket across any of those different entities.

But Nick, on the new private loan side, if you want to give some additional color on the competitive landscape or the marketplace?

I'd say over the last, call it, 12 to 24 months, we really haven't seen any new entrants in the market, I think, from a combination there of a fundraising difficulty for smaller or new entrants. We just haven't seen that happen. I think a lot of the fundraising has really drifted towards the upper middle market, and the larger side is competing in the broad syndicated side. And so we're seeing the same handful of players. One interesting one on the lower middle market and the private credit side is we don't see the same 6 or 7 or 8 firms in every single transaction. There will be 5 or 6 people bidding for each transaction, but it's a very different group on any individual deal.

Cory, did we answer your question or address the topics you're trying to hit on?

Yes, you did.

This concludes our question-and-answer session. I would now like to turn the floor back over to management for any closing remarks.

I just want to thank everybody for joining us this morning, and we look forward to talking to you again in early August after our second quarter earnings release. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you.

Greetings, and welcome to the MSC Income Fund Fourth Quarter Earnings Conference Call. [Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce Zach Vaughan. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's Fourth Quarter 2025 Earnings Conference Call. Joining me with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; Nick Meserve, Managing Director and Head of the Private Credit Investment Group; and Cory Gilbert, Chief Financial Officer. MSC Income Fund issued a press release yesterday afternoon that details the fund's fourth quarter and full year financial and operating results. Document is available on the Investor Relations section of the fund's website at mscincomefund.com.

A replay of today's call will be available beginning an hour after the completion of the call and will remain available until March 6. The Information on how to access the replay was included in yesterday's earnings release. We also advise you that this conference call is being broadcast live to the Internet and can be accessed on the fund's home page.

Please note that information reported on this call speaks only as of today, February 27, 2026, 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 may contain forward-looking statements. Any 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. 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 fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov.

MSC Income Fund 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 adjusted net investment income, or ANII. ANII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding the impact of the capital gains incentive fee.

MSC Income Fund believes presenting ANII and the related per share amount is useful and appropriate supplemental disclosure for analyzing the fund's financial performance since the calculation of the capital gains incentive fee is based on realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in NII.

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. MSC Income Fund defines ROE as the net increase in net assets resulting from operations divided by average quarterly NAV.

As a reminder, the fund effectuated a 2-for-1 reverse stock split on December 16, 2024. All per share amounts, share data related information discussed on this call today reflect the effect of the reverse stock split. 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.

Now I'll turn the call over to MSC Income Fund'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 provide you with the fund's key quarterly updates while also providing a few updates on the fund's performance for the full year. Following our comments, we'll be happy to take your questions.

We're very pleased with the fund's performance in the fourth quarter which resulted in a return on equity of 16.3%, favorable adjusted net investment income per share and a significant increase in the fair value of the fund's investments including the benefits of net realized gains in both the fund's private loan and lower middle market portfolios, which resulted in a significant increase in NAV per share.

The fund also produced favorable investment activity in the fourth quarter which generated meaningful growth of its investment portfolio. After the fund's positive performance in the first 3 quarters of 2025, the fund's strong performance in the fourth quarter resulted in an ROE of 12.5% for the full year and pretax adjusted NII per share in excess of the fund's total dividends paid.

Based upon the quality of the fund's existing investment portfolio, combined with the fund's expanded regulatory leverage capacity, which became effective at the end of January 2026 and which provides the fund significant capacity to add additional debt to fund the future growth of its investment portfolio and the current attractive pipeline of new private loan investment opportunities, we remain excited about the future expectations for the fund.

We're also confident that the fund's sole focus on its private loan strategy with respect to new portfolio company investments and the growth of recurring interest income from such debt investments, together with the fund's contractual future base management fee reductions as the fund's lower middle market investments decreased as a percentage of its total investment portfolio which strengthened the fund's ability to deliver attractive recurring dividends and favorable total returns to the fund shareholders in the future. Fund generated adjusted net investment income, or ANII, which is NII, excluding the impact of the capital gains incentive fee of $0.34 per share in the quarter or $0.37 per share on a pretax ANII basis.

These results, combined with our positive outlook for the future, resulted in our most recent dividend announcements, which I will discuss in more detail later. The fund finished the quarter with NAV per share of $15.85, a $0.31 increase from the prior quarter, we continue to be pleased with the performance of the fund's investment portfolio, including both the private loan and lower middle market portfolios.

Before I will discuss our financial results in more detail. Consistent with our guidance last quarter, the fund's private loan investment activity in the fourth quarter returned to our expected normal level of quarterly activity and resulted in a net increase in private loan investments of $57 million. The fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments as we work to grow the fund's investment portfolio.

Consistent with my comments last quarter, we're pleased that the fund successfully exited 2 private loan portfolio equity investments in the fourth quarter with these activities resulting in total realized gains of $16 million (sic) [ $15.9 million ] or $0.34 per share both at meaningful premiums to the fund's third quarter fair values. Fund is also focused on maximizing the benefits from its legacy lower middle market investment portfolio and recycling this existing capital into private loan investments as investments are exited or repaid. Part of these activities, the fund fully exited its investments in one high-performing lower middle market portfolio company, Mystic Logistics in the fourth quarter, resulting in a $6 million realized gain. We also continue to see significant interest from potential buyers in several of the fund's lower middle market portfolio companies, which we expect will lead to additional favorable realizations over the next few quarters.

Fund also continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation. Nick and David will cover the fund's investment activity in more detail.

Based upon the fund's results for the quarter and its future outlook, earlier this week, the fund's Board of Directors declared a regular quarterly dividend of $0.35 per share and a supplemental dividend of $0.01 per share, both of which are payable on May 1, 2026, to shareholders of record as of March 31, 2026.

Going forward, the fund expects to continue to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include a regular quarterly dividend and a supplemental dividend to be set at a level generally consistent with the fund's pretax ANII per share. Based upon the total dividends payable on May 1 and the current stock price, the fund is currently providing its shareholders a dividend yield at 11.5%.

As we look forward to the fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as above average. We're excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies, and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters.

My last few comments are reminders of the continued support the fund has received from Main Street Capital Corporation. Main Street's wholly owned subsidiary was appointed the sole advisor to the fund in October 2020. Main Street has purchased over $27 million of the fund's common stock. In conjunction with the fund's equity offering in January 2025, Main Street entered into an open market share purchase plan to purchase up to $20 million of the fund's shares for a 12-month period beginning in March 2025 at times when the fund shares are trading at predetermined levels below the fund's NAV per share with the terms of such plan being identical to the fund's open market share repurchase plan to purchase up to $65 million of the fund shares and with any open market share purchases being split by the fund and Main Street on a pro rata basis.

Through today, Main Street has purchased over $5 million and the fund has repurchased over $18 million under these plans. We believe Main Street's significant equity ownership in the fund and its participation in the post-listing share purchase plan demonstrates Main Street's commitment to the future success of the fund and reinforces Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy.

With that, I'll turn the call over to Nick.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we are pleased with the performance of the fund's private loan investment portfolio in the fourth quarter, which represents the largest portion of the fund's investment portfolio in which, as a reminder, is now the fund's sole focus with respect to new portfolio company investments.

The overall operating performance for most of the fund's private loan portfolio companies continue to be positive, contributed the fund's favorable fourth quarter financial results. As we previously noted, over the past few years, the fund has seen softness in certain private loan portfolio companies within the consumer space.

We have been and are working on maximizing recoveries on those specific investments over the next few years. One of the favorable realized exits in the fourth quarter that Dwayne mentioned was a previously restructured portfolio company with consumer exposure. Due to the significant efforts and successes of that portfolio company's management team, the hard work of our team and the patience to work through a difficult situation, we ended up with a positive outcome. We expect and hope to have similar outcomes on several previously restructured investments in the future.

Fund also benefited from a realized gain of $13.5 million from the exit of one of its equity investments in a private loan portfolio company in the fourth quarter, which illustrates the opportunity that can be available in the future from these equity co-investments.

Given the current economic uncertainty that exists across certain parts of the economy, we are diligently working to stay in front of the fund's portfolio companies to understand their exposures to changing environments. To date, based upon these ever-evolving discussions, we are comfortable with the future outlook for the portfolio. At quarter end, 92% of the private loan portfolio was comprised of secured debt investments over 99% of which were first lien and 96% of which were floating rate loans. Portfolio had an attractive weighted average yield of 10.7%, which was down 130 basis points from the end of 2024 primarily as a result of decreases in the SOFR rates for these floating rate debt investments.

But we're also starting to see the tighter spreads on new investments start to bring down the portfolio average. During the fourth quarter, the fund invested $101 million in the private loan portfolio, which after aggregate investment activity, resulted a net increase of $57 million. Fund ended the fourth quarter investments in 81 private loan portfolio companies totaling $809 million of fair value and representing 61% of the fund's total investment portfolio at fair value. As Dwayne mentioned, our private loan pipeline is above average, continue to see increasing private equity activity, and that is delivering both good new origination levels and replenishing the pipeline.

With that, I'll turn the call over to David.

Thanks, Nick, and good morning, everyone. In addition to the private loan portfolio that Nick just covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the fund partner directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation utilizing the customized one-stop debt and equity financing solutions provided in Main Street's lower middle market investment strategy.

After the listing of the fund shares on New York Stock Exchange in January of 2025, the fund no longer makes investments in new lower middle market portfolio companies but continues to participate in follow-on investments in its existing lower middle market portfolio companies. We are pleased to report that the overall operating performance for most of the fund's lower middle market portfolio companies continues to be positive, which contributed to the attractive fourth quarter financial results.

These contributions included both strong dividend income and continued fair value appreciation. During the fourth quarter, the fund completed $23 million in total lower middle market follow-on investments which after aggregate investment activity resulted in a net increase in the lower middle market portfolio of $15 million.

At quarter end, the Lower Middle Market portfolio had investments in 55 portfolio companies totaling $488 million of fair value and representing 36% of the fund's total investment portfolio. The lower middle market portfolio at fair value was comprised of 53% debt investments and 47% equity investments. 99% of these debt investments were first-lien loans and they had an attractive weighted average yield of over 12%. The fund had equity ownership positions in all of its lower middle market portfolio companies, representing an 8% average ownership position.

We expect these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation and eventually meaningful realized gains upon the future exit of these lower middle market investments.

As Dwayne mentioned, we continue to see significant interest from potential buyers in several of the funds lower middle market portfolio companies, which we expect will lead to favorable realizations and additional fair value appreciation over the next few quarters. A great recent example of the benefits of these portfolio companies can provide is the recent exit of the fund's investment in Mystic Logistics in the fourth quarter. This exit resulted in a realized gain of $6 million. Also notable is the fact that Mystic Logistics paid total dividends to the fund of $5.5 million over the life of the investment.

Turning to the fund's total investment portfolio as of December 31, the fund continued to maintain a highly diversified portfolio with investments in 144 portfolio companies spanning across numerous industries and end markets. The fund's largest portfolio companies represented less than 4% of the total investment portfolio at fair value at quarter end and less than 4% of total investment income for the year ended December 31, with most of the portfolio investments representing less than 1% of the fund's income and assets.

With that, I'll turn the call over to Cory.

Thank you, David, and thank you to everyone who has joined us today. Fund's total investment income for the fourth quarter was $34.9 million, an increase of $1.5 million or 4.4% from the fourth quarter of 2024 and a decrease of $0.5 million or 1.3% from the third quarter. Fourth quarter included income considered less consistent or nonrecurring in nature of $1.9 million as we've previously discussed these nonrecurring items vary quarter-to-quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment repricing and other activity related to debt investments. For the fourth quarter, these items were $0.9 million higher than the average of the prior 4 quarters, $1.1 million higher than the fourth quarter of 2024 and $0.6 million higher than the third quarter.

Dividend income for the fourth quarter increased by $2.6 million from a year ago and by $1.7 million from the third quarter. The increase in dividend income from both the prior year and third quarter was primarily due to an increase in dividends from lower middle market equity investments and included $1.2 million of nonrecurring items.

As we previously discussed, dividend income will fluctuate quarter-to-quarter based on the underlying performance, cash flows and capital allocation activities of the fund's portfolio companies and certain nonrecurring items. Interest income for the fourth quarter decreased by $0.8 million from a year ago and by $1.3 million from the third quarter.

The decrease in interest income from both the prior year and the third quarter was principally attributable to a decrease in interest rates primarily resulting from decreases in benchmark index rates on floating rate debt investments and an increased negative impact from investments on nonaccrual status, partially offset by the growth of the investment portfolio.

Fee income for the fourth quarter decreased by $0.3 million from a year ago and by $0.9 million from the third quarter. The decrease in fee income from both the prior year and the third quarter was primarily due to the refinancing and prepayment of debt investments.

Fund's expenses, net of waivers for the fourth quarter increased by $1.3 million from the prior year and by $2.2 million from the third quarter. These increases were primarily driven by a $2.8 million capital gains incentive fee accrued in the fourth quarter of 2025.

This accrual was partially offset by a $1.2 million decrease in interest expense and a $0.4 million decrease in base management fee from the prior year and a $0.5 million decrease in general and administrative expenses and a $0.3 million decrease in interest expense from the third quarter.

The capital gains incentive fee accrual is primarily the result of the significant net fair value appreciation of the fund's investments since the listing and was recognized during the fourth quarter of 2025. However, this amount is not currently payable and is not expected to be payable in the near future, if ever.

The decrease in interest expense from a year ago was largely driven by a decreased weighted average interest rate on the credit facilities due to a decrease in the applicable spreads resulting from amendments of the credit facilities since the fourth quarter of 2024 and decreases in floating benchmark index rates.

The decrease in interest expense from the third quarter is primarily driven by a decreased weighted average interest rate in the credit facilities due to decreases in floating benchmark index rates. The fund's expense ratio calculated as the ratio of total noninterest operating expenses, excluding incentive fees, as a percentage of the fund's average total assets was 1.8% on an annualized basis for the fourth quarter, a decrease from 2.1% in the prior year and a decrease from 2% in the third quarter. The fund's NII, excluding the impact of the capital gains incentive fee and NII related taxes in the fourth quarter was $17.2 million or $0.37 per share increasing from $14.2 million or $0.35 per share from the prior year.

During the quarter, the fund recorded a net increase in the fair value of its investments of $17.2 million representing the impact of $16.6 million of net realized gains and a $0.5 million of net unrealized appreciation. The net fair value increase was attributable to increases of $12 million in the lower middle market portfolio and $8.1 million in the private loan portfolio partially offset by a decrease of $3.1 million in the residual middle market portfolio.

Overall, the fund's operating results for the fourth quarter resulted in a net increase in net assets of $30 million and NAV per share of $15.85, a $0.31 increase from the third quarter and $0.32 above the fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January 2025.

As of year-end, the fund had investments on nonaccrual status, comprising 1% of the total investment portfolio at fair value and 3.9% at cost. As of year-end, the fund's regulatory asset coverage ratio was 2.22 and its net debt to NAV ratio was 0.79. As Dwayne mentioned, the fund's focus remains on achieving a fully invested portfolio through its expanded regulatory leverage capacity, which became effective on January 29, 2026.

With that, I will now turn the call back to the operator so we can take any questions.

[Operator Instructions] Our first question is from Brian McKenna with Citizens.

Great. So it was good to see a strong quarter of originations and then just kind of the growth in the overall investment portfolio. Sorry if I missed this, but I'm just trying to figure out how should the decline in interest income quarter-on-quarter was from lower base rates and then why we didn't see really any meaningful offsets there from growth in this portfolio? I'm assuming it's timing related, but any thoughts there would be helpful.

Sure, Brian. Thanks for the question. I'd say to the second part, it is timing. I think a lot of the investment activity was back ended. It was in the second half of the quarter. So that's why you don't see as much of a benefit there. You did see some decline from rates. And I'd say that, that was about just over $0.5 million was the decline from a SOFR movement standpoint inside the quarter.

Okay. Got it. That's helpful. And then just given the commentary on the main call around the outlook for the lower middle market portfolio, and what will likely need some additional markup in realization events across that portfolio. It would seem like some of this is going to flow through to MSIS as well, similar to 3Q or 4Q. So given this dynamic and then the upside that's created and net assets from that along with a low level of leverage today, is there an opportunity to lean in further on the buyback just so you start accreting even more NAV?

Yes. I'd say, Brian, when you look at the benefit or the impact to MSC Income Fund will be the same as Main, obviously, just a different allocation. Historically, Main Street had about 80% of lower middle market investments and MSC Income Fund had 20%. That's assuming they had liquidity at the time. But in general, somewhere in that area code would be the sharing between Main Street and MSC Income Fund on historical lower middle market investments. I think when you look at those proceeds, I think we'll just have to continue to look at what's the best use of that capital.

Is it to provide a buyback or some other similar activity for the shareholders? Is it to pay out more dividends? Or is it to retain that capital if we can do so on a tax cost-efficient basis, retain that capital and grow the portfolio. So we haven't had those significant realizations come through yet. But if we see that type of activity, those will be the 3 things we have to weigh and determine what's the best path for the fund and for the shareholders.

Our next question is from Robert Dodd with Raymond James.

Several have answered on the prior call, but I do have one here. On the mix, right, I mean, you're a 36% lower middle market at the end of December. Obviously, Mystic exited. Sounds like you're expecting several more realizations from the lower middle market portfolio so there will be some fair value appreciation probably there. And on the other hand, growth in the private loan portfolio as well. I'm going to pull out a crystal ball fast. What do you think the odds are that you get down close to, say, 20% lower middle market by the end of this year or even the end of next year because that's where the fee trigger changes for the base management fee. So do you -- with the expectations of realizations in the moment, do you think it is actually going to shift the mix significantly over the next, say, 12 to 24 months?

Sure, Robert. Thanks for the question. I'd say, similar to some of our comments in the past, I think the movement from where we are today with 36% lower middle market to being at or below 20%, that's going to take an extended period of time, and that's going to be the case for a couple of reasons. One, we think this is a huge positive for the investment portfolio. It's a very, very diversified portfolio. So there's no individual name on the lower middle market side that I would say is significant. I think the largest thing we have from memory is about 3.5%. So even if you exit that, you'd have to have several of those exit, obviously, trying to drop 16%, 17%. You'd have to have 5 or 6 of them exit if they were all the same size, but that's the largest.

So you've got a very diversified portfolio. So as you exit these investments, it's just going to take time. I think when you look at the other factor and Mystic is a good example, if you go back and look at the press release, that was issued for the Mystic transaction. We did realize the exit in Mystic. But in that situation, it was a merger with a larger kind of complementary business. So as a result, the funds stayed in that investment for a part of its investment, both debt and equity, basically moved up the capital structure from a larger equity investment relative to total investment to something that was more first lien senior secured debt and a smaller equity investment. But that -- the -- some of those proceeds stayed invested in that business, which is now called UBM or United business Mail, I think, is the UBM stands for.

So you'll have some of that. So sometimes, when we exit our lower middle market companies, it's not a 100% full exit. You could have some rollover continuation in the new business. So again, like we said in the past, it's going to be a while. I'd say the biggest catalyst for bringing that percentage down is going to be less about the excess of the lower middle market investments. It's going to be more about the growth of the portfolio first through the additional debt capacity that the fund has. And then after that, any other ability that we have to grow the portfolio. So the example would be XYZ company, say it's 3%, that gets proceeds, but then you take those proceeds. And to Brian's point from earlier, if you retain them as opposed to paying them out and use that retained capital to grow the business, that should get you closer to 20% percentage over time as opposed to paying that out and not growing the portfolio. So those would be the ways that we would look at that transition.

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

Just one in terms of the portfolio leverage there. Wondering if you could just share any updated outlook you might have just given the originations pipeline, given the current environment and the opportunities you're seeing now that you've gone past the regulatory limits there?

Sure, Ken. Thanks for the question, and thanks for joining us. Yes, I'd say we have the expanded regulatory leverage. We received that just with the passage of time, that happened at the end of January. So in conjunction with that, we obviously have to go get the -- just one thing to have the capacity, but you also have to have access to it. So I'd say we've been actively working to get additional liquidity. Obviously, we haven't announced anything yet, but I think we feel good about where we sit in terms of the fund's ability to gain additional debt capacity, both secured and unsecured. We just have to go execute to it. But I think we feel good about leverage. We feel good about liquidity. We just got to have the -- have those activities get finalized and get executed.

Got you. Very helpful there. And just in terms of the private loan side in terms of some of the more recent deals you've been seeing some of the more recent investments there. Wondering if you could talk a little bit more about some of the spreads you're seeing and then what are your expectations around that go forward.

Sure. I'll give super high level, and then I'll let Nick add on additional color. I'd say here more recently in the last quarter or 2. I think that our view and my view is that spreads have started to stabilized. They are less than they were 12 or 18 months ago. But overall, I think the spreads has stabilized, I think that's likely because of some of the uncertainty in the marketplace. I think bigger factor is just the overall increase in private equity activity as a whole would be my view. But Nick, you give your views or additional color?

Yes. Since beginning of the third quarter, we've seen spreads kind of stabilize in that 5% to 5.50% range. I think what we have also seen is I'd say the outliers of maybe a deal at S+ 600 or 650, we're seeing less and less of those. And so we really see a tighter band of pricing kind of in that 5% to 5.75% range on the wide end. On the smaller end of deals that we focus on, we have not seen a lot of crossover to 4.75%. I think from a cost of capital perspective in the industry. Once you dip below that, it gets tougher. And so I think we'll hopefully see that continue into 2026 and like we would expect kind of a flattish year on spreads in that 5%, 5.50% range.

Our next question is from Arren Cyganovich with Truist Financial.

I was wondering if you could just provide a little detail on how the underlying portfolio companies are doing in general, what you're seeing in terms of revenue EBITDA growth trends you're seeing for the portfolio overall?

Yes, Arren, thanks for the question. I'd say we -- in both the lower middle market and the private credit, I would say we're seeing consistent good performance, nothing significant one direction or other in terms of significant outperformance or underperformance, Obviously, having a big diverse portfolio. You're always going to have some companies that are outperforming and others that are not performing in the way that we would want them to or where we expected them to. But overall, I wouldn't say there's been anything that is a significant change over the last couple of quarters in either direction. David, Nick, if you guys have a different view or anything you want to add?

Nothing there.

And then on the LMM portfolio kind of coming down over time, is -- can you remind me if what's the plan long term? Is there always going to be some element of LMM? I mean I see that as personally view the LMM portfolio is a net positive given the history you've had in terms of equity realizations with a lot of those investments?

Yes. Arren, I'd say the plan there is that eventually -- I just don't know when eventually is, could be 10, 15, 20 years, eventually lower middle market as it sits today, will eventually get to a very, very small amount and eventually 0. And the reason I say that is because the Fund's strategy after the listing at the end of January of 2025 is that it will not make any new lower middle market investments. It will continue to support and participate in any add-on or follow-on investments in existing companies just like we talked about related to Mystic and UBM. We have also had a number of companies in the fourth quarter and first quarter that have had follow-on investment opportunities, and the fund is going to participate in those on a pro rata basis with Main Street.

So because of that, it's going to take a long time. But eventually, even though we have a permanent holding period ability on our side at MSC Income Fund at Main Street. Our partners typically don't. They're individuals, they're going to age out. They're going to want to retire. In certain situations, their management team might be able to buy them out and give them full liquidity. But most situations, that likely results in a transaction where the company is sold to a third party in most situations. So that's going to be the driver. It's just going to take a long time.

I think longer term, we view that as a positive for the Fund. The Fund's goal is to produce a very consistent well-covered dividend covered by recurring interest income. So as you have investments in the lower middle market that have a mix of debt and equity as they get repaid, exited and we take those proceeds and deploy them into first lien senior secured private loan investment opportunities.

One, you're moving up the capital structure from a risk standpoint, you're also generating more consistent contractual, predictable income. So we think that's consistent with the fund's plan, and that is our expectation or our intent. Longer term, and this is -- do not have anything planned here. But longer term, Main Street is always looking for different avenues or opportunities to create value from an investment standpoint. There's nothing that Main Street is doing today. But if Main Street is a platform decides to enter into a new strategy that we think is attractive for Main Street, then we would offer that to MSC Income Fund.

We have to have an agreement with the MSC Income Fund Board. But if it was attractive to Main Street, I would bet that it's -- there's a good chance it's attractive to MSC Income Fund as long as it's supportive with the fund's goal, as I said earlier, with producing a very consistent, well-covered kind of highly predictable dividend. So I think you could see something else change. But longer term, as we sit here today, it's more status quo and it's just going to take a while for the lower middle market portfolio to roll off.

Our next question is from Doug Harter with UBS.

Mindful of your prior answer about needing to get the leverage facilities. Can you just remind us what the target leverage is?

Sure.

Thanks for your question. Yes, our target leverage under the new expanded regulatory leverage range is going to be 1.15 to 1.25 debt to equity.

Got it. And do you expect that to change as kind of as the mix shifts away from lower middle market? Just how should we think about the inherent leverage of the 2 strategies.

Yes. I would say, as we see it today, I would not expect it to change. I think we always want to have some reasonable amount of flexibility and liquidity. So I think if you start going above that, just from our perspective, from my perspective, I think it starts getting tight. So I think that 1.15 to 1.25 is probably a pretty good range. I think as you have the portfolio migrate from lower middle market to private loan, that's when you probably move up inside of that range. But as we sit here today, I would not expect us to go above that range.

Our next question is from Mickey Schleien with Ladenburg Thalman.

Dwayne, your software allocation at about 7%, it's not particularly high, but it is meaningful. So I'd love to hear what your thesis is on the impact of AI on these companies? And how have you been underwriting investments in those companies over the last couple of years?

Sure, Mickey. Thanks for the question, and thanks for joining us. As you said, the fund's exposure to software is very limited kind of that mid-single digit type percentage. Inside of that, and you probably heard us say this before, just given your longer-term history with Main Street over the years. We, as a platform, are very much value-based or value-focused investors. So software, particularly high-growth software. You think about some of the stuff you hear about in the industry, ARR type loans or loans where you expect a bunch of growth before the loan can be serviced from a debt service standpoint. Those are things that just don't fit our profile.

They never have, and they don't today. So that's why when we look at our exposure here, even though we've got kind of a mid-single-digit type percentage exposed to software, we think those software names are pretty well protected. Obviously, they and we are talking about their exposures to AI. But as we sit here today, we're not there's nothing there that we're overly concerned about. And Nick, if you want to add any additional color there, any different takes on it.

As Dwayne said, we just didn't really focused. We haven't historically focused on, I'd say, high growth in the software space, and we won't do that going forward, so I think our exposure, we do have there is a little less exposed or we're a little insulated from some of the AI boom is there's just less growth there. I think we focus a little more on infrastructure software versus pure growth SaaS software.

So when you refer to infrastructure software, are you referring to sort of enterprise-level software that's really ingrained into the portfolio companies' operations?

To that degree, I think a lot of times, it will be a different moat they might have or it's more of a niche software for a very specific industry. Those I think would be less impacted by AI as you go forward. But eventually, will have an impact, but I think that's what we focus historically.

This concludes our question-and-answer session. I would now like to hand the floor back to management for any closing remarks.

We just want to thank everyone again for joining us this morning. We appreciate the continued support of the fund shareholders and we look forward to our next update call in May after the release of our results for the first quarter. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

Greetings, and welcome to the MSC Income Fund Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zach Vaughan. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's Third Quarter Earnings Conference Call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; Nick Meserve, Managing Director and Head of the Private Credit Investment Group; and Cory Gilbert, Chief Financial Officer.

MSC Income Fund issued a press release yesterday afternoon that details the fund's third quarter financial and operating results. This document is available on the Investor Relations section of the fund's website at mscincomefund.com.

A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 21. Information on how to access the replay was included in yesterday's earnings release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the fund's homepage.

Please note that information reported on this call speaks only as of today, November 14, 2025, 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 may 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 fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. MSC Income Fund assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss 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. MSC Income Fund defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV.

As previously announced, the fund effectuated a 2-for-1 reverse stock split on December 16, 2024. All per share amounts, shared data and related information discussed on today's call reflect the effect of the reverse stock split.

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 MSC Income Fund'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 you the fund's key quarterly updates, after which, we'll be happy to take your questions. We are pleased with the fund's performance in the third quarter, which resulted in a return on equity of 14.6% and favorable net investment income. We believe that the quality of the fund's existing investment portfolio, combined with the fund's existing liquidity and near-term expanded regulatory leverage capacity, which will become effective at the end of January 2026 and current attractive pipeline of new private loan investment opportunities provide the opportunity for increased net investment income and shareholder dividends as we work to enhance the fund's investment portfolio over the next several quarters.

We are also confident that the funds so focus on its private loan strategy for investments in new portfolio companies. Together with the fund's contractual future base management fee reductions as the fund's lower middle market investments decrease as a percentage of its total investment portfolio will strengthen the fund's stability to deliver attractive recurring dividends and favorable total returns to the fund shareholders in the future. The fund generated NII per share of $0.35 in the quarter, after excise tax and NII-related income taxes of $0.01 per share or $0.36 on a pretax NII basis.

These results, combined with our positive outlook for the future, resulted in our most recent dividend announcements, which I will discuss in more detail later. The fund finished the quarter with an NAV per share of $15.54, a $0.21 per share increase from the prior quarter and we continue to be pleased with the performance of the fund's investment portfolio, including both the private loan and lower middle market portfolios.

Cory will discuss our financial results in more detail. Now turning to investment activity. The fund's private loan investment activity in the quarter continue to be slower than our expected normal quarterly activity, resulting in a net decrease in private loan investments of $6.7 million. Despite the slower-than-expected activity in the third quarter, we remain confident in our ability to grow the funds investment portfolio in the future. The fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments, both to deploy its current liquidity and to position the fund to deploy the additional liquidity the fund expects to have access to through the increased regulatory debt capacity that will become effective at the end of January 2026.

In addition, the fund is focused on maximizing the benefits from the fund's legacy lower middle market investment portfolio and recycling this existing capital in the private loan investments as investments are exited or repaid. We've also continued to see significant interest from potential buyers in several of the funds lower middle market portfolio companies, which we expect will lead to favorable realizations over the next few quarters, and we'll move the fund closer to achieving the benefits of a reduced future base management fee percentage.

Similar to the potential for investment realizations in the [ front ] lower middle market portfolio, the fund recently exited one of its private loan portfolio company equity investments and has a second exit in process, subject to customary closing conditions and regulatory approvals. With these exits expected to represent total realized gains of approximately $15 million or approximately $0.30 per share, both at meaningful premiums to the fund's quarter-end fair values. Nick will cover the fund's investment activity in more detail.

Based upon the fund results for the quarter and its future outlook, earlier this week, the fund's Board of Directors declared a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share both of which are payable on January 30, 2026, to shareholders of record as of December 31, 2025. Going forward, the fund expects to continue to maintain a dividend policy that provides for total quarterly dividends which are expected to include a regular quarterly dividend and a supplemental quarterly dividend to be set at a level generally consistent with the fund's pretax NII.

Based upon the most recently declared regular and supplemental quarterly dividends and the current stock price, the fund is currently providing its shareholders a dividend yield of approximately 12%. As the fund executes its transition to a private loan-only investment strategy and investment portfolio and optimizes its use of leverage, our long-term goal is for the fund to increase the total dividends paid to the shareholders in the future. As we look forward to the fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as above average. Despite the slower investment activity over the last 2 quarters, we are excited about the current pipeline of new investment opportunities and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters.

My last few comments are reminders of the continued support the funds received from Main Street Capital Corporation. Since Main Street's wholly owned subsidiary was appointed the sole advisor to the fund in October 2020, Main Street has purchased over $23 million of equity in the fund. In conjunction with the fund's equity offering in January, Main Street entered into an open market share purchase plan to purchase up to $20 million of the fund's shares for a 12-month period beginning in March 2025. At times when the fund shares are trading at predetermined levels below the fund's NAV per share. With the terms of such plan being identical to the fund's open market share repurchase plan to purchase up to $65 million of the fund shares and with any open market share purchases being split by the fund and Main Street on a pro rata basis.

Through today, Main Street has purchased over $2 million, and the fund has repurchased over $7 million under these plans. As additional support for the fund, Main Street, through its wholly owned investment adviser voluntarily agreed to permanently waive a portion of its incentive fees earned for the third quarter to provide the fund a resulting pretax NII of $0.36 per share. We believe these actions demonstrate Main Street's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy.

With that, I will turn the call over to Nick.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we are pleased with the performance of the fund's private loan investment portfolio in the third quarter. The overall operating performance for most of the fund's private loan portfolio companies continue to be positive. Which contributed the fund's favorable third quarter financial results. The fund has continued to see softness in certain private loan portfolio companies, particularly those of consumer exposure, and we are working on maximizing recoveries on those specific investments over the next few years. One of the favorable realized exits to the fourth quarter.

[Audio Gap]

M&A activity in both our late-stage and early-stage pipelines, are very full at the moment. As a result, we expect to have favorable new investment activity over the next 2 quarters.

With that, I'll turn the call over to David.

Thanks, Nick, and good morning, everyone. In addition to the private loan portfolio that Nick just covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the fund partnered directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation utilizing the customized one-stop debt and equity financing solutions provided by Main Street's lower middle market investment strategy. After listing of the Fund shares on the New York Stock Exchange at the end of January, the Fund no longer makes any investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies.

We're pleased to report that the overall operating performance for most of the Fund's lower middle market portfolio companies continues to be positive, which contributed to the attractive third quarter financial results. These contributions included both strong dividend income and continued fair value appreciation. Despite the continued heightened level of concern and uncertainty in the overall economy, we remain confident in the ability of the fund's lower middle market portfolio companies to continue to navigate the current climate. During the third quarter, the Fund completed $6 million in total lower middle market portfolio on investments, which after aggregate investment activity resulted in a net decrease in the lower middle market portfolio of $2.6 million. At quarter end, the lower middle market portfolio had investments in 55 portfolio companies totaling $467 million of fair value and representing 37% of the Fund's total investment portfolio.

The lower middle market portfolio at fair value is comprised of 53% debt investments and 47% equity investments. These debt investments had an attractive weighted average yield of approximately 13%, consistent with the prior year and over 99% were first lien loans. The Fund had equity ownership positions in all of its lower middle market portfolio companies, representing a 9% average ownership position. We expect these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation and eventually meaningful realized gains upon the future exit of these lower middle market portfolio company investments.

As Dwayne mentioned, we've seen significant interest from potential buyers in several of the funds lower middle market portfolio companies, which we expect will lead to favorable realizations and additional fair value appreciation over the next few quarters. Turning to Fund's total investment portfolio as of September 30. The fund continued to maintain a highly diversified portfolio with investments in 144 portfolio companies spanning across numerous industries and end markets. The Fund's largest portfolio companies represented less than 4% of the total investment portfolio at fair value at quarter end and less than 4% of the total investment income for the trailing 12 months ended September 30, and with most portfolio investments representing less than 1% of the Fund's income and assets.

With that, I will turn the call over to Cory.

Thank you, David, and thank you to everyone who has joined us today. The Fund's total investment income for the third quarter was $35.4 million, an increase of $1.9 million or 5.6% from the third quarter of 2024 and consistent with the second quarter. The third quarter included income considered less consistent or nonrecurring in nature of $1.4 million, and we previously discussed these nonrecurring items vary quarter-to-quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment, repricing and other activities related to debt investments.

For the third quarter, these items were $0.6 million higher than the average of the prior 4 quarters, $0.9 million higher than the third quarter of 2024 and $0.5 million higher than the second quarter. Dividend income for the third quarter increased by $1.2 million from a year ago, but decreased by $1.3 million from the second quarter. The increase in dividend income from the prior year was primarily due to an increase in dividends from lower middle market and private loan equity investments. The decrease in dividend income from the second quarter was primarily due to a decrease in dividends from lower middle market equity investments.

As previously discussed, dividend income will fluctuate quarter-to-quarter based on the underlying performance, cash flows and capital allocation activities of the Fund's portfolio companies. Fee income for the third quarter increased by $0.8 million from a year ago and by $0.3 million from the second quarter. The increase in fee income from both the prior year and the second quarter was primarily due to the refinancing and prepayment of debt investments. Interest income was consistent with the third quarter of 2024, and increased by $0.8 million from the second quarter. The Fund's expenses, net of waivers for the third quarter decreased by $1 million from the prior year and were consistent with the second quarter. The decrease from prior year was primarily driven by a $1.7 million decrease in interest expense and a $0.5 million decrease in base management fees. Partially offset by a $1.2 million increase in incentive fees.

The decrease in interest expense from a year ago was largely driven by decreases in weighted average interest rate on the Fund's credit facilities due to decreases in benchmark index rates and a decrease to the applicable spreads resulting from amendments of the credit facilities since the first quarter of 2024, partially offset by an increase in weighted average outstanding borrowings used to fund the growth of the Fund's investment portfolio. The increase in incentive fees, which is after a $0.2 million voluntary permanent waiver provided by the Fund's investment adviser in the third quarter of 2025 is primarily attributable to an increase in the pre-incentive fee [ NII ]. The fund's expense ratio calculated as the Fund's total operating expenses net of any waivers and excluding interest expense as a percentage of the Fund's average total assets was 3% on an annualized basis for the third quarter, consistent with both the prior year and the second quarter.

Excluding incentive fees, the Fund's expense ratio was 2% on an annualized basis for the third quarter a decrease from 2.2% in the prior year and an increase from 1.9% in the second quarter. The Fund's NII before taxes in the third quarter was $17 million or $0.36 per share, increasing from $14.2 million or $0.35 per share from the prior year. The Fund's NII in the third quarter was $16.6 million or $0.35 per share, increasing from $12.9 million or $0.32 per share from the prior year. During the quarter, the Fund recorded a net increase in the fair value of its investments of $11.2 million, representing the impact of $21 million of net unrealized appreciation partially offset by $9.9 million of net realized losses. The net fair value increase was attributable to increases of $9.4 million in the lower middle market portfolio and $4 million in the private loan portfolio, partially offset by a decrease of $2.6 million in the middle market portfolio.

Overall, the Fund's operating results for the third quarter resulted in a net increase in net assets of $26.5 million and an NAV per share of $15.54 a $0.21 increase from the second quarter and $0.01 above the Fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January of this year. As of quarter end, the Fund had nonaccrual investments comprising 1.4% of the total investment portfolio at fair value and 4.6% at cost. As of quarter end, the Fund's regulatory asset coverage ratio was [ 2.39 ], and its net debt to NAV ratio was [ 0.7 ]. This remains below the fund's targeted leverage levels. As Dwayne mentioned, the fund's focus remains on achieving a fully invested portfolio within its current leverage limits through January 2026, at which point the fund will benefit from expanded regulatory leverage capacity as previously approved by the Fund's Board in January 2025.

With that, I will now turn the call back to the operator so we can take any questions.

[Operator Instructions] Our first question comes from the line of Robert Dodd with Raymond James.

Congrats on the quarter and getting another one behind you. All of the private loan book slower this quarter, but looking like it's ramping up. I mean last quarter, I think you told us like you missed out on some deals because of pricing, because pricing move more and more aggressive in the private loan book. I mean can you give us an update there? Is that -- was that true again in the third quarter and you've moved a little bit on pricing in the fourth, and that's why the optimism in terms of activity is increased? Or can you give us some color on like what's created that transition from acceleration?

Sure, Robert. Thanks for the question, and I'll give a few comments, and I'll let Nick add on if he has anything that he wants to add. But I'd say that the biggest change for us is more the activity levels than it is the competitive nature. The market is definitely still competitive. I do think that the pricing today is inside of where it would have been a year ago and even 6 months ago. But I'd say that most of the improvement on our side is just pure volume at the front end and the later stages of the pipeline or the investment funnel on our side. You still do some -- see some transactions that are inside of where we are willing to go, but we probably moved a little bit and then just seeing a significant uptick or increase in the pipeline.

But Nick, add any additional color that you would add.

I'd say, overall, I don't think pricing has gotten tighter in the last 3 or 4 months. It really is just a deal volume pickup. And I think that really happened in early to mid-third quarter. And there was a few deals, I think, that we thought would close by quarter end that you got pushed in the fourth quarter. And so we'll see that flow through hopefully in the fourth quarter. The other thing ad Robert, I think we also hope to -- the only thing I would add, Robert, is I would think we would hope to see more of our existing borrowers continue to have add-ons either new commitments or executing on the unfunded commitments we have with the DDTLs whether that's for acquisitions or other growth activities. I think we've had more conversations here recently with some of those activities. So hopefully, I don't know if it will be this quarter, next quarter, if it's the next couple of quarters, but I'd say we're seeing continued good demand there as well, which we really find attractive.

Got it. On -- I mean, in terms of the activity we van, I mean, you've talked obviously about consumer being a problem area for a while. What areas are really attractive in terms of sectors are attractive right now to you looking into '26, '27? Or is -- is there enough bad news in consumer that some of the opportunities are actually on much bad terms. I mean basically, what are the sectors you're particularly looking at the moment?

Sure, Robert. I would say that we continue to be risk off in general on the consumer side. It's not that we won't ever do a consumer deal. I think if it's a very, very attractive opportunity you'll still see us look at it. But in general, we continue to be risk off in that area. And I'd say we're probably even more risk off, if it's a loan-only opportunity, we've got something on the lower middle market side, and we find the management team and the -- the industry or the company attractive. You could see us do something there. I know that's less relevant for for the fund going forward. But as a platform, I think that's the way we would look at the consumer side. I'd say most of what we're seeing broadly is kind of B2B type opportunities.

But again, Nick, feel free to add additional color.

Yes, our focus is on our traditional businesses, industrials, manufacturing, aerospace and defense, I would say it's everything outside of consumer. And like Dwayne says, we will still do consumer but it's got a higher bar and usually it doesn't have a direct exposure to just, I'd say, the ups and downs as we can see here more of a generic buy.

Our next question comes from the line of Brian Mckenna with Citizens.

So it's great to hear all the positive commentary around the outlook for originations. Assuming pipelines continue to build here into year-end, what kind of acceleration can we see in funding into next year? And then is there a way to think about the base case or even the bull case for portfolio growth in 2026? And I guess what I'm getting at is how does this all play into the trajectory of earnings and really the dividend throughout next year -- and then related to that, the $0.30 per share of expected realized gains, how should we think about the uses of those gains and proceeds from that investment and just kind of the redeployment opportunity or how much of that will get paid out in the dividend?

Sure, Brian. Thanks for the question. So there were a couple there that I'll hit on if I miss one of them, just ask a follow-up if I don't answer the question. But I'd say the way we're -- we're looking at the situation for the fund broadly is we are very excited about the pipeline increasing. As you've heard us say for the last 2 quarters, we've been behind budget behind expectations from an origination standpoint. Despite that, I think we've still been very pleased with the top line investment income and more pleased with the net investment income. So we've been able to navigate what we think are really good returns for the shareholders despite being behind budget on the origination side.

That being said, if we're going to grow the dividend in the future, we're going to do that by utilizing the underleveraged position. I'll let Cory correct me here, but we're probably -- in today's level, got about $100 million of leverage that we could utilize with our current regulatory limit. And then when we get to the end of January, that number increases by $250 million or so. So we've got a tremendous amount of powder. We just need the pipeline to come to fruition, which we're seeing come through as Nick and I both said there. So I'd say we're excited about where we sit. And we think there is a clear avenue to not only generate really attractive net investment income, but also be in a position to have an opportunity to have increased dividends at some point in 2026.

The other benefit, just to remind everyone, as we execute the growth plans and execute growth of the investment portfolio, it's going to be highly concentrated in the private loan. And at some point, we'll get the added benefit, which is a contractual benefit that exists in the advisory agreement that the fee will drop from 1.5% to 1.25%. So we think we've got a number of catalysts that give us the path of the opportunity to have a really good outcome from a net investment income standpoint and then from a shareholder dividend standpoint. On the realized gains, -- we're very pleased with those. We gave some commentary to the amounts. We also -- we didn't give amounts on it because it hasn't executed yet, but we also have given reference to the fact that there's a number of lower middle market investments or portfolio companies that have seen significant inbound interest from third parties and where some of those companies are in discussions on activities that could lead to an exit.

So we're excited about that for 2 reasons. One, we think those activities should generate additional fair value appreciation, both unrealized and then eventually realized, which is always good from an NAV standpoint and an ROE standpoint. But you hit on the fact that as we execute those exits for the benefit of the fund, I mentioned the significant liquidity we have. That just gives us more dry powder to move out of an equity investment that may not have contractual investment income. It might be getting some dividends, but it may not have contractual investment income. We can then rotate that that capital into more private loans that have the contractual interest income and give us additional liquidity, to grow the interest income and eventually hopefully grow the net investment income and the dividend.

So that's the way we're looking at it. As you know, we've got a structure that could allow us to retain some of those gains inside our blockers. So depending upon which company it is that we're exiting and where it sits inside of our our legal structure or our corporate structure, there could be an opportunity to retain those gains and redeploy it. So we're looking at all those opportunities, but we're just very pleased that we have the opportunity to consider all those things given how well those portfolio companies are performing and the level of interest we're getting from third parties.

So I think I hit on each of your questions, Brian, but if I missed one, just reask it or you can ask a follow-up.

Yes. No, that's perfect. I appreciate all the detail. There were a few questions in there, so I'll hop back into the queue, but congrats on the strong quarter.

Thanks, Brian.

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

Just one on the above-average private loan pipeline you talked about. Any further color around that? Any particular drivers you're seeing within the segments that you're focusing in?

Thank you for the question. I wouldn't say there's anything specific. I think our view is it's just you've seen private equity sponsors, investors become more active. I think that's probably a combination of a couple of things. One is the environment. I think in general, most people are viewing it more positively than they would have 6 or 12 months ago. I think you also have a lot of private equity sponsors that are sitting on a lot of dry powder, and they have other investments that they're well into their investment period on, and they're likely getting some discussion or having some discussion with their private equity fund LPs about liquidity. So I think all those things are contributing factors to a better environment today than 12 months ago. But again, Nick, if there's something else you would add, feel free to add additional color.

One thing I'd add on the pipeline is that it also just feels more real, if you will. And so I think some of the deals we worked on in the past year or 2, it never felt like it was going to transact. And I'd say everything in the pipeline today feels like that the business will actually transact versus just an efficient exercise on what value might be.

Got you. Very helpful there. And just one follow-up, if I may, just on the realized gain that you said. If I got it right, it sounds like it was a it was a restructuring, and there was a -- it looks like a favorable exit there. Just curious as to what you believe help deliver such a favorable outcome there in those positions?

Sure, Ken. So I'd say the realized gains on the private loan side, there's 2 different portfolio companies, one of which has already been exited. The other has been announced is just going through the customary regulatory and other kind of closing approvals or processes. So those 2 investments, those 2 companies were very different. One of them, you performed extremely well or extremely strong performance from day one, continue to have growth and has a lot of future growth in front of it, and that led to a really good outcome for us. as an equity co-investor as well as for the other owners of that portfolio company. So that's just a company that from day one performed well. The second one, and it is not a massive investment for the fund, but it's one that we think shows the opportunity we have, on some of these restructured investments if you have the ability to be patient, which we and the fund clearly do, and then you have the wherewithal to work through the issues with that portfolio company with that management team.

So it was a company that got restructured was very, very significantly impacted to the negative during COVID, but we and our co-investor, co-lender in that company took the steps to preserve the value allow that company post-COVID or when things started to rebound to have a really good recovery. That management team, as Nick said in his comments, did a fantastic job, which we're very, very much appreciative of. And then on our side, our team do what we needed to do to give the company the opportunity to not only survive, but survive and then have the opportunity to perform really well post the restructuring.

So all that stuff played out, it took a couple of years, but we ended up having a really nice exit here in the fourth quarter that led to that realized gain.

Our next question comes from the line of Arren Cyganovich with Truist.

The higher expected pipeline activity that's coming on oftentimes when activity picks up, then the repayment activity picks up or what's your expectations in terms of repayments being beyond the one that you may potentially exit by sale?

Yes. I'd say, Arren, thanks for the question. I'd say that in the last 2 quarters, in addition to having our investment activity being a little bit slower on the outbound side. We also had some elevated repayments. I think -- there will be some repayments in the fourth quarter. But I think that, that level has returned more than normal. But Nick, if you have a different view, kind of add on here.

Yes. I'd say I think you're right in general. And as the market for M&A picks up, usually, it also the originations will go up and the repayments will go up. To date, we have not seen that hand in hand right now, but I would expect that in the first half of '26 that, you will probably see that go back to the typical kind of 1/3 life of any random deal.

Okay. And then could you just remind me of your expectations in terms of leverage target? And what you need to see to get there? I mean, I imagine it will rise with the private loan originations, but are you keeping leverage at a particular level until you do the exit element?

Yes. I would say that our plan for leverage is working at 2 ways. One is the the current situation with the existing regulatory limits we have, which is the old BDC requirements than then come end of January of '26, the Board has already able to approve and the expanded leverage will become effective. So I'll let Cory kind of give color on both of those levels.

Yes. So currently, our leverage targets are at [ 0.85 ] to [ 0.95 ] debt to equity at the end of -- we were running below that at [ 0.72 ]. That's just due to the kind of the production and slower origination on the private loan pipeline and portfolio. As we look to this expanded leverage, regulatory leverage at the end of January, our leverage targets are going to increase to [ 1.15 ] to [ 1.25 ], but that's the range we plan to work within.

Our next question comes from the line of Paul Johnson with KBW.

You guys have been talking about the risk in the consumer part of the economy and potentially and just in the portfolio. I was wondering if there's any kind of specific goal there if there's an objective to cut the exposure in consumer names or potentially to try to exit or accelerate the exit of specific names in the portfolio? Or if it's just simply just kind of a higher level of monitoring in a higher bar, I guess, on new names going forward?

Sure, Paul. Thanks for the question. I'd say we've been having these calls here for a couple of quarters in this format. Obviously, on the Main Street Capital Corporation side, we've been doing this forever. So I'd say we have been signaling for the last couple of years. I can't remember now if it's 2.5 years or so, but we've been signaling for a while that we're seeing stress on some of the consumer names and that we were also generally risk off, not willing to do anything risk off, but just taking a more conservative view towards new consumer opportunities. So we've been in that stance or posture for a while. So as a result, we have not been aggressively or actively adding exposure and trying to minimize it to the extent we can.

And in relation to the existing names we have that have had some level of underperformance. I think each situation is different, and we have to evaluate it with our co-investors, whether it's another co-lender or if it's the equity sponsor or both plus the management team to try and figure out what's the best answer. So I'd say each situation is a little bit different. But in general, the approach we're taking is to try not to add aggressively to the exposure from a new investment standpoint. And then for the existing names figure out whatever the best path is, whether that's a short-term path or a long-term path to maximize the opportunity, both for us, the management team and our co-investors. I know that's not a specific answer because every situation is going to be different. But I think that's the way we're looking at it broadly.

Got it. Appreciate that's helpful. And would you say that, that exposure is primarily in the private loan portfolio are mainly in the -- out of the lower middle market. roughly?

I would say it's a mix -- I'd say it's a mix of the two. They both have some exposure and both have some exposure that also has underperformed have been restructured. So I'd say both of them have that exposure.

Okay. And then last question was just -- I saw that you guys are ramping your second private fund under the Main Street, I was just wondering if you can maybe talk about what the investment mandate was for that fund, whether that overlaps at all with MS IF and whether or not that could potentially be something you would want to roll into the public BDC in the future?

Yes. I would say from a strategy standpoint, the strategy for everything we have today on the asset management side is is focused on the private credit -- private loan strategy. So it -- both our first private fund and the second private fund that you're referring to their investment strategy is identical to the current strategy of MSC Income Fund. In terms of having a path or a plan to merge those funds, in the MSC Income Fund. I'd say we don't have that plan today. Obviously, we could look at some opportunities there, but the plan is those funds would just go to their traditional period of investment period and then getting past the investment period than just going through a normal kind of line down or liquidation period. But that's the way we're looking at those funds today.

Our next question comes from the line of Doug Harter with UBS.

The adviser kind of waived some of the incentive fee this quarter. I guess how should we think about that going forward? And what would be the situations where that might happen again?

Doug, thanks for the question. I'd say the view is Main Street through the adviser that Main Street wholly owns, we're going to continue to be supportive of the Fund's just like we have in the past. There's nothing contractual. But we look at the opportunity both on the equity investments that the Main Street has made into the fund and then the small waiver we gave this quarter all being signs that we expect to be supportive, and we also think that the strategy, the existing investment portfolio and the investment opportunity are all positive. So I think that's the way we view it.

Our next question comes from the line of Mickey Schein with Clear Street.

We've generally heard that activity picked up in the third quarter, and it sounds like you're fairly optimistic on your deal flow outlook. So that could help balance the direct lending loan market. With that in mind, what is your sense of the market's supply and demand balance? And what's your outlook for spreads?

Yes, Mickey, thanks for joining us, and thanks for the question. I'd say that we have a -- I'll let Nick add on here, but I think we have -- continue to have a favorable view of the the outlook at least near term, the Q4 and Q1. Obviously, it's hard to say beyond that, but I do think we -- we view the environment to be productive or positive. So I think as we sit here today, we're hopeful that, that activity extend not just through Q4 and Q1 of next year, but broader or longer into 2026. In terms of spreads, we had seen just like everybody has spreads have compressed over the last 12 months or so. But I think as we look at it today, I think we've seen a little bit more stability. It remains to be seen if that if that continues. But I think in general, the spread movement is less today than it would have been over the last 12 months.

But again, Nick, I add on additional comments on your side.

Yes, on the supply demand balance, I'd say one thing on the amount of fundraising in the private credit space, the vast majority has been on, I'd say, the upper middle market and larger deals. So on the smaller end, it's still a little bit too much demand right now, but I think there's there's an opening there that allows us to continue to find the right size. And so I'd say our window there, we feel really good about the next 12 months, they expect volumes to pick up from there. On the spread side, I mean, obviously has tightened over the last 12 months. I do think we found a little bit of a floor here for a little while as there's a limit of how much pricing can go below that [ U.S. plus 500 ] on the smaller deal flows on the smaller deal sizes.

That's helpful. It's taken a couple of quarters, but I'm starting to see -- or we're starting to see the impact of tariffs on some companies at some BDCs that's a slow process. I'd like to understand how much of that risk do you see remaining in the portfolio in relation to tariffs?

Yes, Micky, I would say it's been a while since we gave detailed commentary. I think it was the Q1 conference call, and we get pretty detailed commentary there, just given the nature of our businesses, they have some tariff exposure. I think we acknowledge that early on. But I'd say that when you look at the companies broadly, both the private loan and the lower middle market portfolios, the companies have been able to navigate that risk. Well, and we're not seeing broad-based kind of negative impacts there. That could change in the future, but I think we feel pretty good about how the portfolio companies and their management teams have been able to navigate that risk.

Dwayne, do you see any tail risks related to that issue?

I mean, not as we sit here today. I mean, that could change, obviously, but as we said here today, I think we feel pretty good about it.

Okay. That's good to hear. My last question, given that you've operated in the lower middle market for a long time, I'm curious how long you think it will take for the fund's lower middle market portfolio to run off?

That's a great question, Micky. And I don't have a great answer for you. As you probably recall from all the time that you tracked Main Street Capital Corporation historically. It is a long term to permanent holding period. So we're not -- we're not like a traditional private equity firm that has a very defined exit time line and strategy. We're going to do what we think is right for the company. We're going to do what's right for what partners in the business, which are the management teams of those companies what they want to do. Because of that, it can be a very, very long-term holding period.

So we don't have a clear path on how quickly the lower middle market investments will exit. We do have a clearer path in terms of how we can grow the private loan portion of the portfolio through the liquidity that both Corey and I talked about earlier. And the pipeline that Nick and his team are executing to. We feel better about visibility to that. And I'd say when you look at driving down the lower middle market portfolio as a percentage of the total portfolio, growth of the private loan portfolio is going to be the bigger driver than excess of lower middle market, and that's what we're executing to.

Okay. That's helpful and really interesting. I just thought of one other question I'd like to ask, if I might. Besides reversals, how much of this quarter's unrealized gains were driven by underlying performance of portfolio companies versus comparable multiples?

Yes. So the gain, just to be clear, Mike, those will be Q4 gains as opposed to Q3 if i get your...

No, no the one -- the Q3 that you've just reported.

I'm sorry, you're talking about the unrealized fair value. I'd say it's a combination of the two. For the companies that are getting a lot of inbound interest as you probably would expect, we can't ignore inbound interest, particularly if it's something that is pretty well defined. So it would be a combination both of EBITDA multiple expansion, but also just fundamental EBITDA growth. So you can see in our footnotes, which you'll see it in the 10-Q, we give a schedule that shows the weighted average EBITDA multiples. And I think you will see those go up slightly, but it won't be a massive increase in the multiple when you look at it on a weighted average basis across the portfolio.

Okay. That's helpful. Those are all my questions this morning. Thank you for your time.

Our next question is a follow-up from Brian Mckenna with Citizens.

Okay. So just a few questions on the lower middle market portfolio. What was the fair value of the equity portfolio at quarter end? And then how much is that marked up relative to cost what percent of equity investments have been held for over 5 years within the MSIS portfolio? And then when you look at the broader equity portfolio of Main Street, how much are equity investments typically marked up in a realization event versus the last unrealized market?

-- There's a lot there, Brian. So I probably won't recall others, and I may not have all those numbers at my my fingertip. Cory is kind of pulling up some numbers here to give you the color on what the fair value is versus the cost basis. There is a fair amount of unrealized appreciation in those names. In general, in terms of the kind of the duration or the holding period of the existing investments, it is a long-term permanent holding period. So I would say when you look at the number of companies that are in there that have been in the Main Street, I'm saying broadly, Main Street Capital Corporation and MSC Income Fund portfolios together, it's about 25% to 1/3 have been there for longer than 10 years. You've got another group that have been in there for longer than 8 years.

So these are intentionally mature, well-established companies. They are also well-established investments from a holding period standpoint. So you see the benefit of our patient approach and long-term approach to building value with the management team of those companies over a long period of time. Cory if you have the number what's kind of fair value versus cost on?

Yes. Brian, on the lower Middle market equity, the cost basis as of [indiscernible] was about $112 million, and the fair value of that is $220 million. So about $107 million appreciation between the two.

This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

We just want to say thank you again to everyone for joining us this morning. We appreciate the continued support of the fund shareholders, and we look forward to speaking to everyone again in February after the release of our results for the fourth quarter.

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