Main Street Capital's Q3 2025: Contradictions Emerge on Pipeline, Private Loan Portfolio, and Private Equity Deal Flow

Date of Call: November 7, 2025

Financials Results

• Revenue: $139.8M total investment income, up $3.0M or 2.2% YOY, down $4.1M or 2.9% sequentially
• EPS: DNII before taxes per share $1.07, $0.01 higher YOY and $0.04 lower sequentially; Q4 2025 DNII before taxes expected at least $1.05 per share

Guidance:

• DNII before taxes for Q4 2025 expected to be at least $1.05 per share, with potential upside from portfolio investment activity.
• Management currently anticipates proposing an additional significant supplemental dividend payable in March 2026.
• Lower middle market and private loan pipelines are described as above average; expect continued strong LMM activity in Q4 and further private loan deployment into 2026.
• Company plans to operate at leverage levels more conservative than long-term targets over the next few quarters.

Business Commentary:

• Investment Activity and Pipeline:
• Main Street Capital's lower middle market investments increased by $61 million, with a strong pipeline characterized as above average.
• The private loan investment portfolio saw a $69 million net decrease, despite an increased pipeline.

• The lower investment activity in private loans was due to a combination of slower origination and higher-than-expected repayments.

• Financial Performance and Dividends:

• The company's NAV per share increased to a record $32.78, reflecting net fair value appreciation in both lower middle market and private loan portfolios.
• Main Street declared a supplemental $0.30 per share dividend for December, marking the 17th consecutive quarterly supplemental dividend.

• The strong financial performance driven by favorable portfolio performance and expectations for additional realized gains supports the dividend increase.

• Operating Expenses and Compensation:

• Operating expenses increased by $1.1 million over the same quarter last year, primarily due to higher cash compensation and share-based compensation expenses.

• The increase was also driven by growth in the investment and asset management teams, including the addition of investment professionals.

• Portfolio Company Performance:

• The majority of lower middle market portfolio companies showed strong dividend income contributions and significant net fair value appreciation.
• This performance is attributed to positive operational results and interest from potential buyers for several portfolio companies.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "We are pleased with our performance in the third quarter"; annualized return on equity of 17%; "record NAV per share of $32.78"; announced supplemental dividend and increased regular monthly dividends — management highlighted strong liquidity, conservative leverage and above-average pipelines.

Q&A:

• Question from Arren Cyganovich (Truist Securities, Inc., Research Division): You noted the private loan pipeline is above average versus last quarter — can you discuss sustainability and what's changed?
  Response: Pipeline growth driven by increased market activity; quality remains consistent and management expects the pickup to continue into 2026 with more live deals.

• Question from Arren Cyganovich (Truist Securities, Inc., Research Division): Did you see an improvement in credit quality this quarter and what's driving that?
  Response: No specific quarter-over-quarter change; overall portfolios continue to perform at a high level with expected outliers, not a material credit-quality shift.

• Question from Unknown Analyst (Raymond James): What drove the $69M net decrease in the private loan portfolio — repayments, slowing deal flow, or fewer attractive opportunities?
  Response: Combination of below-expectation originations, elevated repayments/prepayments and timing (some expected closings pushed into Q4).

• Question from Unknown Analyst (Raymond James): Do you see these trends shifting into 4Q or is it more of the same?
  Response: Management is confident in Q4 and Q1 given a stronger pipeline and expects increased origination activity near term.

• Question from Cory Johnson (UBS Investment Bank, Research Division): Compensation was higher due to headcount — what roles were added and will headcount continue to grow?
  Response: Hires focused on investment professionals across lower middle market and private loan/private credit to support portfolio and asset manager growth; expect continued team expansion.

• Question from Cory Johnson (UBS Investment Bank, Research Division): Any AUM targets for the RIA in 2026?
  Response: No numerical guidance; primary catalysts are MSC Income Fund's increased regulatory leverage capacity at end of January 2026 and accelerated deployment from MS Private Loan Fund II in 2026.

• Question from Cory Johnson (UBS Investment Bank, Research Division): Are AI-driven efficiency gains showing up in valuations or realizations yet?
  Response: Not yet — AI benefits are viewed as forward-looking and have not materially impacted historical valuations to date.

Contradiction Point 1

Pipeline and Deal Activity

It involves differing statements about the company's pipeline and deal activity, which are crucial for understanding investment strategy and potential growth.

Can you discuss the sustainability of this strategy and the necessary changes in the private loan focus in the lower middle market? - Arren Cyganovich(Truist Securities, Inc., Research Division)

2025Q3: The increase in the pipeline is driven by more market activity, with a consistent quality of transactions. The market has improved, leading to more live deals and a higher volume of transactions. - Dwayne Hyzak(CEO)

Are the below-average private loan pipeline and 20-50 bps of spread tightening interrelated? Why isn't increased deal activity evident despite spread tightening? - Arren Saul Cyganovich(Truist Securities, Inc., Research Division)

2025Q2: Deal activity is softer due to private equity M&A activity being down. Spread tightening is somewhat related to less deal flow. - Nicholas T. Meserve(Managing Director)

Contradiction Point 2

Private Loan Portfolio Decrease

It involves differing explanations for the decrease in the private loan portfolio, impacting investor understanding of the company's financial performance and strategy.

What caused the $69 million net decrease in the private loan portfolio? - Unknown Analyst(Raymond James)

2025Q3: The decrease was due to lower-than-expected investment activity and higher-than-expected repayments in the quarter. - Dwayne Hyzak(CEO)

What caused the quarter's decline in business: reduced deal flow or increased repayments? Are deal flows slowing or are fewer attractive opportunities available? - Robert James Dodd(Raymond James & Associates, Inc., Research Division)

2025Q2: It was a combination of both. Investment activity was slowed by the private equity industry still being slow given economic uncertainty. There were also higher-than-expected repayments. - Dwayne Louis Hyzak(CEO)

Contradiction Point 3

Private Loan Portfolio Activity and Private Equity Deal Flow

It involves the expected activity and deal flow in the private loan portfolio, which directly impacts the company's investment strategy and financial performance.

What caused the $69 million net decrease in the private loan portfolio? - Unknown Analyst (Raymond James)

2025Q3: The decrease was due to lower-than-expected investment activity and higher-than-expected repayments in the quarter. Private equity activity and deal flow are expected to improve. - Dwayne Hyzak(CEO)

Are potential changes in capital gains taxes causing a slowdown in expected activity? - Unknown Analyst (Raymond James)

2024Q4: We think that private equity deal flow is likely to slow down, but the quality is going to get better. So we will have to wait and see whether or not that actually -- that is going to have an impact on us. - Dwayne Hyzak(CEO)