As a financier of small private companies, Main Street Capital Corporation (NYSE:MAIN) has put up a record that is the envy of its industry. This quarter marked its eighth year as a public company, and its results were spectacular relative to its peers'.

This quarter by the numbers
Business development companies like Main Street Capital report two measures of earnings. The first is operating income, or net investment income, which captures the BDC's earnings excluding capital gains or losses. This quarter, Main Street Capital earned $27.9 million in net investment income, or $0.56 per share. Higher dividend income from its equity investments helped drive income higher this quarter.

Net income, which measures its earnings power inclusive of capital gains or losses, came in at $20.7 million, or $0.41 per share. On the conference call, Main Street insiders noted that mark-to-market losses in its portfolio accounted for capital losses of about $0.15 per share.

Its net asset value, or book value, fell by $0.05 per share from the prior quarter to $21.79 per share.

Some additional detail
I encourage shareholders to listen to the company's third-quarter conference call, as it provided some additional insight into the company's financial results that you won't find in its press release or quarterly filings:

  • A number of Main Street Capital's smaller portfolio companies are in advanced discussions to sell to larger companies or private-equity sponsors. Many are receiving offers well above the valuation Main Street carries them at in its portfolio, suggesting upside in the form of book value growth and realized gains.
  • Since its IPO, Main Street Capital has sold 33 of its "lower middle market" businesses. Of those, 23 resulted in realized gains of $82 million. The remaining 10 resulted in realized losses of only $8 million.
  • Of the companies Main Street has sold at a realized gain, the average sale was transacted at a 56% premium to the valuation Main Street gave the company just four quarters prior, indicating that it conservatively marks its book of investments.

Looking forward, the company expects that it will be able to rotate out of lower-yielding "middle market" debt investments and into higher-yielding "lower middle market" investments to drive improvements in its operating income.

CEO Vince Foster indicated that, on average, lower middle market loan yields are "several hundred basis points higher" than middle market loans yields. Its filings reveal that loans to smaller companies currently yield 12.3% vs. 8% for loans to larger companies.

Main Street sees near-term opportunity to shift roughly $50 million to 100 million of capital from lower-yielding investments to higher-yielding investments. Assuming a 3% increase in yields, that could add as much as $3 million, or $0.06 per share, to annual net investment income.

The one to beat
Main Street is setting the benchmark for quality in its industry. Not only has it outperformed in terms of portfolio performance, but it also has a knack for keeping operating costs low as a percentage of its investment portfolio. It noted in its report that its operating expenses to assets ratio was a paltry 1.3% -- well below competitors', which typically pay 2% of assets and 20% of operating income to their managers each year.

As in past quarters, Main Street filed its quarterly report following the conclusion of its conference call, and it will take time to get through. But from its release and subsequent conference call, it appears the third quarter was a very good quarter, indeed.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.