nasdaq – gs: main introduction to business development companies (bdcs) and main street capital...
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NASDAQ – GS: MAIN
Introduction to Business Development Companies (“BDCs”) and Main Street Capital Corporation
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Forward-Looking Statements and Non-GAAP Financial Measures
This presentation contains forward-looking statements regarding the plans and objectives of management for future operations. Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including the factors discussed under the captions “Cautionary Statement Concerning Forward Looking Statements” and “Risk Factors” included in our filings with the Securities and Exchange Commission. Other factors that could cause actual results to differ materially include changes in the economy and future changes in laws or regulations and conditions in our operating areas. We have based the forward-looking statements included in this presentation on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, unless we are required to do so by applicable law. However, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
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Business Development Companies (“BDCs”)
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Overview
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Created by the Small Business Investment Incentive Act of 1980 (the “1980 Amendments”) as a result of a perceived crisis in the capital markets in the 1970s
Private equity and venture capital firms believed the “small private investment company” exemption (Section 3(c)(1) of 1940 Act) limited their capacity to provide financing to small, growing businesses
Provided Regulated Investment Company (RIC) status in 1990
Special type of closed-end fund that:
Provides small, growing companies access to capital
Enables private equity funds to access the public capital markets
Enables retail investors to participate in the upside of pre-IPO investing with complete liquidity
Hybrid between an operating company and an investment company
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Key Market Role
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Retail InvestorsPublic Equity Capital Markets
Accredited Investors
Business Development Companies
Small and Middle-MarketBusinesses
Investment Company Act of 1940
Private Equity Firms
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Benefits of BDCs as an Investment Vehicle
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Access to public capital markets
Shares are traded on national exchanges
Flow-through tax treatment as RIC
Reduced burden under 1940 Act, as compared to closed-end funds
Restrictions on leverage
Restrictions on affiliated transactions
External model permits management fee and “carried interest” incentive fee structure
Publicly available financial information though quarterly reporting
Portfolio is typically diversified
Reduces risk typically associated with private equity investments
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BDC Industry Renaissance
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Prior to 2003, the largest BDCs were primarily internally managed
Choice reflected the success of the internally managed, income producing BDC model
In 2004, Apollo Investment Corporation raised $930 million in less than three months which ignited the growth in the BDC industry
There has been a steady stream of BDC IPOs since that period
Approximately 35 internally and externally managed BDCs make up the current BDC space; 29 of which are the subject of frequent research
Current BDC space has average Market Capitalization of $565 million with the 10 largest BDCs having a combined Market Capitalization of $12.9 billion*
* As of June 1, 2012.
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Non-Traded BDC Structures
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The first registered, continuously-offered unlisted BDC, FS Investment Corporation, commenced fundraising in 2008; since then, these fund vehicles have grown rapidly and gained the attention of potential sponsors and the capital markets
Longer offering period with periodic closings (as opposed to IPO)
Subject to individual state registration requirements for public offerings, which can be time-consuming and expensive
Less susceptible to capital raise constraints caused by market downturns due to ability to adjust periodic offering price to remain at or above NAV
Lack of price fluctuation attractive to yield-based investors
Not fully liquid: exit through periodic repurchase offers (often at discount to NAV)
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Eligible BDC Investments
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A BDC must invest 70% of its assets in “good” BDC assets
70% basket includes securities issued by an eligible portfolio company, as defined in Section 2(a)(46), which includes:
U.S. issuers that are neither an investment company as defined in section 3 (other than a wholly-owned SBIC) nor a company which would be an investment company except for the exclusion from the definition of investment company in section 3(c) and
(i) do not have any class of securities listed on a national securities exchange; or
(ii) have a class of securities listed on a national securities exchange, but have an aggregate market value outstanding voting and non-voting common equity of less than $250 million
A BDC can generally invest with flexibility in “bad” assets that do not fall within the “70% basket”
The SEC Staff has never been called upon to consider whether utilizing a specific strategy for the entire “30% basket,” e.g., investing solely in foreign companies, might run afoul of the intent of Section 55(a)
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BDC Borrowing Limitations
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BDCs must have 200% asset coverage (Total Assets/Total Debt)
For example, a BDC with $50 in equity can borrow up to $50
A BDC would be able to invest $100 in growing businesses
Other investment companies are restricted to a 300% asset coverage requirement with respect to issuing debt
BDCs may exclude leverage at the SBIC level if the SEC grants exemptive relief
$50 Debt$50
Equity $50 Equity
$25Debt$50
Equity $50 Equity
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How do BDCs Value Their Assets?
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Investments are reported at fair value
FASB ASC 820 – Fair Value Measurements and Disclosures
Fair Value – Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date
Regulated investment companies also governed by definition of “value” in Investment Company Act of 1940 further interpreted in SEC Codification of Financial Reporting section 404.03 – “fair value as determined in good faith by the board of directors”
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Tax Considerations for BDCs
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A BDC may elect to be taxed as a RIC under the Internal Revenue Code
Taxation as a RIC
Allows “pass through” tax treatment for income and capital gains that are distributable to shareholders
A BDC must distribute at least 90% of its investment income to shareholders annually
The BDC may retain, distribute or “deem distribute” capital gains
BDC must meet minimum source of income requirements annually and meet requirements on a quarterly basis with respect to portfolio diversification
Conversion to RIC status
Formation considerations – Built-in gains
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BDC Market Statistics
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BDC Market Statistics
Source: Raymond James – BDC Weekly Update, June 01, 2012.
Market Cap. ($MM)
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BDC Market Statistics
Source: Raymond James – BDC Weekly Update, June 01, 2012.(1) Dividend Yield uses the current dividend annualized.
Dividend Yield (1)
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BDC Market Statistics
Source: Raymond James – BDC Weekly Update, June 01, 2012.
Price / NAV
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BDC Market Statistics
Price / 2012 EPS
Source: Raymond James – BDC Weekly Update, June 01, 2012.
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Main Street Capital CorporationCorporate Overview
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MAIN is a Principal Investor in Private Debt and Equity
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MAIN is a Principal Investor in Private Debt and Equity
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High cash dividend yield – dividends paid monthly
Long-term focus on delivering shareholders sustainable growth in both the value of portfolio assets and recurring dividends
Owns two Small Business Investment Company (SBIC) Funds
Main Street Mezzanine Fund (2002 vintage) and Main Street Capital II (2006 vintage)
Provides access to 10-year, low cost, fixed rate government-backed leverage
Strong capitalization and liquidity position – stable, long-term debt and significant available liquidity
Internally managed cost structure provides significant operating leverage
Favorable ratio of total operating expenses, excluding interest expense, to average total assets of 2.2%
Greater portion of gross portfolio returns are delivered to our shareholders
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MAIN Regulatory FrameworkOperates as Business Development Company
Regulated by SEC - 1940 Act
Publicly-traded, private investment company
Regulated Investment Company (RIC) tax structure
Eliminates corporate level income tax
Efficient tax structure providing high yield to investors
Passes through capital gains to investors
Small Business Investment Company subsidiaries
Regulated by SBA
Access to low cost, fixed rate, long-term leverage
Total leverage capacity of $225 million
MAIN received 2011 SBIC of the Year Award
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MAIN Corporate Structure – Internally Managed
Main Street Mezzanine Fund, LP
(2002 vintage SBIC)Assets: ~$247 million
SBIC Debt: $125 million
Main Street Mezzanine Fund, LP
(2002 vintage SBIC)Assets: ~$247 million
SBIC Debt: $125 million
Main Street Capital II, LP (2006 vintage SBIC)Assets: ~$159 million
SBIC Debt: $95 million
Main Street Capital II, LP (2006 vintage SBIC)Assets: ~$159 million
SBIC Debt: $95 million
“Internally managed” means no external management fees or expenses and provides operating leverage to MAIN’s business. MAIN targets cash operating and administrative costs at or less than 2% of total assets.
Main Street Capital Corporation
(BDC/RIC)Assets: ~$332 million
Line of Credit: $107 million($235 million facility)
Main Street Capital Corporation
(BDC/RIC)Assets: ~$332 million
Line of Credit: $107 million($235 million facility)
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Flexible Capital for the Lower Middle Market
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Market Segment Opportunity for LMM Investment Strategy
MAIN targets LMM investments in established, profitable companies
Large and critical portion of U.S. economy
175,000+ domestic LMM businesses(1)
LMM is under-served from a capital perspective and less competitive
Inefficient asset class generates pricing inefficiencies
Enterprise values average 4X – 5X EBITDA and leverage multiples average 2X – 3X EBITDA to MAIN
Ability to become a partner vs. a “commoditized vendor of capital”
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(1) Source: U.S. Small Business Administration, Office of Advocacy
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LMM Investment Portfolio
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Privately Placed Debt Investment Strategy
MAIN also maintains a portfolio of privately placed, interest-bearing debt investments
Favorable market environment has generated attractive investment opportunities
Generally larger issuances of secured and/or rated debt securities 69% of current privately-placed debt portfolio is first lien term
debt and 31% is second lien term debt Most have a B or BB S&P rating
Generally larger companies than LMM investment strategy Current privately-placed portfolio has weighted average
revenues of approximately $367 million 7% - 12% targeted gross yields
27 investments representing 27% of total portfolio at cost Weighted average yield of 10.6%
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Includes complimentary LMM debt and equity investments and privately placed debt investments
Total portfolio consists of 73% LMM / 27% privately placed investments (as a percentage of cost)
81 portfolio companies
Average investment size of $6.2 million
Largest individual portfolio company represents 3.2% of total investment income and 4.3% of total portfolio fair value
Significant diversification
Issuer
Industry
Transaction type
Geography
End markets
Total Investment Portfolio
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Total Portfolio by Industry (as a Percentage of Cost)
Commercial Services & Supplies, 11%
Energy Equipment & Services, 10%Machinery, 8%
Media, 7%
Health Care Providers & Services, 7%
Construction & Engineering, 5%Software, 4%
Specialty Retail, 4%
Hotels, Restaurants & Leisure, 4%
Insurance, 3%
Electronic Equipment, Instruments & Components, 3%
Food & Staples Retailing, 3%
Professional Services, 3%
Internet Software & Services, 2%
Diversified Consumer Services, 2%
Building Products, 2%
Food Products, 2%
Paper & Forest Products, 2%
Health Care Equipment & Supplies, 2%
Auto Components, 2%
Consumer Finance, 2%
Transportation Infrastructure, 1%
Chemicals, 1%
Leisure Equipment & Products, 1%
Trading Companies & Distributors, 1%
Pharmaceuticals, 1%
Real Estate Management & Development, 1%
IT Services, 1%Internet & Catalog Retail, 1%
Diversified Telecommunication Services, 1%
Construction Materials, 1%
Containers & Packaging, 1%
Other, 1%
Combined Portfolio
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Diversified Total Portfolio (as a Percentage of Cost)
Growth Capital 22%Acquisition
19%
Recapitalization/Refinancing33%
28%
42%
12%
9%
9%
LBO/MBO 26%
Invested Capital by Transaction Type
Invested Capital by Geography
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MAIN Total Return Performance Since IPO
Notes:(1)Assumes dividends reinvested on ex-dividend date(2)BDC Index includes: ACAS, AINV, ARCC, BKCC, FDUS, FSC, GAIN, GBDC, GLAD, HRZN, HTGC, KCAP, MAIN, MCC, MCGC, MVC, NGPC, NMFC, PNNT, PSEC, SAR, SLRC, SUNS, TCAP, TCRD, TICC and TINY(3)BDC Index is equal weighted(4)First trading date is October 4, 2007 and last trading date is December 30, 2011
20%20%
40%40%
60%60%
80%80%
100%100%
120%120%
140%140%
160%160%
180%180%
200%200%
220%220%
MAIN (118.4%) S&P 500 (-10.1%) BDC Index (42.7%) Russell 2000 (-4.6%)
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Q&A
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Contact Information
Main Street Capital Corporation1300 Post Oak Blvd., Suite 800
Houston, TX 77056713-350-6000 (main)713-350-6042 (fax)
www.mainstcapital.com
Vincent D. FosterChairman of the Board and Chief Executive Officer
Alejandro PalomoSr. Associate713-350-6019