Main Street Capital (MAIN) Q4 2022 Earnings Call Transcript

Main Street Capital (MAIN -0.55%)
Q4 2022 Earnings Call
Feb 24, 2023, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Main Street Capital Corporation fourth-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 with Dennard Lascar Investor Relations. Thank you, sir.

You may begin.

Zach Vaughan -- Investor Relations

Thank you, operator. And good morning, everyone. Thank you for joining us for Main Street Capital Corporation's fourth-quarter 2022 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, chief executive officer; David Magdol, president and chief investment officer; and Jesse Morris, chief financial officer and chief operating officer.

Also participating for the Q&A portion of the call is Nick Meserve, managing director and head of the private credit investment group. Main Street issued a press release yesterday afternoon that details the company's fourth-quarter and full-year financial and operating results. This document is available on the investor relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until March 3rd.

Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, February 24th, 2023, and therefore, you were advised the time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements.

Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These statements are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties, and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now, I'll turn the call over to Main Street CEO, Dwayne Hyzak. 

Dwayne Hyzak -- Chief Executive Officer

Thank you, Zach. Good morning, everyone, and thank you for joining us today. We appreciate your participation on this morning's call. We hope that everyone's doing well.

On today's call, I'll provide my usual updates regarding our performance in the quarter while also providing a few updates on our performance for the full year. I'll also provide updates on our asset management activities, our recent declarations of another supplemental dividend payable in March and our regular monthly dividends for the second quarter of 2023, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure, and leverage, and our expectations for the first quarter of 2023, after which we will be happy to take your questions. We're very pleased with our fourth-quarter results, which closed a record year for Main Street across several key performance indicators with significant positive momentum for 2023.

Our results include new quarterly records for net investment income, or NII, per share and distributable net investment income, or DNII, per share, significantly exceeding our records achieved in the third quarter and representing the sixth consecutive quarter in which we set our matched or NII per share record. This consistent, strong performance demonstrates the continued and sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, and the underlying quality of our portfolio companies. We're also pleased that the positive results included strong contributions from both our lower middle market and private loan investment strategies and our asset management business, providing us confidence about the recurring nature of these positive results in the future. As a result of our strong performance, our quarterly DNII per share exceeded $1 per share for the first time, and we generated an annualized net income return on equity of over 20%.

We're also pleased with the strong results for the full year, which also included record NII per share and DNII per share, and allowed us to end the year at a record net asset value per share. After these record-breaking results and some meaningful capital markets activities, we entered the new year with a strong liquidity position and a conservative leverage profile. We remain very encouraged by the continued favorable performance of our diversified lower middle market and private loan investment strategies and remain confident that these strategies, together with the benefits of our asset management business and our cost-efficient operating structure, will allow us to continue to deliver superior results for our shareholders over the long-term future. These positive results and our favorable outlook for the first quarter resulted in our recommendation to our board of directors for our most recent dividend announcements, which I will discuss in more detail later.

Our net asset value per share increased in the quarter due to the impact of the fair value increases and several components of our investment portfolio and the positive impact of our equity issuances in the quarter. Our lower middle market portfolio companies continued their strong performance overall, which resulted in another quarter of meaningful fair value appreciation in the equity investments in this portfolio. We are excited about the new and follow-on investments we made in our lower middle market portfolio companies during the quarter. We expect that these follow-on investments will drive additional fair value appreciation in these portfolio companies in future quarters.

We also benefited from meaningful fair value appreciation in our private loan portfolio and in the value of our wholly owned registered investment advisor through a combination of portfolio of company-specific and broader market-based drivers. We also continue to have favorable investment activities in the fourth quarter. Our lower middle market investments of $152 million in the quarter resulted in a net increase in lower middle market investments after repayments of $127 million. This capped off another strong year of activity with total lower middle market investments of $373 million for the year, resulting in a net increase of $264 million.

Our private loan investment activities in the quarter include new investments of $86 million, which, after aggregate repayments, resulted in a net decrease in our private loan investments of $26 million. For the year, we completed $713 million of new investments, resulting in a net increase in our private loan portfolio of $335 million. Given our favorable liquidity position after our recent capital markets activities, which Jesse will address in his comments, which we achieved despite a very challenging capital markets environment, we are very well positioned to continue the growth of our investment portfolio over the next few quarters. We've also continued to produce positive results in our asset management business.

The funds we advise through our external investment manager, including MSC Income Fund, a non-traded BDC, and MS Private Loan Fund I, a private credit fund, continued to experience favorable performance in the fourth quarter. This positive performance resulted in significant incentive fee income for our asset management business. And as a result, we received significantly higher dividends from our asset management business. We remain excited about our plans for these funds as we execute on our investment strategies and other strategic initiatives.

And we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund. We are also optimistic about our strategy for growing our asset management business within our internally managed structure and are actively working to increase the contributions from this unique benefit to our Main Street stakeholders. And we look forward to sharing additional details as we execute our plans for this business in 2023 and work to create additional value for the next few years. Based upon our results for the fourth quarter, combined with our favorable outlook in each segment of our business and the benefits of our efficient operating structure, earlier this week, our board declared a supplemental dividend of $0.175 per share payable in March, representing our largest and sixth consecutive quarterly supplemental dividend.

Our board also declared regular monthly dividends for the second quarter of 2023 at $0.225 per share, payable in each of April, May, and June, representing a 4.7% increase from the second quarter of 2022. The increased supplemental dividend for March is a result of our strong performance in the fourth quarter, which resulted in DNII per share that was $0.37, or 56%, greater than our monthly dividends paid during the quarter. The March 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12-month period of $0.45 per share, representing an additional 17% paid to our shareholders in excess of our regular monthly dividends. Including the supplemental dividends, our DNII per share for the fourth quarter exceeded our total dividends paid by $0.20 per share.

We are pleased to be able to deliver this significant additional value to our shareholders while also maintaining a significant portion of our excess earnings to support our capital structure and investment portfolio against risks from the current economic uncertainties that may be realized in 2023 and to further enhance the growth of our NAV per share. As we've previously mentioned, we currently expect to recommend that our board declare future supplemental dividends to the extent DNII significantly exceed our regular monthly dividends paid in future quarters and we maintain a stable to positive net asset value. Based upon our expectations for continued favorable performance in the first quarter, we currently anticipate proposing an additional supplemental dividend payable in June 2023. Now turning to our current investment pipeline.

As of today, and after our robust activity for the fourth quarter, I would characterize our lower middle market investment pipeline as below average. While the near-term pipeline is currently below average, we remain highly confident in our ability to generate significant new lower middle market investment opportunities in 2023. We also continue to be very pleased with the performance of our private credit team and the significant growth they have provided for our private loan portfolio and our asset management business. And as of today, I characterize our private loan investment pipeline as average.

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

David Magdol -- President and Chief Investment Officer

Thanks, Dwayne. And good morning, everyone. [Inaudible] provides a good opportunity to look back at our history and highlight the benefits of our unique and diversified investment strategy and discuss how this is enabled us to deliver attractive returns to our shareholders over an extended period of time. We believe, looking back at our history, also supports our intent to continue to execute our unique and highly differentiated strategy in the future.

Since our IPO in 2007, we have increased our monthly dividends per share by 105%, and we have declared cumulative total dividends to our shareholders of $36.65 per share, or over 2.4 times our IPO price of $15 per share. Our total return to shareholders since our IPO calculated using our stock price as of yesterday's close and assuming reinvestment of all dividends received since our IPO was 8.6 times money invested. This compares very favorably to 2.5 times money invested for the S&P 500 over the same period of time and is significantly higher when compared to our BDC peers. As we've previously discussed, we believe that the primary drivers of our long-term success have been and will continue to be our focus on making both debt and equity investments in the underserved lower middle market, supporting our private credit activities for the benefit of our balance sheet and for the clients of our asset management business, which clearly benefits our shareholders and our industry-leading cost structure, which provides for a strong alignment of interests between our management team and shareholders through our team's meaningful stock ownership and incentive compensation plan, which is tied to our ability to achieve superior financial results for our shareholders.

Most notably and uniquely, our lower middle market strategy provides attractive leverage points and yields on our first-lien debt investments while also creating a true partnership with the management teams of our portfolio companies through our flexible equity ownership structures. This approach provides significant downside protection through our first-lien debt investments while still providing the benefits of alignment and significant upside potential with our equity investments made alongside our portfolio company management team partners. Our long-term historical track record of investing in a lower middle market, coupled with our view that this market continues to be underserved, gives us confidence that we will be able to continue to find attractive new investment opportunities in this important cornerstone of our business in the future. In 2022, Main Street invested $373 million in our lower middle market strategy.

$137 million of this capital was deployed in five new lower middle market platform companies, with the remaining $236 million represented follow-on investments in existing seeds in lower middle market companies. Consistent with our comments in prior quarters, these follow-on investments were made to support the growth strategies and some of our highest-performing portfolio companies, which makes this aspect of our lower middle market investment activity very exciting for us. Consistent with our guidance in prior quarters, 2022 represents the strongest year of add-on investments in our lower middle market companies in Main Street's history. Our follow-on investments are typically used to support multiple objectives, including acquisitions, diversification opportunities, product or geographic expansion, and recapitalization transactions.

These follow-on investments support proven management teams that intrinsically pose less investment risk when compared to providing capital to new portfolio companies. Since we are significant equity owners in our lower middle market companies, we benefit from participating alongside the proven managers in these businesses as they strive to achieve meaningful equity value creation. As we've stated in the past, our lower middle market portfolio companies perform over time. They naturally deleverage free cash flow generated from operations.

This also allows us, along with our lower middle market portfolio management team partners, to benefit from the distributions received from this cash flow. Given the strength and quality of our lower middle market portfolio, we expect dividend income to continue to be a primary contributor to our results in 2023. Additionally, this deleveraging, coupled with the attractive underlying operating results of our lower middle market portfolio companies, allowed us to achieve $75 million in fair value appreciation in realized activities. This benefit in our lower middle market equity investments is unique among our BDC peers with value appreciation, along with realized gains, serving to offset losses we will naturally incur in our investing activities.

Our unrealized equity appreciation also provides potential upside to Main Street's net asset value that other BDC simply do not have. The last important area I'd like to cover regarding our 2022 accomplishments are the impressive contributions that our private credit team delivered during the year. Our private credit team continued to execute on our strategy to dedicate significant resources toward growing the private loan segment of our business while deemphasizing our middle market portfolio, which, as a reminder, typically includes investments in larger syndicated loans. Our purposeful and intentional strategic shift over the last five years to grow our private loan portfolio is primarily driven by our belief that an attractive and growing direct lending environment exists and that private loan investments provide an attractive, risk-adjusted return profile for Main Street.

During 2022, Main Street invested $713 million in our private loan strategy, which helped increase our private loan portfolio by 29% and purposely decrease our middle market portfolio by 17%. As a result, at year-end, our private loan portfolio had grown to represent 36% of our total investments at fair value, and the middle market portfolio declined by 300 basis points to represent 8% of our total investments at fair value. As Dwayne discussed earlier, our private loan capabilities also support our key strategic intention to continue growing our asset management business. Now turning to our current portfolio.

As of December 31st, we had investments in 194 portfolio companies, spanning across more than 50 different industries. Our largest portfolio company represented 3.4% of our total investment income for the year and 3.2% of our total investment portfolio fair value at year-end. Majority of our portfolio investments represented less than 1% of our income and our assets. Our investment activity in the fourth quarter included total investments in our lower middle market portfolio of $152 million, which, after aggregate repayments on debt investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of $127 million.

During the quarter, we also made $86 million in private loan investments, which, after aggregate repayments of debt investments and return of invested equity capital, resulted in a net decrease in our private loan portfolio of $26 million. Finally, during the quarter, we had a net decrease in our middle market portfolio of $19 million. At year-end, our lower middle market portfolio included investments in 78 companies, representing over $2.1 billion of fair value, which is over 20% of our cost basis. We had investments in 85 companies in our private loan portfolio, representing $1.5 billion in fair value.

In our middle market portfolio, we had investments in 31 companies, representing $329 million of fair value. Total investment portfolio at fair value at year-end was 109% of the related cost basis. These additional details on our investment portfolio at year-end are included in the press release that we issued yesterday. With that, I will turn the call over to Jesse to cover our financial results, capital structure, and liquidity position.

Jesse Morris -- Chief Financial Officer and Chief Operating Officer

Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the fourth quarter, which included a number of quarterly records and capped a year with Main Street achieving records for net investment income, distributable net investment income, and net asset value on a per-share basis. Our total investment income for the fourth quarter represented another consecutive quarterly record, increasing by 31.7 million, or 38.6%, over the same period in 2021 to a total of 113.9 million. The fourth quarter surpassed our most recent quarterly record for total investment income in the third quarter of 2022 by 15.5 million, or 15.7%, including meaningful increases in interest, dividend, and fee income, which demonstrates the continued strength and momentum of our investment and asset management strategies.

Interest income increased by 32.5 million from a year ago and 11.3 million over the third quarter. We estimate the continued benefit from increases in benchmark index rates drove a little over half of the increase over the third quarter, with the remainder driven primarily by the continued growth in our portfolio debt investments. In addition, the combined favorably impact of certain elevated income items in the fourth quarter, including dividends and accelerated prepayments, repricing, or other activities were considered less consistent, was approximately 2 million, or $0.02 per share above the average of the prior four quarters and was comparable to such income amounts earned in the fourth quarter of 2021. Our operating expenses for the quarter increased by 7 million over the fourth quarter of 2021, largely driven by increases of 7.1 million in interest expense, 1.5 million in general and administrative expenses, and 0.7 million in share-based compensation, partially offset by a decline of 1.5 million in cash compensation-related expenses and an increase of 0.8 million in expenses allocated to the external investment manager.

The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, was 1.4% for the year and continues to be among the lowest in our industry. Our external investment manager contributed 7 million to our net investment income for the fourth quarter, an increase of 2.1 million from the same period of the prior year, primarily due to a 1.9 million increase in incentive fees earned. During the quarter, we recorded net fair value appreciation, including net realized losses and net unrealized appreciation, on the investment portfolio of 36.2 million, including net fair value appreciation of 24.2 million in our lower middle market portfolio, 9.2 million in our private loan portfolio, and 10.4 million in our external investment manager. These were partially offset by a net fair value depreciation of 8.8 million in our middle market portfolio.

Net asset value, or NAV, per share increased by $0.92 over the third quarter and by $1.57, or 6.2%, when compared to a year ago to a record NAV per share of $26.86 at year-end. We ended the fourth quarter with 12 investments on non-accrual status, comprising approximately 0.6% of the total investment portfolio at fair value and approximately 3.7% of cost. While not material to our NAV expectations for the next quarter, we did resolve a large and very long-standing non-accrual in the first quarter of 2023, which will impact these non-accrual stats at March 31st, 2023. We continue to believe our conservative leverage, strong liquidity, and continued access to capital are significant strengths that have us well positioned for the future.

Given our belief of the importance of liquidity and a conservative capital structure, as we indicated in our third-quarter conference call, we continue to explore additional sources of debt financing. During the fourth quarter, we were active on the capital front, including the execution of a new SPV credit facility with commitments of 255 million, the execution of 100 million unsecured private placement notes, the repayment of the 185 million due on our 2022 notes at maturity, and a net 71 million raise from equity issuances under our aftermarket program. As a result of these actions, we ended the year with strong liquidity, including cash and availability under our credit facilities of 617 million. Taken together with an additional 110 million provided by additional capital activities in January 2023, including the issuance of 50 million additional unsecured private placement notes, and the expansion of commitments under our corporate credit facility of about 60 million, we believe this provides us with the liquidity necessary to continue to be opportunistic and pursue attractive investment opportunities in 2023 while continuing to maintain a conservative leverage profile and healthy liquidity in these uncertain periods.

Our regulatory debt-to-equity leverage, calculated as total debt excluding our SBIC debentures, divided by net asset value, was 0.79, and our regulatory asset coverage ratio was 227%, both of which are improvements from the third quarter and are intentionally slightly below the conservative end of our target ranges of 0.8 to 0.9 times and 210% to 225%, respectively. Coming back to our operating results. Our return on equity for the fourth quarter was 28.8% on an annualized basis and 12.6% for the year. DNII per share for the quarter was a record $1.03 per share, exceeding the total regular monthly dividends per share paid to our shareholders in the fourth quarter by $0.37 per share, or approximately 56%.

DNII per share for the quarter eclipsed our prior record in the third quarter of 2022 by $0.15 per share, or 11.7%, and increased by $0.25, or 32.1%, over the same period last year. Total dividends paid in 2022 were $2.945 per share, including $0.35 per share in supplemental dividends, an increase of 14.4% over total dividends paid during 2021. As Dwayne mentioned, given the strength of our operating results and the outlook for 2023, our board approved a supplemental dividend of $0.175 cents per share payable in March 2023. With this supplemental dividend, total declared dividends for the first quarter of 2023 are $0.85 per share, representing an 11.8% increase over the total monthly and supplemental dividends paid in the fourth quarter of 2022 and a total annualized yield of approximately 8.5%.

As we look forward, given the strength of our underlying portfolio, we expect another strong top line and earnings quarter in the first quarter of 2023 with expected DNII per share of at least $0.98 per share and with the potential for upside driven by the level of dividend income and portfolio investment activities during the quarter. With that, I will now turn the call back over to the operator so we can take any questions.

Questions & Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from Robert Dodd with Raymond James. Please proceed with your question.

Robert Dodd -- Raymond James -- Analyst

Hi, good morning, and congratulations on another really good quarter. Dividend income if I can. I know it's hard to not just predict, but in this quarter, if I take out the dividend from the asset manager [Inaudible], it was still a really strong dividend quarter just from the portfolio companies. I mean, you know, 2021 was crazy, but, you know, [Inaudible] can you give us any color -- you've given us some color in the press about how much the concentration of what portion of the portfolio that income comes from.

Can you give us color -- update on that or even maybe how much of that income comes from portfolio companies you've held for five years or more? Or any breakdown you can give us for kind of the types, age, concentration of portfolio companies it's coming from?

Dwayne Hyzak -- Chief Executive Officer

Sure, Robert. Thanks for the question. We're happy to give you those details. As you said, and you'll be able to see this when you see the 10-K, you know, the contributions on the dividend income side are pretty broad-based.

If you take out MSC Income Fund, it would take another 12 companies on the lower middle market side before you got to 50% of the remaining dividend income. So. we think it's a -- you know, it's nice diversity contributions from a broad base of companies. You know, once you get past that 12, there's a very large number of other companies that are meaningful contributors.

So, as you heard us say in our comments, you know, we feel good about how the lower middle market companies are performing. You see that in both the appreciation we recognized in the quarter. But you also see it to the question you raised here -- to the point you raised here with the broad-based dividend income that we saw from the portfolio in the fourth quarter.

Robert Dodd -- Raymond James -- Analyst

Got it. Got it. Thank you for that. I mean -- then the other question, the lower middle market pipeline, you said it's below average.

I mean, but you also gave a lot more. But can you give me why currently it is below average. Do you think -- is it a function of the outlook on the economic environment? Or, you know, for it to get back to average or above average, do we need more certainty in kind of the economy? Because, obviously, sellers -- business owners, but it's not sponsors for your lower middle market deals, right? So, they have different views on the economy. Any color on what it takes to get a rebound in the pipeline on that side of business?

Dwayne Hyzak -- Chief Executive Officer

You know, obviously, the statement we provide each quarter is always highly judgmental. So, you've heard this for a long time. And, you know, I'd say it's below average today largely because, you know, the third quarter and fourth quarter were both very, very active, very robust, you know, time periods. As I said in my comments, you know, while it is below average today, you know, it's not a concern.

I think we feel very confident, very good about the ability of our platform to consistently generate lower middle market opportunities over the long term. Just as we sit here at this point in time, you know, it's a little bit slower, but it's not a big concern for us. I think we -- you know, we expect to be active. That's why we've prepared ourselves, from a capital structure standpoint, to continue to be active and continue to grow in that area.

And we just need the -- you know, the market to -- you know, to reset a little bit and see, you know, the seller's expectations go back into, you know, being in line with where we need them to be from an execution standpoint. I'll let David add any additional comments he has there.

David Magdol -- President and Chief Investment Officer

Yeah. Robert. So when we think about the comment and how we characterize it, the near-term outlook is really mostly impacted by Q1 '23 and how we see our closing is taking place in that period of time. But I'd say the lower middle market's always been lumpy.

You know, the medium term, Q2 and beyond, we have a better visibility toward the pipeline growing. So, I wouldn't be concerned relative to the overall market and taking -- you know, making too many assumptions about it being, you know, unattractive or not being able to surface our type of opportunities. We're very confident that the year will play out well relative to the opportunity sets. We're still dealing with family owned businesses.

They still need to transact. And we've got a very active, you know, kind of medium-term pipeline that's out there.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you. And again, congratulations on the quarter.

Dwayne Hyzak -- Chief Executive Officer

Thank you, Robert. We appreciate it.

Operator

Our next question comes from Bryce Rowe with B. Riley. Please proceed with your question.

Bryce Rowe -- B. Riley Financial -- Analyst

Thanks a bunch. Good morning, guys.

Dwayne Hyzak -- Chief Executive Officer

Morning, Bryce.

Bryce Rowe -- B. Riley Financial -- Analyst

Let's see. I just wanted to -- I wanted to kind of dive into the fair value marks here in the quarter. Nice to see NAV up and obviously a contribution from the ATM, but also unrealized -- or net gain type of activity. You highlight in the press release that, you know, some, I guess, 33 lower middle market portfolio companies saw net appreciation, and 27, depreciation.

Can you -- you know, kind of similar to Robert's question around dividend breadth, can you talk about, you know, is there a, you know, a portfolio company that's having an outsized impact from a market perspective here in the quarter?

Dwayne Hyzak -- Chief Executive Officer

Sure, Bryce. I always say that, you know, when you look at our appreciation on the lower middle market side, there's a number of companies that continue to outperform significantly. And we see it, you know, as to Robert's prior question on the dividend income side, and on your question here, you also see it on the unrealized appreciation. And just looking at, you know, schedule here, I would say there is -- you know, there's kind of, you know, six or seven companies that, you know, contributed significantly to the unrealized appreciation, you know, during the quarter.

What I'll also tell you -- and I won't give you numbers by names -- but I would say that those same companies are also a lot of the primary contributors to the dividend income. So, we just got some companies that despite the challenges we see in the economy with inflation, supply chain, you know, quality, labor, etc., you know, these companies, as you've heard us say in the past, are excellent managers, excellent teams, and they've been able to navigate the challenges, not just navigate them, but, you know, continue to, you know, excel. And you're seeing that come through in the continued appreciation on the fair value side and on the dividend income contributions.

Bryce Rowe -- B. Riley Financial -- Analyst

OK. OK. That's helpful. And then, you know, maybe on the asset management activities and the dividend into the BDC here in the quarter.

Obviously, you know, nice uptick in the dividend. Looked like the incentive fee income kind of ticked up pretty meaningfully in the fourth quarter. Is that -- you know, is that a sustainable level? Is there anything, you know, in that income that wouldn't be considered kind of recurring?

Dwayne Hyzak -- Chief Executive Officer

Yeah, but I would say there was one transaction in the quarter that benefited both Main Street directly. It also benefited MSC Income Fund. So, you know, that transaction will not be recurring. But even without that transaction, we would have seen some incentive fee income at MSC Income Fund.

So, that's very, very difficult to predict, you know, what happens in the future, even one quarter out. I would say, as we sit here today, we would expect to have some incentive fee for a contribution from our asset management business. It may just be down a little bit from where it was in the fourth quarter, primarily or directly attributable to that one transaction that I referenced.

Bryce Rowe -- B. Riley Financial -- Analyst

OK. OK. And then, maybe last one for me. You all highlight where not -- accruals are today, obviously, not a meaningful piece of the portfolio.

But can you talk about kind of the puts and takes quarter on quarter? I guess you have 12 non-accruals today versus 11 last quarter, and you did highlight some realized, you know, loss activity. I'm just curious if those non-accruals generated some of that.

Dwayne Hyzak -- Chief Executive Officer

Yeah, I'll let Jesse you add on any additional detail that he has here. But I'd say that, you know, during the quarter, you know, from memory, we had one, you know -- one net add. So, you know, not a lot of movement, as you said. I think the portfolio as a whole continues to perform well.

We do have some names that have underperformed. And, you know, when they underperform based on the -- you know, the private loan or middle market side, you know, the first thing we do is look for the private equity sponsor in terms of what they're going to do in relation to supporting the company. And I'd say that, you know, we've seen, in most situations, the private equity sponsors continue to be very, very supportive, which obviously is a good thing and a big part of our investment strategy in the private loan segment. But we have had a couple of where, you know, the performance was such that the private equity firms, you know, either, you know, we're not supportive or we -- you know, we needed to do a restructure that either caused, you know, the non-accrual or, you know, the realized loss activity.

But I'll let Jesse give any additional specifics he can add on.

Jesse Morris -- Chief Financial Officer and Chief Operating Officer

Bryce, we had one that came on. That was the movements. And I think you probably heard it in my commentary, but we expect to have another one come off in the first quarter of this year.

Bryce Rowe -- B. Riley Financial -- Analyst

Got it. OK. I think I'll leave it there. Appreciate it.

Dwayne Hyzak -- Chief Executive Officer

Thanks a lot, Bryce.

Bryce Rowe -- B. Riley Financial -- Analyst

Thank you.

Operator

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

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Good morning. Thanks for taking my question. Just one on the asset management business.

You mentioned briefly in the prepared remarks about actively working on growing the business. Realized that still a little early days, but I wonder if you could talk a little bit more about what sorts of activity you're working on. And also, maybe you could -- wonder if you could just comment upon what you're seeing in terms of either fundraising or investor demand for the product there. Thanks.

Dwayne Hyzak -- Chief Executive Officer

Sure. Thanks for the question, Ken. While it is early because we haven't, you know, launched anything, I'd say, consistent with our messaging for the last year or longer, our desire is to grow the asset management business. I think it would be natural that our next step there would be another private, you know, fund or a private vehicle similar to MS Private Loan Fund I.

I think the good news for us and you could see it, you know, in my comments, and you can also see it in the incentive fees we earned during the quarter, that fund has performed really well. So, I think the LPs or the investors there are very pleased or excited about that performance. So, we are, you know, somewhat confident that once we launch another vehicle, there will be a significant amount of interest from those existing LPs. And the -- you know, the outcome -- the eventual outcome to how much success we have there will be how successful we are at bringing new LPs in, you know, specifically on the institutional side.

So, I'd say that the -- you know, the big question in terms of how large will that next vehicle be. But I think we've got a high level of confidence that we'll have a new vehicle in the near term and that that --you know, that new vehicle will have strong reception at least from the existing LPs in our first private vehicle.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Very helpful there. And just one follow-on if I may. Just on the liquidity position, wondering if you're comfortable with the liquidity position as it is, or do you see a further boost in liquidity position over the near term there? Thanks.

Dwayne Hyzak -- Chief Executive Officer

Sure. Thanks, Ken. I think you probably heard us say over a long period of time that, you know, one of the big things that we value is liquidity. We always want to be in a position where we can not only be defensive, but we can be, you know, on offense.

We always want to be in position to support our lower middle market companies, whether that's, you know, in good times or bad. We also want to make sure that when the market is most attractive, which is when no one else has capital that we can be on offense. You've seen us do that, you know, through each of, you know, the big step-backs in the economy, whether it was the Great Recession or, more recently here, during COVID. And if you look at some of the best-performing companies, specifically on the lower middle market side that we touched on earlier in response to some of the other questions, several of those investments were made right in the middle of COVID.

And we, you know, wouldn't have been able to do that had we not had our very conservative capital structure and, you know, significant liquidity position. So, we're always focused on maintaining significant liquidity. I think, you know, we've done a great job over the last two or three months of, you know, really enhancing our liquidity and our capital structure. But you're going to see us always focused on being in a conservative position so we can do what I just touched on.

But I'll let Jesse, you know, add any additional comments he wants to add.

Jesse Morris -- Chief Financial Officer and Chief Operating Officer

So, I think you covered it.

Dwayne Hyzak -- Chief Executive Officer

OK.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Great. Very helpful there. Thanks again.

Dwayne Hyzak -- Chief Executive Officer

Thank you, Ken.

Operator

Our next question is from Mark Hughes with Truist Securities. Please proceed with your question.

Mark Hughes -- Truist Securities -- Analyst

Yeah. Thanks. Good morning.

Dwayne Hyzak -- Chief Executive Officer

Morning, Mark.

Mark Hughes -- Truist Securities -- Analyst

In terms of the private loan pipeline average, you know, this is kind of a slow deal environment. You seem pretty optimistic about that. I'm just interested in your thoughts on what's driving that.

Dwayne Hyzak -- Chief Executive Officer

Sure. I do think, overall, you know, for the last couple of months, you have seen a slowdown in the overall market. You know, from my standpoint, just purely, you know, my personal opinion, I think that's because, you know, the private equity firms have been needing to reset their expectations given the significantly higher cost of capital that exists in today's marketplace. I think, to some extent, you know, that's happening.

So, I do think that you'll see that, you know, part of the marketplace from an activity standpoint starting to improve. And I think we've already seen that here more recently. But I would give credit to our private credit team over the last couple of years, including during COVID, and largely because of what we just talked about, you know, us having liquidity and having a capital structure that allowed us to continue to be active. You know, we did a great job, and we built some, you know, what we think are some really, you know, good, high-quality relationships with private equity firms that we want to be doing business with.

So, we continue to see good deal flow. You know, I do think we, just like everybody else, is being very prudent in how we approach the market. But from our standpoint, when a private equity firm is trying to -- transacting in this marketplace, you know, we think the quality of that transaction is likely better because it survived what's going on in the broader economy. And that private equity firm, you know, is excited about moving forward with that investment, despite the fact that they're going to pay a higher cost of capital, at least on the debt capital side.

So, we think it's a good environment to be investing for those reasons. And obviously, as we touched on earlier, you have the ability to continue to be active and be selective where it makes sense given our conservative capital structure and our liquidity position. But I'll see if Nick wants to add any additional comments on that point.

Nick Meserve -- Managing Director and Head of Private Credit Investment Group

I think Dwayne got the kind of the overall theme. I think other one is repayments are down significantly across the industry. And so, with lower repayments, you know, our need to respend that money is lower. And so, our total transactions might be down, but our dollar amount we'll spend in total and net basis will be where we target for the year.

Mark Hughes -- Truist Securities -- Analyst

Yeah, Thank you for that. And then, just to kind of step back. Lower middle market, if we do run into a slower economy, is that going to perform from a credit perspective? Refresh me on the kind of the dynamics there.

Dwayne Hyzak -- Chief Executive Officer

First of all, I'll provide a couple of comments, and then, if David wants to add on, he can. But I'd say the key points we look at, one is, you know, most of our lower middle market portfolios, fixed-rate debt as opposed to floating. So, you know, they're not being impacted by the rising rate environment. It's one of the -- you know, the big positives we see in that part of our strategy.

You know, the management teams there, they are obviously dealing with inflation and supply chain, labor, etc., but they are not worried about, you know, their capital structure because they've got a, you know, very well-capitalized, you know, strong investor in Main Street in the capital structure. And they are not seeing, at least for the -- you know, the majority of that portfolio, are not seeing their interest expense, you know, changes as market rates have improved. So, we think that's a big positive today, and we think it will be a, you know -- continue to be a big positive going forward. The reason we've always valued our -- you know, kind of really favored our lower middle market investment strategies, our primary strategy is that we are directly aligned with the people that run that business day to day.

You know, the individuals that are the management teams that are typically the majority owners of these businesses, you know, they're living with that company day to day with the customers, vendors, employees. So, when we've seen them, you know, execute in times of stress, again, whether it's COVID, Great Recession, whatever time period you want to pick, you know, clearly, they're dealing with challenges just like everybody else's. But in our opinion, and not just our opinion but our experience long term over the last 20 years, is that they will outperform the market just because they are making changes on a real-time basis. These businesses are not large.

So, when they make a strategic decision to, -- you know to pivot to address what's going on in the marketplace, you know, it has an impact almost immediately. So, that's something that we've always viewed as a big positive. And they -- you know, they're doing that one because it's right thing to do. But they're also doing it because, you know, they're the majority owner of the business in most situations.

So, those are the two biggest things I'll highlight, but I'll let David add any additional color.

David Magdol -- President and Chief Investment Officer

I think Dwayne covered most of it. Just a couple of additional points. One is that, you know, for the most part, we're backing existing managers that have been in the business for a lengthy period of time, have seen cycles up and down in the past, and they know what to do. They're proactively looking at their, you know, operating expenses, looking where they can cut.

They're very nimble as small businesses and look ahead very proactively. They also have less leverage on the front end that we'd see in a normal private equity type of transaction, just total leverage. So, their coverage is better. And, you know, the overall portfolio is very seasoned at this point.

So, if you look at the 75 companies, we have, many of them been in the portfolio for an extended period of time and have naturally deleveraged. So, they're really well situated for a tougher economic climate if we happen to be there in their individual industry segment.

Mark Hughes -- Truist Securities -- Analyst

Appreciate that. Thank you.

Dwayne Hyzak -- Chief Executive Officer

Thanks, Mark.

Operator

Our next question comes from Vilas Abraham with UBS. Please proceed with your question.

Vilas Abraham -- UBS -- Analyst

Hi, everyone. Thanks for the question. Just to put a finer point on some of the capital structure commentary, so leverage -- regulatory leverage dropped down to 0.79, I believe. So, is the message here that you guys are comfortable running at the bottom or you are below the range? And, you know, how are you thinking about timing on when that could go up? And also just, you know, how you couple that with the equity issuance that you're able to do here?

Dwayne Hyzak -- Chief Executive Officer

Sure. Thanks for the question and thanks for joining us this morning on the call. Yeah, I'd say we're very comfortable, you know, being above or below the range. Obviously, we're -- you know, we're a little bit more on the conservative side today.

I'd say that is, you know, very much intentional, just given the current economic environment, kind of the overall backdrop that we're dealing with. In terms of, you know, when will it move the other direction, it'll all be driven primarily by the pace of opportunities in our lower middle market strategy and then, secondarily, our private loan strategy. But we're comfortable -- you know, you can see it in our quarterly results, we're comfortable that we can deliver best-in-class returns, you know, not just from an industry standpoint, but compared to other public companies without running it, you know, at higher levels of leverage. And we think that's a huge part of, you know, the benefit that a shareholder or an investor, you know, gets from investing in Main Street.

You're getting a very, very good return, and we think you're getting it on a very -- you know, a very, you know, positive or favorable risk-adjusted basis.

Vilas Abraham -- UBS -- Analyst

Got it. OK. And then, just maybe on the dividend, just, you know, how are you guys thinking about the base versus the supplemental dividend? And, you know, what would it take to get a bump-up in the base at some point?

Dwayne Hyzak -- Chief Executive Officer

Sure. So, I think we've been trying to be fairly consistent for the last year or so in terms of setting our policy. And I'd say that we're not planning on making changes there. So, our long-term goals -- and when we say long-term goals, you know, three to five years, not, you know, kind of two to three quarters -- is to deliver a consistent, recurring, and growing monthly dividend.

You know, historically, it's been, you know, kind of 3%, plus or minus. And I think, in this environment, most recently, we've been above that, closer to 5%. And I think, you know, near term, we would expect that to, you know, continue to be the case. On the supplemental, you know, that's going to be directly attributable to how much distributable net investment income, or DNII, are we able to generate in a quarter in relation to the monthly.

So, you know, our dividend for March is based upon the fourth quarter's results for -- I think I may have touched on in the prepared comments. But, you know, we exceeded the monthly dividend by a very wide margin. I think it was $0.37, off the top of my head. And we paid out about half of that -- a little bit less than half that in the supplemental.

So, that's -- you know, that's the -- you know, the approach we've taken the last couple of quarters. I think we'll continue to take that conservative approach. And the reason we're not paying out more is, though -- you know, even though we feel really good about the portfolio is performing at a super, super high level, there is additional risk in the economy. We think it's prudent, you know, to preserve some of that just in case things -- you take a step back, we would not think it would be prudent to be paying out 100% of your dividend -- 100% of your earnings and dividends today, because, you know, there's a number of factors that would say, you know, there's risk in the economy that, you know, would support not doing that.

So, that's why you see us taking, you know, a fairly conservative approach and how we're -- you know, how we're paying that supplemental dividend.

Vilas Abraham -- UBS -- Analyst

Got it. Makes sense. And maybe one last quick one. You mentioned that six or seven companies contributed materially to the -- you know, to the appreciation this quarter.

Were those in any specific sector, or was that kind of cross-sector?

Dwayne Hyzak -- Chief Executive Officer

When you say sector, you mean industry, or you mean by strategy?

Vilas Abraham -- UBS -- Analyst

Industry. Yeah, industry

Dwayne Hyzak -- Chief Executive Officer

Yeah. Yeah. I would not say that they're specific to a, you know, individual industry or sector. I think if you look at it, you know, our portfolio in the lower middle market continues to be very, very, you know, diverse.

And, you know, when you look at the top contributors there, I'd say that, you know, they are across a wide range of different industries.

Vilas Abraham -- UBS -- Analyst

Thank you.

Dwayne Hyzak -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from Erik Zwick with Hovde Group. Please proceed with your question.

Erik Zwick -- Hovde Group -- Analyst

Thank you. Good morning. There has been a number of comments this morning with regard to credit quality and still an excess risk in the economy and the outlook. And I'm curious, you know, from what you track and the data that you have, are you seeing any early signs of, you know, deterioration or concerns about credit quality, they're in heightened amendment requests or internal watch list growing, or any companies that are, you know, maybe getting close to covenant [Inaudible], anything along those lines at this point?

Dwayne Hyzak -- Chief Executive Officer

Yeah. Erik, I would say that, you know, when you look at changes there, I wouldn't say that we've seen a huge change. I think when we look at underperformance, you know, at a specific portfolio company level or more broad-based, I think it continues to be, you know, very company specific and not -- you know, not something that is driven by the broader economy. And, you know, David, Nick, Jesse, you guys jump in here, but we're -- you know, we're not seeing a systematic -- or thematic, you know, kind of issue across the portfolio.

Just like in any environment, you know, some companies perform better; some, you know, companies underperform. But I would say that, you know, the relative overperformance, underperformance, you know, has not changed dramatically here in the most -- you know, the most recent months. But you guys add on if you have a different -- you know, different view or a different opinion on it.

David Magdol -- President and Chief Investment Officer

The only thing I'd add is that, you know, if you look at our diversification, we're very purposefully and intentionally diverse across a lot of different industry segments, some of which are countercyclical. So, we do feel like we're well positioned, as well positioned as we can be. Obviously, if we have a major change in the overall economy, we'll feel that impact, but right now, we're pretty comfortable with where we sit.

Erik Zwick -- Hovde Group -- Analyst

Thanks. I appreciate the commentary there. And just one more for me. Just with regard to the strategy to de-emphasize, the middle market portfolio, I think you mentioned it's about 8% fair value of the total portfolio now.

Is the goal to bring that down to zero? Or do you still occasionally see, you know, attractive opportunities to invest within that portion of the portfolio?

Dwayne Hyzak -- Chief Executive Officer

Sure, Erik. We've been trying to deemphasize -- we're not trying -- we have been deemphasizing the middle market strategy for a number of years. So, you know, five, six years ago, we said publicly that we were going to be working to deemphasize that and pivot, you know, to the private loan strategy. And I think we've been highly successful in doing that.

And I think it's been a significant contributor to our success over the last couple of years. And you'll see us continue to do that. We don't expect it to go to zero. You know, we do want to maintain that -- you know, that capability because there could be stuff that comes up from time to time where it makes sense to continue to be active there.

But I think you'll see us continue to, you know, minimize those activities going forward.

Erik Zwick -- Hovde Group -- Analyst

Got it. Thanks for taking my questions today.

Dwayne Hyzak -- Chief Executive Officer

Thank you, Erik. We appreciate it.

Operator

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Dwayne Hyzak for closing comments.

Dwayne Hyzak -- Chief Executive Officer

Thank you, Maria. Thank you again, everybody, for joining us this morning for our call. We really appreciate your interest in and support of Main Street, and we look forward to talking to you again in early May.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Zach Vaughan -- Investor Relations

Dwayne Hyzak -- Chief Executive Officer

David Magdol -- President and Chief Investment Officer

Jesse Morris -- Chief Financial Officer and Chief Operating Officer

Robert Dodd -- Raymond James -- Analyst

Bryce Rowe -- B. Riley Financial -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Mark Hughes -- Truist Securities -- Analyst

Nick Meserve -- Managing Director and Head of Private Credit Investment Group

Vilas Abraham -- UBS -- Analyst

Erik Zwick -- Hovde Group -- Analyst

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