Important Avenue Capital (MAIN) This fall 2024 Earnings Name Transcript

Important Avenue Capital (MAIN 3.16%)
This fall 2024 Earnings Name
Feb 28, 2025, 10:00 a.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Greetings and welcome to the Important Avenue Capital fourth quarter earnings convention name. Presently, all members are in a listen-only mode. An issue-and-answer session will comply with the formal presentation. [Operator instructions] As a reminder, this convention is being recorded.

It’s now my pleasure to introduce Zach Vaughan. Thanks. You might start.

Zach Vaughan — Investor Relations

Thanks, operator, and good morning, everybody. Thanks for becoming a member of us for Important Avenue Capital Company’s fourth quarter 2024 earnings convention name. Becoming a member of me in the present day with ready feedback are Dwayne Hyzak, chief govt officer; David Magdol, president and chief funding officer; and Ryan Nelson, chief monetary officer. Additionally collaborating within the Q&A portion of the decision are Jesse Morris, chief working officer; and Nick Meserve, managing director and head of Important Avenue’s personal credit score funding group.

Important Avenue issued a press launch yesterday afternoon that particulars the corporate’s fourth quarter and full 12 months monetary and working outcomes. This doc is accessible on the investor relations part of the corporate’s web site at mainstcapital.com. A replay of in the present day’s name might be out there starting an hour after the completion of the decision and can stay out there till March seventh. Info on how one can entry the replay was included in yesterday’s launch.

We additionally advise you that this convention name is being broadcast dwell via the web and might be accessed on the corporate’s homepage. Please notice that data reported on this name speaks solely as of in the present day, February 28, 2025. And due to this fact, you might be suggested that the time-sensitive data might now not be correct on the time of any replay listening or transcript studying. Right this moment’s name will include forward-looking statements.

Many of those forward-looking statements might be recognized by means of phrases resembling anticipates, believes, expects, intends, will, ought to, might, or related expressions. These statements are based mostly on administration’s estimates, assumptions, and projections as of the date of this name, and there aren’t any ensures of future efficiency. Precise outcomes might differ materially from the outcomes expressed or implied in these statements because of dangers, uncertainties, and different elements, together with, however not restricted to, the elements set forth within the firm’s filings with the Securities and Change Fee, which might be discovered on the corporate’s web site or at sec.gov. Important Avenue assumes no obligation to replace any of those statements until required by legislation.

Throughout in the present day’s name, administration will talk about non-GAAP monetary measures, together with distributable web funding earnings or DNII. DNII is web funding earnings, or NII, as decided in accordance with U.S. typically accepted accounting ideas, or GAAP, excluding the influence of noncash compensation bills. Administration believes that presenting DNII and the associated per-share quantity are helpful and applicable supplemental disclosures for analyzing Important Avenue’s monetary efficiency since noncash compensation bills don’t lead to a web money influence to Important Avenue upon settlement.

Please discuss with yesterday’s press launch for a reconciliation of those non-GAAP measures to probably the most straight comparable GAAP monetary measures. Two extra key efficiency indicators that administration might be discussing on this name are web asset worth or NAV and return on fairness or ROE. NAV is outlined as whole property minus whole liabilities and can also be reported on a per-share foundation. Important Avenue defines ROE as the online enhance in web property ensuing from operations divided by the typical quarterly whole web property.

Please notice that sure data mentioned on this name, together with data associated to portfolio firms, was derived from third-party sources and has not been independently verified. Now, I am going to flip the decision over to Important Avenue CEO, Dwayne Hyzak.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks, Zach. Good morning, everybody, and thanks for becoming a member of us. We respect your participation on this morning’s name, and we hope that everybody is doing nicely. On in the present day’s name, I’ll present my standard updates relating to our efficiency within the fourth quarter whereas additionally offering just a few updates on our efficiency for the complete 12 months.

I am going to additionally present updates on our asset administration actions, our latest dividend declarations, our expectations for dividends going ahead, our latest funding actions and present funding pipeline, and a number of other different noteworthy updates. Following my feedback, David and Ryan will present extra feedback relating to our funding technique, funding portfolio, monetary outcomes, capital construction and liquidity, and our expectations for the primary quarter of 2025. After which, we’ll be comfortable to take your questions. We’re extraordinarily happy with our fourth quarter outcomes, which closed one other nice 12 months for Important Avenue, as highlighted by a document annualized return on fairness of 25.4% for the quarter.

Our constructive efficiency in all 4 quarters for the 12 months resulted in a return on fairness of 19.4% for the complete 12 months, robust ranges of NII per share and DNII per share to fund our document stage of annual shareholder dividends, and a brand new document for NAV per share for the tenth consecutive quarter. We consider that these continued robust outcomes display the sustainable energy of our total platform, the advantages of our differentiated and diversified funding methods, the distinctive contributions of our asset administration enterprise, and the continued underlying total energy and high quality of our portfolio firms. Our continued constructive efficiency allowed us to extend our whole dividends paid to our shareholders within the fourth quarter by 6% over the prior 12 months, leading to an 11% enhance for the complete 12 months. This allowed us to proceed our development of accelerating the dividends paid to our shareholders over the previous few years whereas additionally persevering with to generate DNII per share, which exceeds the whole dividends paid to our shareholders.

We proceed to be inspired by the favorable total efficiency of the businesses in our diversified decrease center market and personal mortgage funding portfolios and stay assured that these methods, along with the advantages of our asset administration enterprise, our important out there liquidity, and our price environment friendly working construction, will enable us to proceed to ship superior outcomes for our shareholders sooner or later. These constructive outcomes, mixed with our favorable outlook for the primary quarter, resulted in our suggestions to our board of administrators for our most up-to-date dividend bulletins, which I’ll talk about in additional element later. Our NAV per share elevated within the quarter, primarily as a result of influence of web truthful worth will increase in our funding portfolio, together with the profit within the quarter from the most important realized acquire in our agency’s historical past and the continued advantages from our asset administration enterprise. Ryan will talk about our NAV per share enhance in additional element.

The continued favorable efficiency of nearly all of our decrease center market portfolio firms resulted in one other quarter of robust dividend earnings contributions and important web truthful worth appreciation in our decrease center market fairness investments. The realized acquire that I referenced was a $54 million realized acquire on the exit of our fairness funding in Pearl Meyer, which we consider is a good instance of the distinctive advantages of our decrease center market funding technique and which resulted in important advantages for Important Avenue and our Pearl Meyer administration group companions. The advantages for Important Avenue included important dividend earnings, truthful worth appreciation, and the realized acquire, leading to best-in-class returns on our fairness funding, along with the engaging curiosity earnings offered by our debt investments. This extremely engaging funding additionally highlights one of many largest advantages we offer to our portfolio firms via our decrease center market funding technique, which is the power of our portfolio firms to execute important development via acquisitions with the acquisitions funded 100% by debt financing from Important Avenue, thereby permitting the administration group to execute important worth creation with out expertise dilution of their present possession share.

We proceed most of these value-creating actions within the fourth quarter and are excited concerning the follow-on investments we made to finance strategic acquisitions by three of our high-performing decrease center market portfolio firms, every of which had been funded by follow-on debt investments by Important Avenue for a complete of over $36 million of incremental debt investments in these portfolio firms. We anticipate that these follow-on investments will present the chance for added future truthful worth appreciation, along with offering us the extremely engaging incremental debt investments in these high-performing portfolio firms. Per my feedback over the previous few quarters, we additionally proceed to see elevated curiosity from potential consumers in sure portfolio firms that would result in favorable realizations over the subsequent few quarters, additional highlighting the energy and high quality of our portfolio firms. Our decrease center market funding exercise within the fourth quarter included whole investments of $168 million, together with investments totaling $116 million in two new portfolio firms, which, along with the elevated reimbursement exercise within the quarter, primarily as a result of Pearl Meyer exit, resulted in a web enhance in our decrease center market investments of $11 million.

Our personal mortgage funding actions within the quarter included whole investments of $108 million, which, after repayments and different funding exercise, resulted in a web enhance in our personal mortgage investments of $7 million. We have additionally continued to provide favorable leads to our asset administration enterprise. The funds we suggested via our Exterior Funding Supervisor continued to expertise favorable efficiency within the fourth quarter, leading to important incentive price earnings for our asset administration enterprise for the ninth consecutive quarter and, along with our recurring administration charges, a big contribution to our web funding earnings. We additionally benefited from important truthful worth appreciation within the worth of our Exterior Funding Supervisor because of a mixture of the continued enhance in price earnings, development in property beneath administration, and broader market-based drivers.

We stay enthusiastic about our plans for the exterior funds that we handle as we execute our funding methods and discover different strategic initiatives, and we’re optimistic concerning the future efficiency of the funds and the engaging returns we’re offering to the traders of every fund and about our technique for rising our asset administration enterprise inside our internally managed construction. As a part of our efforts to develop our asset administration enterprise, we’re more than happy that in late January, MSC Revenue Fund, a BDC suggested by our Exterior Funding Supervisor and our largest asset administration enterprise initiative, efficiently accomplished a list on the New York Inventory Change and a public fairness providing, wherein the fund raised web fairness proceeds of $91 million. We had been more than happy with the itemizing and fairness providing, which resulted within the fund with the ability to speed up the timing and enhance the dimensions of the providing. We’re very enthusiastic about our future plans for MSC Revenue Fund and consider that the fund’s itemizing and fairness providing, together with the transition of its funding technique and funding portfolio to be solely centered on co-investing with Important Avenue and our personal mortgage funding technique, offers the fund the power to proceed to offer its shareholders with a really engaging supply of recurring dividend earnings and engaging whole shareholder returns and likewise offers important future advantages to Important Avenue via the chance to develop the asset administration charges that our Exterior Funding Supervisor receives from the fund because it executes its development plans.

Based mostly upon our outcomes for the fourth quarter, mixed with our favorable outlook in every of our major funding methods and for our asset administration enterprise, earlier this week, our board declared a supplemental dividend of $0.30 per share, payable in March, representing our 14th consecutive quarterly supplemental dividend; and common month-to-month dividends for the second quarter of 2025 of $0.25 per share, payable in every of April, Might, and June, representing a 4% enhance from the second quarter of 2024. The supplemental dividend for March is a results of our robust efficiency within the fourth quarter and can lead to whole supplemental dividends paid in the course of the trailing 12-month interval of $1.20 per share, representing an extra 41% paid to our shareholders in extra of our common month-to-month dividends. We at present anticipate to advocate that our board proceed to declare future supplemental dividends to the extent DNII considerably exceeds our common month-to-month dividends paid in future quarters and we keep a secure to constructive NAV. Based mostly upon our expectations for continued favorable efficiency within the first quarter, we at present anticipate proposing an extra supplemental dividend payable in June 2025.

Now, turning to our present funding pipeline. As of in the present day, I might characterize our decrease center market funding pipeline as common, with a number of new investments scheduled to shut earlier than quarter-end. We consider that the distinctive and versatile financing options that we are able to present to decrease center market firms and their house owners and administration groups and our differentiated long-term to everlasting holding durations symbolize a lovely answer to the wants of many decrease center market firms. And regardless of the present broad financial uncertainty, we’re assured in our expectations for favorable decrease center market funding exercise over the subsequent few months.

We additionally proceed to be more than happy with the efficiency of our personal credit score group and the numerous development they’ve offered for our personal mortgage portfolio and our asset administration enterprise. And as of in the present day, I might additionally characterize our personal mortgage funding pipeline as common. With that, I’ll flip the decision over to David.

David L. Magdol — President and Chief Funding Officer

Thanks, Dwayne, and good morning, everybody. Annually-end offers alternative to look again at our historical past and spotlight the outcomes of our distinctive and diversified funding methods and talk about how these methods have enabled us to ship extremely engaging returns to our shareholders over an prolonged time frame. Since our IPO in 2007, we now have elevated our month-to-month dividends per share by 127% and we have declared cumulative whole dividends to our shareholders of virtually $45 per share or roughly thrice our IPO value of $15 per share. Our whole return to shareholders since our IPO calculated utilizing our inventory value as of yesterday’s shut and assuming reinvestment of all dividends acquired since our IPO was 16 occasions cash invested.

This compares favorably to the 4.4 occasions cash invested for the S&P 500 over the identical time frame and is considerably increased when in comparison with different BDCs. As we beforehand mentioned, we consider that the first drivers of our long-term success have been and can proceed to be our deal with making each debt and fairness investments within the underserved decrease center market; our personal credit score funding actions for the advantage of our stakeholders and for the purchasers of our asset administration enterprise; our internally managed construction, which permits us to keep up an industry-leading price construction; and the robust alignment of pursuits between our staff and our shareholders because of our group’s significant inventory possession. Most notably and uniquely, our decrease center market technique offers engaging leverage factors and earnings yield on our first-lien debt investments whereas additionally creating a real partnership with the administration groups and different fairness house owners of our portfolio firms via our versatile and extremely aligned fairness possession constructions. This strategy offers us important draw back safety via our first-lien debt investments and most popular fairness positions whereas nonetheless offering the advantages of serious upside potential via our fairness investments.

Important Avenue’s long-term historic monitor document of investing within the decrease center market, coupled with our view that this market continues to be underserved, provides us confidence that we can proceed to search out engaging new funding alternatives on this major space of funding focus for our enterprise. Our capability to offer extremely custom-made and differentiated capital options for the predominantly household owned companies that exist within the decrease center market has been and continues to be a powerful differentiator for us. In 2024, Important Avenue invested $466 million in our decrease center market technique. 2 hundred and twenty-eight million of this capital was deployed in seven new decrease center market platform firms, with the remaining 238 million predominantly representing follow-on investments in present and well-performing decrease center market firms.

Per our feedback in prior quarters, nearly all of these follow-on investments had been made to assist development methods in a few of our highest-performing portfolio firms, which makes this side of our decrease center market funding exercise very thrilling for us. Our follow-on investments are sometimes used to assist a number of targets, together with acquisitions, product or geographic enlargement alternatives, and recapitalization transactions. Most significantly, these follow-on investments are made in assist of confirmed administration groups that we consider symbolize considerably much less funding threat when in comparison with offering capital to new funding portfolio firms. Since we’re important fairness house owners in our decrease center market firms, we additionally profit from collaborating alongside the confirmed supervisor in these companies as they try to realize significant fairness worth creation.

As we now have said previously, as our decrease center market portfolio firms carry out over time, they naturally deleverage with free money stream generated from operations. This enables us, together with our decrease center market portfolio administration group companions, to profit from a bigger portion of the portfolio firm’s money stream after debt service, which might be out there for distribution to the fairness house owners. Given the energy and high quality of our decrease center market portfolio and the long-term holding interval for a lot of of our firms, we anticipate dividend earnings to proceed to be a big contributor to our leads to 2025 and sooner or later. Moreover, this deleveraging, coupled with the engaging total robust working outcomes from our decrease center market portfolio firms, allowed us to realize $120 million in web truthful worth will increase in 2024 for our decrease center market portfolio, together with the most important realized acquire in our agency’s historical past.

The profit from realized features on our decrease center market fairness investments is exclusive to us amongst our BDC friends and offers the chance to offset losses which can naturally incur when investing in non-investment-grade asset courses. As our decrease center market fairness investments carry out, in addition they present us the chance for unrealized appreciation, which permits us to proceed to develop our [Technical difficulty] which is a chance that the funding methods of different BDCs merely should not have. An incredible instance of a decrease center market fairness funding that highlights the advantages of our distinctive funding technique was the exit from our portfolio firm Pearl Meyer that Dwayne talked about in his remarks. We accomplished the exit in our funding in Pearl Meyer within the fourth quarter, which resulted in a realized acquire of $54 million.

Along with the realized acquire achieved upon exit, Pearl Meyer additionally distributed whole dividends to us of $32 million over the lifetime of our funding. Consequently, on a cumulative foundation, since our preliminary funding in April 2020 and taking the realized acquire and dividends into consideration, we realized an annual inner charge of return of 69% and seven.7 occasions cash invested return on our fairness funding. Together with all debt and fairness investments in Pearl Meyer, Important Avenue realized an IRR of 33%. The final necessary space I might wish to cowl relating to our 2024 accomplishments are the spectacular contributions that our personal credit score group delivered in the course of the 12 months.

Our personal credit score group continued to execute on our technique to dedicate important assets towards rising the personal mortgage section of our enterprise, which we consider offers a really engaging risk-adjusted return profile for us and for the purchasers of our asset administration enterprise. Throughout 2024, we accomplished gross investments of roughly $900 million in our personal mortgage technique and grew the price foundation of our personal mortgage funding portfolio by $449 million. Because of these funding actions, our personal mortgage portfolio represented 46% of our whole investments at price at year-end and our center market portfolio declined to symbolize lower than 5% of our whole investments at price. As Dwayne mentioned earlier, our personal mortgage capabilities are additionally the first driver of our strategic goal to proceed to develop our asset administration enterprise.

As of December thirty first, we had investments in 190 portfolio firms, spanning throughout quite a few industries and finish markets. Our largest portfolio firm, excluding the Exterior Funding Supervisor, represented solely 3.3% of our whole funding earnings for the 12 months and solely 3.8% of our whole funding portfolio truthful worth at year-end. Nearly all of our portfolio investments represented lower than 1% of our earnings and our property. Now, turning to our funding exercise.

Within the fourth quarter, we made whole investments in our decrease center market portfolio of $168 million, together with investments of $116 million in two new decrease center market portfolio firms, which, after mixture repayments on debt investments, return of invested fairness capital from a number of fairness investments, and a lower in the price foundation because of realized losses on sure portfolio investments, resulted in a web enhance in our decrease center market portfolio of $11 million. Throughout the quarter, we additionally accomplished $108 million in whole personal mortgage investments, which, after mixture repayments of debt investments and a lower in price foundation because of a realized — to realized losses on a number of portfolio investments, resulted in a web enhance in our personal mortgage portfolio of $7 million. At year-end, our decrease center market portfolio included investments in 84 firms, representing 2.5 billion of truthful worth, which is 29% above our associated price foundation. We had investments in 91 firms in our personal mortgage portfolio, representing $1.9 billion of truthful worth.

The full funding portfolio at truthful worth at year-end was 16% above our associated price foundation. Extra particulars on our funding portfolio at year-end are included within the press launch that we issued yesterday. With that, I’ll flip the decision over to Ryan to cowl our monetary outcomes, capital construction, and liquidity place.

Ryan Nelson — Chief Monetary Officer

Thanks, David. To echo Dwayne’s and David’s feedback, we’re happy with our working outcomes for the fourth quarter, which included numerous quarterly information and capped the 12 months wherein Important Avenue achieved information for web funding earnings and distributable web funding earnings and web property — web asset worth per share. Our whole funding earnings for the fourth quarter was $140.4 million, rising by $11.1 million or 8.6% over the fourth quarter of 2023 and by $3.6 million or 2.6% from the third quarter of 2024. The constructive momentum we skilled in the course of the first three quarters continued into the fourth quarter and culminated in a 12 months with robust ranges of curiosity, dividend, and price earnings, which, once more, demonstrated the continued energy of our differentiated funding and asset administration methods.

Curiosity earnings elevated by $9.3 million from a 12 months in the past and decreased $0.6 million when in comparison with the third quarter. The rise over the prior 12 months was pushed primarily by the influence of elevated web funding exercise over final 12 months, partially offset by the influence of a rise in investments on nonaccrual standing and a lower in rates of interest on our floating charge debt investments, primarily ensuing from decreases in benchmark index charges. The lower from the third quarter was primarily pushed by the influence of decreases in rates of interest on our floating charge debt investments, partially offset by a rise in web funding exercise. Dividend earnings elevated by $0.7 million or 3.1% when in comparison with a 12 months in the past, together with a $0.2 million enhance in uncommon or nonrecurring dividends, and elevated by $1.3 million or 5.5% from the third quarter, together with a $0.3 million enhance in uncommon or nonrecurring dividends.

The will increase in dividend earnings are a results of the continued underlying energy of our portfolio firms. Payment earnings elevated by $1.1 million or 23.3% from a 12 months in the past and elevated by $2.9 million or 96.6% from the third quarter of 2024. The rise in price earnings from the prior 12 months was primarily pushed by increased closing charges on new and follow-on investments, partially offset by a lower from accelerated amortization and an exit prepayment and modification charges, pushed by funding exercise. The rise in price earnings over the third quarter was primarily pushed by increased closing charges on new and follow-on investments in the course of the fourth quarter and elevated prepayment and modification charges, pushed by funding exercise.

Prepayment and different price earnings thought of nonrecurring decreased by $0.2 million in comparison with a 12 months in the past and elevated by $1.1 million in comparison with the third quarter of 2024. The fourth quarter included lowered ranges of earnings thought of much less constant or nonrecurring in nature compared to the fourth quarter of 2023 and elevated ranges of earnings thought of much less constant or nonrecurring in nature compared to the third quarter of 2024, together with dividends from our fairness investments and accelerated prepayment, repricing, and different exercise associated to our debt investments. Within the mixture, this stuff totaled $3.7 million and had been $1.3 million or $0.02 per share decrease in comparison with the typical of the prior 4 quarters or $1.6 million or $0.02 per share decrease than such gadgets within the fourth quarter of 2023, and $1.5 million or $0.02 per share increased than the third quarter of 2024. Our working bills elevated by $10.9 million over the fourth quarter of 2023, largely pushed by will increase in rate of interest expense and compensation-related bills, partially offset by a rise in bills allotted to the Exterior Funding Supervisor.

The rise in curiosity expense from a 12 months in the past was primarily pushed by a rise in common borrowings to fund a portion of development of our funding portfolio and a rise within the weighted common charge on our debt obligations. The ratio of our whole working bills excluding curiosity expense as a share of our whole — of our common whole property was 1.3% for the quarter on an annualized foundation and for the 12 months and continues to be among the many lowest in our {industry}. Our Exterior Funding Supervisor contributed $8.7 million to our web funding earnings in the course of the fourth quarter, representing a lower of $0.5 million from the identical quarter a 12 months in the past, which resulted in a complete of $34.3 million for the 12 months, representing a rise of $1 million or 3% over the prior 12 months. The supervisor earned $3.4 million in incentive charges in the course of the quarter and $13.7 million for the 12 months, representing a lower of $0.5 million and a rise of $0.3 million, respectively, over the identical durations within the prior 12 months.

The supervisor ended the quarter with whole property beneath administration of $1.6 billion. Throughout the quarter, we recorded web truthful worth appreciation, together with web realized features and web unrealized appreciation on the funding portfolio, of $80.8 million. This enhance was pushed by web truthful worth appreciation in our decrease center market portfolio and our Exterior Funding Supervisor, partially offset by web truthful worth depreciation in our personal mortgage portfolio and sure of our different portfolio investments. The web truthful worth appreciation in our decrease center market portfolio was largely pushed by the continued constructive efficiency of sure of our portfolio firms.

The web truthful worth depreciation in our personal mortgage portfolio was pushed by the influence of particular portfolio firm underperformance, partially offset by decreases in market spreads. The truthful worth appreciation of our Exterior Funding Supervisor was a results of a mixture of will increase within the valuation multiples of publicly traded friends, which we use as one of many benchmarks for valuation functions, and a rise within the price earnings generated by the Exterior Funding Supervisor. We ended the fourth quarter with investments on nonaccrual standing comprising roughly 0.9% of the whole funding portfolio at truthful worth and roughly 3.5% at price. Internet asset worth, or NAV, elevated by $1.08 per share over the third quarter and by $2.45 or 8.4% when in comparison with a 12 months in the past to a document NAV per share of $31.65 at year-end.

Our regulatory debt to fairness leverage calculated as whole debt excluding our SBIC debentures divided by web asset worth was 0.64 occasions, and our regulatory asset protection was 2.56 occasions. And these ratios proceed to be extra conservative than our long-term goal ranges of 0.8 to 0.9 occasions and a pair of.1 to 2.25 occasions, respectively. Given our present liquidity place, we had been much less energetic in the course of the fourth quarter in our on the market, or ATM, program, elevating web proceeds of $8.9 million from fairness issuances. After giving impact to the capital actions in 2024, we entered 2025 with robust liquidity, together with money and availability beneath our credit score services in extra of $1.4 billion with one near-term debt maturity of $150 million in December of 2025.

We proceed to consider that our conservative leverage, robust liquidity, and continued entry to capital are important strengths which are confirmed to profit us traditionally and have us nicely positioned for the long run, permitting us to proceed to execute our engaging funding methods. As mentioned final quarter, with this present stage of liquidity, we at present anticipate to fund our new web funding exercise in 2025 via a better portion of debt financing. And as such, we’d anticipate leverage to proceed to extend throughout this time to be nearer to our long-term said targets. Nonetheless, we anticipate to proceed to function all year long at leverage ranges extra conservative than our long-term targets.

Coming again to our working outcomes, because of our robust efficiency for the quarter and 12 months, our return on fairness for the fourth quarter was 25.4% on an annualized foundation and 19.4% for the 12 months. DNII per share for the quarter of $1.08 decreased from DNII per share for the fourth quarter of final 12 months by $0.04 or 3.6% and exceeded DNII per share for the third quarter by $0.02 per share or 1.9%. The mixed influence of sure funding earnings thought of much less constant or nonrecurring in nature on a per-share foundation was $0.02 per share beneath the typical of the final 4 quarters, $0.02 per share beneath the identical quarter a 12 months in the past, and $0.02 per share above the third quarter. For the 12 months, this stuff had been $0.05 per share beneath 2023 ranges.

Trying ahead, we anticipate headwinds on top-line earnings associated to the lower in floating market index charges, however given the energy of our underlying portfolio, we anticipate one other robust earnings quarter within the first quarter of 2025, with anticipated DNII of no less than $1.05 per share, with potential for upside, pushed by portfolio funding actions in the course of the quarter. And we’d additionally anticipate that we’d advocate to our board that it declare one other supplemental dividend within the second quarter. With that, I’ll now flip the decision again over to the operator so we are able to take any questions.

Questions & Solutions:

Operator

Thanks. We’ll now be conducting a question-and-answer session. [Operator instructions]Our first questions come from the road of Robert Dodd with Raymond James. Please proceed along with your questions.

Hey, Robert, are you able to verify in case you’re self-muted, please?

Robert Dodd — Analyst

I’m self-muted. I apologize. Congratulations on the quarter and Pearl Meyer, specifically. Simply perhaps segueing from that, are you able to give us any colour on publicity within the portfolio to potential tariff points or authorities effectivity initiatives? I imply, it isn’t their first rodeo with tariffs and tailored fairly nicely earlier than, however are you able to simply give us any ideas on that given the financial setting and what’s popping out of D.C.

for the time being?

Dwayne Louis Hyzak — Chief Govt Officer

Positive, Robert. We’re comfortable to do this. So, good morning and thanks for the query. I might say, on the tariff subject, clearly, we’re in some very attention-grabbing occasions right here.

And I believe our view is that if the tariffs are applied and maintained the way in which that they are being mentioned proper now, that there is many companies and industries within the U.S. which are going to have some points or some publicity, simply given the worldwide nature of the enterprise world in the present day. And I might say while you take a look at our portfolio, I might say we’re no totally different. , there are particular firms in our portfolio that can undoubtedly have an effect.

However as you most likely heard us say previously, you already know, we do have a really, very numerous portfolio. We predict that is a profit in all durations. We predict it will even be a profit while you take a look at the potential influence of tariffs going ahead. We additionally, you already know, take a look at the businesses that we now have.

As you’ve got heard us say previously, significantly within the decrease center market, you already know, these are largely U.S. domestic-focused companies. , each prospects and distributors are going to be extra centered from a, you already know, U.S. home standpoint.

So, whereas we might be impacted, if we evaluate our anticipated impacts to the broader U.S. financial system, we do assume that our impacts might be much less. So, not that we cannot be impacted, however we predict will probably be a good comparability relative to different components of the U.S. financial system.

However regardless of that view, as I believe you’d most likely anticipate, I might say we now have been and we’re actively working with our portfolio firms to ensure that they’re being diligent in taking a look at, you already know, their plans or playbooks to take care of the problems that would come about. As you simply mentioned in your feedback, you already know, they’ve handled this sort of factor earlier than, you already know, each with COVID-19, provide chain points, after which tariffs traditionally; after which extra just lately, the sort of excessive inflation interval. So, we predict that our, you already know, firms and their administration groups have handled most of these points previously. And after we take a look at our efficiency, you already know, since COVID, we predict they’ve performed a extremely good job of coping with the uncertainty that has existed in numerous totally different fronts, and we’d be hopeful that they will proceed to navigate issues in a constructive method.

However we’re clearly centered on it, spending time on it, and we’ll proceed to deal with that with our administration groups and our firms. You’ve got heard us additionally say this earlier than, however, you already know, one of many issues we have at all times cherished concerning the decrease center market is that we do assume we now have best-in-class administration groups. I believe we have confirmed that during the last 5 to 10 years with the efficiency within the decrease center market. So, these are nice operators.

They’re additionally very, very a lot aligned with us, way more centered on their fairness possession place versus only a paycheck or a bonus. So, we predict that they handle their companies in a really productive method. And due to the dimensions of the businesses, after they execute a plan, that plan can really have an effect very, in a short time. So, we predict these are all positives.

So, I believe it’s going to be attention-grabbing to see how this performs out, not only for us, however for the, you already know, extra broad U.S. financial system. However I believe we really feel that we’re in good condition relative to others and are assured within the skills of our groups to handle it. In your second query or subject concerning the impacts from a authorities effectivity standpoint, I might say we now have some restricted publicity there.

, there’s a few firms that we are able to consider which have important publicity. And clearly, we’re — you already know, identical to we’re on the tariff subject, we’re speaking to these firms and people administration groups often to, one, you already know, keep updated on what is going on on, but in addition you do what we are able to to assist them plan and navigate it. A kind of firms, I might say, has much more influence. , the opposite one, I believe, is definitely persevering with to do exceptionally nicely.

And we predict regardless of what is going on on from a federal effectivity standpoint, we anticipate they’re going to proceed to do nicely. However we predict we now have restricted publicity on that entrance while you take a look at the portfolio we now have.

Robert Dodd — Analyst

Obtained it. Recognize that. If can I’ve yet another, nonetheless tied to D.C. There’s clearly the — are you able to hear me?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, we are able to hear you.

Robert Dodd — Analyst

Are you able to hear me?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah. Robert, are you able to hear us?

Robert Dodd — Analyst

Hello. Simply on taxes, proper? There’s the attitude — I can hear you, sure, now. So, there’s potential that capital features taxes come down perhaps this 12 months, perhaps subsequent 12 months. Who is aware of? Is — are you listening to something from — on the entrance of recent platform acquisitions the place — you already know, is there any slowdown in anticipated exercise as persons are like ready for readability on taxes? As a result of clearly, plenty of these entrepreneurs that doubtlessly have fairly important tax publicity in the event that they promote their enterprise, relying on a wide range of elements.

However is that coming into anyone’s thoughts for the time being or is that simply not a giant deal?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, Robert, I am going to give my views, and I am going to let David add on if he has any extra feedback. However I might say, as we take a look at, you already know, the primary quarter, I believe you most likely heard this from different BDCs or administration groups that you’ve got talked to, I believe exercise each decrease center market and personal mortgage or personal credit score has been lots slower than we anticipated it to be. However I do not assume it is associated to any potential, you already know, modifications from a capital features charge standpoint. I believe there may be some reluctance or warning simply given all the pieces that is happening within the U.S.

financial system with the matters that you simply touched on earlier. So, I do assume that that’s most likely, you already know, sort of dampened a number of the expectations from an M&A standpoint. However I do not assume I’ve heard individuals speaking concerning the capital features stuff. And David is, you already know, sort of shaking his head right here saying that he hasn’t both.

So, we now have not seen that, you already know, pop up. Clearly, if there was a constructive change there, that could possibly be a constructive catalyst. However we simply have not — you already know, we have not heard that enter the discussions of the businesses we have been speaking to.

Robert Dodd — Analyst

Obtained it. Obtained it. Thanks.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks, Robert.

Operator

Thanks. Our subsequent questions come from the road of Kenneth Lee with RBC Capital Markets. Please proceed along with your questions.

Kenneth Lee — Analyst

Hey. Good morning. Thanks for taking my query. Only one on leverage.

So, nonetheless beneath goal ranges, and it sounds just like the expectation is a bit little bit of conservatism for this 12 months. I simply need to dig into that a bit bit extra. Is that this based mostly on any sort of macro elements, and do you see there being sufficient origination exercise to have the ability to deliver up the leverage meaningfully over the close to time period? Thanks.

Dwayne Louis Hyzak — Chief Govt Officer

Yeah. Ken, good morning. Thanks for the query. I might say that the views we have given on leverage are actually — you already know, we’re — we enter the 12 months in a reasonably considerably under-levered place.

, I might say that is pushed by a few various things. One is, you already know, less-than-expected funding exercise each on the decrease center market and personal mortgage aspect of our enterprise as we exited the fourth quarter. And that is continued to be the case, as I mentioned a couple of minutes in the past, as we take a look at the primary couple of months of the 12 months. However I believe Ryan lined this in his ready feedback, however we do anticipate and are centered on attempting to get our leverage up, and the way in which we’ll do this might be pushed by two issues.

One is simply precise funding exercise on a web funding exercise foundation. That is going to be the most important driver of the place we finish the 12 months from a leverage standpoint. After which the opposite aspect of that’s simply given the place we’re at in the present day from a leverage place, we anticipate to be much less energetic beneath the ATM. So, as we do develop our funding portfolio and develop our capital construction alongside that, you must anticipate it to be way more closely weighted towards the debt capital aspect of the capital construction.

And, Ryan, if there’s the rest you’d add on, be happy so as to add on there.

Ryan Nelson — Chief Monetary Officer

No, I believe that about covers. I imply, one factor I might point out is — was known as out within the ready remarks was the exit of Pearl Meyer occurred on the very finish of December, and that was a large verify that was written, which is nice for us however clearly had an influence on these leverage ratios as we hit year-end. So, that additionally has a bit little bit of interaction there.

Kenneth Lee — Analyst

Gotcha. Very useful there. After which throughout the decrease mid market portfolio there, and I believe you talked about within the ready remarks seeing rising curiosity and there could possibly be some potential realizations sooner or later, marvel in case you may simply go a bit bit extra particulars round that, what’s type of the character of those sort of discussions? And is the extent of curiosity rising based mostly on macro elements, regulatory outlook, or every other particular elements there? Thanks.

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, Ken. Similar to we’re with [Inaudible] we’ll be a bit, you already know, restricted on what we are saying there. Clearly, if there’s actions happening, it is beneath a confidential sort of scenario by way of, you already know, having a transaction which may be in course of that isn’t public. However as we mentioned previously, we predict we have got some implausible firms in our decrease center market portfolio, much like what you noticed with Pearl Meyer.

And sooner or later, you already know, they — these firms could also be known as on by both a strategic or a bigger personal fairness agency as a result of identical to we discover these firms very engaging, they might additionally discover them engaging, and that will result in, you already know, dialogue, may result in a course of being run by our portfolio firm with Important Avenue’s help to maximise the worth of these transactions. I might say that is, you already know, much like what occurred on the Pearl Meyer aspect. , we do not mandate something. As you’ve got heard us say previously, we completely view {our relationships} with our decrease center market firms and their administration groups as partnerships.

So, there’s acquired to be one thing that each we and the administration group views as a lovely alternative. However when that occurs, we’ll assist them in maximizing the worth. And we predict we are going to constantly have actually good outcomes in that sort of a situation, identical to we had on Pearl Meyer. David, if you wish to add something to that, be happy so as to add on.

David L. Magdol — President and Chief Funding Officer

I believe you lined it.

Kenneth Lee — Analyst

Nice. Effectively, that is —

Dwayne Louis Hyzak — Chief Govt Officer

Ken, the rest on that?

Kenneth Lee — Analyst

No, that is very useful. Thanks once more.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks, Ken.

Operator

Thanks. [Operator instructions] Our subsequent questions come from the road of Mark Hughes with Truist Securities. Please proceed along with your query.

Mark Hughes — Analyst

Yeah. Thanks. Good morning.

Dwayne Louis Hyzak — Chief Govt Officer

Good morning, Mark.

Mark Hughes — Analyst

Good appreciation within the quarter within the Exterior Funding Supervisor. Something we are able to anticipate associated to the general public providing or was that appreciation in 4Q already factoring that in?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah. I might say, Mark, the appreciation in This fall did not actually have something to do with the itemizing and the providing. It was extra based mostly upon continued development with the constant incentive charges we have been incomes and receiving there, in addition to simply the market. , we now have numerous various factors that go into our valuation strategy.

A kind of elements, not the one issue, however a kind of elements is a publicly traded peer set. And I simply assume that peer set has been buying and selling exceptionally nicely, not simply in This fall, however for the final couple of quarters. You see some profit there from a valuation strategy standpoint.

Mark Hughes — Analyst

After which after we take into consideration the general public providing, simply the rise in property, will that sort of logically set off extra worth for the exterior supervisor or is that also trying on the peer group and different inputs?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, I believe while you take a look at the modifications that occurred together with the itemizing and providing, you already know, the modifications are such that the profit to Important Avenue or via the Exterior Funding Supervisor to Important Avenue are going to be pretty restricted until there is a important change to the working outcomes at MSC Revenue Fund. What I imply there may be we lowered the bottom administration price in order that, you already know, that change within the share will scale back the bottom administration charges we get. We additionally, you already know, modified the motivation price construction to be extra in line with what you see from different externally managed BDCs. And people two at a — you already know, at constant working outcomes could be near breakeven.

The construction was meant to offer MSC Revenue Fund shareholders extra advantages as we develop and have higher efficiency each on the web funding earnings line and the ROE line. So, if we do this, you already know, there might be a decrease incentive price relative to efficiency. However total, while you take a look at the expansion of property and an rising stage of efficiency, we nonetheless assume it is a actually good final result for Important Avenue as nicely after we take a look at the connection that we now have with MSC Revenue Fund.

Mark Hughes — Analyst

Superb. From a regulatory standpoint, Dwayne, I believe you’ve got talked about a time or two you’ve got misplaced some lending alternatives to native banks. Any prospects you assume for looser regulation on banks to get them extra energetic? Would that be a aggressive influence or, you already know, onerous to see? However any ideas there?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, I am going to give just a few ideas, and I am going to let Nick add on if he has a special view as a result of I believe the place we see, you already know, a lot of the stress during the last two, three, 4 years and from that angle, it isn’t on the decrease center market aspect, it is on the personal credit score aspect. And I might say, within the final quarter, we had one other, you already know, engaging firm performing nicely. I would not say it was knocking the quilt off the ball by way of, you already know, their efficiency versus our unique underwriting expectations, however a financial institution got here in and took us out of that at a big discount within the unfold. So, you are still seeing a few of that.

It is vitally restricted. However my view could be I might not anticipate you to see there being important sufficient modifications within the banking rules to alter that. I believe you may nonetheless see a few of that now and again, however I believe it is much less, you already know, particular or associated to modifications within the financial institution regulatory setting and extra a financial institution decides they need to do one thing, they can not clarify why they do it, however they exit and do one thing that we predict is pretty aggressive, but it surely’s helpful for the corporate that they find yourself giving that mortgage to. Nick, be happy so as to add on.

Nicholas T. Meserve — Managing Director and Head of Personal Credit score Funding Group

I might say the same old case for that’s it isn’t a contemporary LBO, it is a transaction that occurred perhaps 12 or 18 months earlier than and perhaps the financial institution had been a banking associate earlier than the sponsor purchased the enterprise. They could not get there on the primary transaction. Normally, it is both velocity or timing and leverage difficulty. So, as an organization performs higher, plenty of occasions, that regional or native financial institution will step again in once more with a decrease charge to attempt to get reinvolved in that enterprise.

Mark Hughes — Analyst

Understood. Thanks.

Nicholas T. Meserve — Managing Director and Head of Personal Credit score Funding Group

From a — I might say from a contemporary LBO perspective, we do not see them actually as competitors there.

Mark Hughes — Analyst

Yeah, yeah. OK. Superb. Thanks.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks, Mark.

Operator

Thanks. Our subsequent questions come from the road of Douglas Harter with UBS. Please proceed along with your questions.

Cory Johnson — UBS — Analyst

Hello. That is Cory Johnson on for Doug. I simply have a query, simply sticking with the competitors for a second. , simply given the success that you’ve got had in your decrease center market technique, you already know, in that portfolio, do you’ve gotten any — I assume, you already know, what are your ideas with regard to maybe issues from competitors relating to different BDCs probably transferring down market or maybe even imitating the decrease center market technique? , simply what are your ideas on competitors normally?

Dwayne Louis Hyzak — Chief Govt Officer

Yeah, thanks for the query. I might say we have not seen a change there. Undoubtedly not a change from the BDC {industry} by way of being extra aggressive with our decrease center market technique or strategy. I believe while you take a look at it — and that is why we now have two very distinct and totally different groups at Important Avenue.

, a group that appears like what I anticipate most BDCs funding group to seem like. It should be very in line with what Nick and his group at Important Avenue do. They’re credit-focused. That is their historical past, that is their expertise, and that is their strategy.

Our decrease center market group is way more, you already know, a non-public equity-type focus. We’re underwriting the transaction the very same manner {that a} personal fairness sponsor or fund would or {that a} strategic acquirer would. And people are simply two very, you already know, totally different approaches and really distinct talent units. So, you already know, we have not seen anyone attempting to come back in and duplicate or turn into aggressive with us in our decrease center market technique.

We additionally do not anticipate them to, on condition that dynamic by way of the variations within the talent set and expertise. May they? They may. I believe during the last 20 years of being within the {industry}, we now have seen some individuals do it a very long time in the past, most likely 10, 15 years in the past. And I might say that these firms, they are not round anymore, and they didn’t fare very nicely since you had, you already know, sort of — you already know, lenders or credit score guys attempting to do personal fairness and it simply — it is a completely totally different talent set.

Cory Johnson — UBS — Analyst

Thanks.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks.

Operator

Thanks. This now concludes our question-and-answer session. I might now like to show the ground again over to administration for any closing feedback.

Dwayne Louis Hyzak — Chief Govt Officer

Thanks very a lot. And simply from our aspect, simply thanks to everybody once more for becoming a member of us in the present day, and we stay up for speaking to everybody once more in just a few months after our first quarter earnings launch. Thanks.

Operator

[Operator signoff]

Length: 0 minutes

Name members:

Zach Vaughan — Investor Relations

Dwayne Louis Hyzak — Chief Govt Officer

David L. Magdol — President and Chief Funding Officer

Ryan Nelson — Chief Monetary Officer

Robert Dodd — Analyst

Dwayne Hyzak — Chief Govt Officer

Kenneth Lee — Analyst

Ken Lee — Analyst

David Magdol — President and Chief Funding Officer

Mark Hughes — Analyst

Nicholas T. Meserve — Managing Director and Head of Personal Credit score Funding Group

Nick Meserve — Managing Director and Head of Personal Credit score Funding Group

Cory Johnson — UBS — Analyst

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