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Presentation

Operator: Greetings and welcome to MSC Income Fund First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan. Thank you, sir. You may begin.

Zach Vaughan: Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund’s first quarter earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; Nick Meserve, Managing Director and Head of Private Credit Investment Group; and Cory Gilbert, Chief Financial Officer. MSC Income Fund issued a press release yesterday afternoon that details the Fund’s first quarter financial and operating results. This document is available on the Investor Relations’ section of the Fund’s Web site at mscincomefund.com. A replay of today’s call will be available beginning an hour after the completion of the call and will remain available until May 20th.

Information on how to access the replay was included in yesterday’s earnings release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the Fund’s homepage. Please note that information reported on this call speaks only as of today, May 13th, 2025, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening. Today’s call may 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 Fund’s filings with the Securities and Exchange Commission, which can be found on the Fund’s website or at sec.gov. MSC Income Fund assumes no obligation to update any of these statements unless required by law. During today’s call, management will discuss net asset value or NAV and return on equity or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per share basis. MSC Income Fund defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. As previously announced, the Fund effectuated a two for one reverse stock split on December 16th, 2024.

All per share amounts, share data, and related information discussed on today’s call reflect the effect of the reverse stock split. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. Now, I’ll turn the call over to MSC Income Fund’s CEO, Dwayne Hyzak.

Dwayne Hyzak: Thanks Zach. Good morning everyone and thank you for taking the time to join us for the MSC Income Fund first quarter 2025 conference call. We appreciate your participation on this morning’s call and we hope that everyone is doing well. On today’s call, I will provide a few highlights regarding the Fund’s operating performance in the quarter, followed by updates on the Fund’s investment activities and current investment pipeline, dividend plans, future outlook and several other noteworthy items. Following my comments, Nick will provide comments on the Fund’s private loan investment strategy, investment activity and investment portfolio. David will provide comments on the Fund’s lower middle market investment portfolio and total investment portfolio, and Cory will cover the Fund’s financial results, capital structure, and liquidity position.

after which we’ll be happy to take your questions. We are pleased with the Fund’s performance in the first quarter, which delivered favorable results and a return on equity of just under 10%. We believe that the first quarter performance provides visibility to the opportunity for continued favorable performance and the potential for increased net investment income and dividends in the future as we work to grow the Fund’s investment portfolio in 2025 and 2026 and achieve further investment portfolio diversification through the increased current liquidity and path to additional debt capacity obtained through the Fund’s successful listing on the New York Stock Exchange and the related equity offering in January. We remain confident that these benefits, together with the change in the Fund’s investment strategy, to be solely focused on its private loan strategy for investments in new portfolio companies will strengthen the Fund’s ability to deliver attractive recurring total dividends and favorable total returns to the Fund’s shareholders in the future.

The Fund generated NII per share of $0.38 in the quarter, which Cory will discuss in more detail. This favorable performance gave us the confidence to recommend that the Fund’s Board of Directors declare a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share, which I’ll discuss in more detail later. The Fund finished the quarter with an NAV per share of $15.35, which Cory will discuss in more detail. While we are pleased with the Fund’s recent results, we continue to believe that the fund has the opportunity to increase its ROE in the future through several post-listing changes and activities, including the favorable changes to the Fund’s fee structure, which, among other changes, provided for an immediate reduction in the Fund’s annual base management fee percentage upon the listing and additional future contractual reductions in the fee percentage as the Fund’s lower middle market investments decrease as a percentage of the Fund’s total investment portfolio.

The listing also provided the Fund the opportunity to expand its utilization of debt capital, and we believe this gives the Fund the opportunity to achieve a lower cost of capital in the future as evidenced by the Fund’s recent amendments to its credit facilities, which Cory will discuss in more detail. We continue to be encouraged by the favorable overall performance of the Fund’s portfolio companies and remain confident in the ability of these companies to maintain positive performance despite the significant market uncertainty associated with tariffs, which Nick and David will discuss in more detail. During the quarter, the fund was highly focused on deploying the liquidity achieved in the recent equity offering and this corresponding increase in available debt capacity into new private loan investments, maximizing the benefits from the Fund’s lower middle market investment portfolio, and recycling existing capital into private loan investments as investments are exited or repaid.

Based upon the Fund’s net investment activities in the quarter, the Fund’s private loan investment portfolio increased by $89 million on a cost basis or approximately 13%, which Nick will cover in more detail, resulting in growth of the Fund’s total investment portfolio of approximately 6%. For the balance of 2025, the Fund will continue to maintain its focus on deploying its available liquidity and then focus on maintaining its investment portfolio in a fully invested position through the end of January 2026, at which point the Fund will achieve expanded regulatory leverage capacity, effectively doubling the Fund’s current regulatory leverage limit and providing the Fund the opportunity to deploy additional capital into new private loan investments and further grow its investment portfolio.

Based upon the Fund’s results for the quarter, we are pleased that we are in a position to recommend that the Fund’s Board of Directors declare a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share, both of which are payable on August 1st, 2025, to shareholders of record as of June 30th, 2025. Going forward, the Fund expects to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include a regular quarterly dividend and a supplemental quarterly dividend to be set at an amount equal to or at a slight discount to the Fund’s net investment income. As such, we expect to recommend that our Board continue to declare future supplemental quarterly dividends to the extent the Fund’s NII exceeds its regular quarterly dividends paid in future quarters.

Based upon the most recently declared regular and supplemental quarterly dividends and the current stock price, the Fund is currently providing its shareholders a dividend yield of approximately 9%. As the Fund executes its transition to a private loan-only investment strategy and investment portfolio and optimizes the use of leverage, our goal is for the Fund to be able to increase the total dividends paid to shareholders in the future. As we look forward to the Fund’s near-term investment activities, we are pleased with our current investment pipeline. The Fund has continued to be active in its private loan investment strategy since quarter end and as of today, I would characterize the private loan investment pipeline as average. Despite the current broad economic uncertainty, we remain highly confident in our ability to continue to generate attractive new investment opportunities over the next few quarters.

And through these investment activities, we remain confident in our ability to grow the Fund’s investment portfolio. My last comment is a reminder on the continued support the Fund has received from Main Street Capital Corporation. Since Main Street’s wholly-owned subsidiary was appointed the sole adviser to the fund in October 2020, Main Street has purchased over $21 million of equity in the Fund, over $4 million of which was purchased as part of the Fund’s public equity offering in January. In conjunction with the offering, Main Street also entered into an open market share purchase plan to purchase up to $20 million of the Fund’s shares for a 12-month period beginning in March 2025 at times if and when the Fund’s shares are trading at predetermined levels below the Fund’s NAV per share, with the terms of such plan being identical to the Fund’s open market share repurchase plan to purchase up to $65 million of the Fund shares and with any open market share purchases being split by the Fund and Main Street on a pro rata basis.

We believe Main Street’s significant equity ownership in the Fund and its participation in the post-listing share purchase plan demonstrates Main Street’s commitment to the future success of the Fund and reinforces Main Street’s confidence in the strength and quality of the Fund’s investment portfolio and investment strategy. With that, I will turn the call over to Nick.

Nick Meserve: Thanks Dwayne and good morning, everyone. As Dwayne highlighted in his remarks, we are pleased with the performance of the Fund’s private loan investment portfolio in the first quarter. The overall operating performance for most of the Fund’s private loan portfolio companies continue to be positive, which contributed to the Fund’s favorable first quarter financial results. The Fund has continued to see softness in certain private loan portfolio companies with consumer exposure and we continue to actively work on maximizing recoveries on those specific investments. The potential tariff situation will more than likely elongate the recovery on those names. We have been and continue to work with the private equity owners and management teams of our private loan portfolio companies to understand their current tariff exposures and mitigation plans.

Based upon those discussions and activities to-date, we are comfortable with our estimated tariff exposure. The largest portion of the Fund’s investments continues to be in its private loan strategy, which, as a reminder, is now the Fund’s sole focus with respect to new portfolio company investments. The Fund’s private loans are typically made to private equity-owned businesses, whereby the private equity firms have substantial cash equity investments in those businesses. These equity investments are, by definition, junior to the first lien senior secured debt investments made by the Fund. Should a specific private loan portfolio company underperform, the general practice and expectation is that the private equity owner of the company will support the business with new equity to protect its existing investment.

As a result, a key factor in underwriting is the historical track record and quality of the private equity sponsor as well as the reputation for supporting their portfolio companies with both managerial assistance and additional equity capital in the event of underperformance. At quarter end, 94% of the private loan portfolio was comprised of secured debt investments, over 99% of which were first lien and 98% of which were floating rate loans. The portfolio had an attractive weighted average yield of 11.6%, which was down 40 basis points from the end of 2024, primarily as a result of decreases in the SOFR rates for these floating rate debt investments. During the first quarter, the Fund invested $138 million in the private loan portfolio, which after aggregate investment activity resulted in a net increase of $89 million.

The Fund ended the first quarter with investments in 84 private loan portfolio companies, totaling $768 million of fair value and representing 61% of the Fund’s total investment portfolio at fair value. With that, I’ll turn the call over to David.

David Magdol: Thanks, Nick and good morning everyone. In addition to the private loan portfolio that Nick just covered, the Fund also maintains a portfolio of legacy lower middle market investments. These are combined debt and equity investments in smaller privately held companies, whereby the Fund partnered directly with the company’s existing business owners and management team through co-investments with Main Street Capital Corporation, utilizing the customized one-stop debt and equity financing solutions provided in Main Street’s lower middle market investment strategy. As a reminder, after the listing of the Fund’s shares on the New York Stock Exchange at the end of January, the Fund will not make any investments in new lower middle market companies, but will continue to participate in follow-on investments in its existing lower middle market portfolio companies.

We are pleased to report that the overall operating performance for most of our lower middle market portfolio companies continues to be positive, which contributed to our attractive first quarter financial results. These contributions included both strong dividend income and meaningful fair value appreciation. Due to the heightened level of concern and uncertainty in the market regarding the potential negative impacts from tariffs and consistent with our practices in other times of heightened market uncertainty, we have been and remain in regular contact with our lower middle market portfolio companies to support them and discuss the proactive actions they are taking to address the current implications and potential challenges in the current market.

To-date, we have seen limited negative impact to the overall portfolio, and we believe that our relationships with best-in-class managers as our partners in our lower middle market portfolio companies and our intentional highly diversified investment strategy and portfolio will continue to serve us well as it has in the past. During the first quarter, the Fund had minimal investment activity related to its existing lower middle market investments, which resulted in a net decrease in the lower middle market portfolio of $1 million. At quarter end, the lower middle market portfolio had investments in 57 portfolio companies, totaling $440 million of fair value and representing 35% of the Fund’s total investment portfolio. The lower middle market portfolio at fair value was comprised of 52% debt investments and 48% equity investments.

These debt investments had an attractive weighted average yield of 13%, consistent with the prior year and over 99% were first lien loans. The Fund had equity ownership positions in all of its lower middle market portfolio companies, representing a 9% average ownership position. We expect these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation, and eventually meaningful realized gains upon the future exit of these lower middle market portfolio investments. Turning to the Fund’s total investment portfolio as of March 31st, the Fund continued to maintain a highly diversified portfolio with investments in 149 portfolio companies spanning across numerous industries and end markets.

The Fund’s largest portfolio companies represented less than 4% of the total investment portfolio fair value at quarter end and less than 3% of the total investment income for the trailing 12 months ended March 31st, 2025, with most portfolio investments representing less than 1% of the Fund’s income and assets. With that, I will turn the call over to Cory.

Cory Gilbert: Thank you, David and thank you to everyone who has joined us today. The Fund’s total investment income for the first quarter was $33.2 million, a decrease of $0.7 million or 2.1% from the first quarter of 2024 and less than 1% lower compared to the fourth quarter of 2024. The first quarter included income considered less consistent or non-recurring in nature of $0.9 million. As we previously discussed, these non-recurring items vary quarter-to-quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment, repricing, and other activity related to debt investments. For the first quarter, these items were $0.4 million lower than the average of the prior four quarters, $1.3 million lower than the first quarter of 2024, and consistent with the fourth quarter of 2024.

Interest income decreased by $1.6 million from the first quarter of 2024 and by $2.2 million from the fourth quarter of 2024. The decrease from the fourth quarter was primarily due to an increase in investments on non-accrual status and a decline in interest rates on floating rate debt investments, primarily resulting from decreases in benchmark index rates, partially offset by higher average levels of income-producing debt investments. Dividend income for the first quarter increased by $2.7 million from a year ago and increased by $2.4 million from the fourth quarter. The increase in dividend income from both prior year and prior quarter was primarily due to increase in dividends from the lower middle market equity investments. As we previously discussed, dividend income will fluctuate quarter-to-quarter based on the underlying performance, cash flows, and capital allocation activities of the Fund’s portfolio companies.

Fee income for the first quarter decreased by $1.8 million from a year ago and decreased by $0.4 million from the fourth quarter. The decrease in fee income from both the prior year and the fourth quarter was primarily due to a decline in exit prepayment and amendment fees related to investment activity. The Fund’s expenses for the first quarter decreased by $3 million from the prior year and decreased by $2.8 million from the fourth quarter of 2024. The $2.8 million decrease from the fourth quarter was primarily driven by a $1.3 million decrease in interest expense, a $1.1 million decrease in incentive fees, and a $0.4 million decrease in base management fees. The decrease in interest expense from a year ago was largely driven by a decrease in weighted average interest rates on the Fund’s credit facilities based upon the decline in benchmark market index rates and reductions to contractual spreads, partially offset by an increase in weighted average borrowings used to fund a portion of the growth of the investment portfolio.

The reduction in incentive fees reflects the transition to the amended advisory agreement effective upon the listing of the Fund’s shares on the New York Stock Exchange on January 29th, 2025. The Fund’s expense ratio calculated as the Fund’s total operating expenses, net of any waivers and excluding interest expense as a percentage of the Fund’s average total assets was 2.6% on an annualized basis for the first quarter compared to 3.4% for the prior year and 3.2% for the fourth quarter. The decreases were primarily due to changes to the incentive fees and base management fee under the amended advisory agreement after the listing on January 29th, 2025. Excluding incentive fees, the Fund’s expense ratio was 1.9% on an annualized basis for the first quarter, a decrease from 2.2% in the prior year and 2.1% in the fourth quarter.

Following the Fund’s listing, the advisory agreement was amended to, among other things, reduce its annual base management fee from 1.75% to 1.5% with an additional future contractual reductions based upon changes to the Fund’s investment portfolio composition and reduced the NII incentive fee from 20% to 17.5%, subject to a unique 50/50 catch-up feature. The Fund’s NII in the first quarter was $16.8 million or $0.38 per share, increasing from $14.5 million or $0.36 per share from the prior year. During the quarter, the Fund recorded a net decrease in fair value of its investments of $2.3 million, representing the combined impact of $21.1 million of net realized losses, partially offset by $18.8 million of net unrealized appreciation. The net fair value decrease was attributable to decreases of $4.3 million in the private loan portfolio and $2.3 million in the middle market portfolio, partially offset by an increase of $4.3 million in the lower middle market portfolio.

Overall, the Fund’s operating results for the first quarter resulted in a net increase in net assets of $15.9 million and an NAV per share of $15.35, an $0.18 decrease from year-end. As of quarter end, the Fund had non-accrual investments comprising 2.8% of the total investment portfolio at fair value and 6.1% at cost. As of quarter end, the Fund’s regulatory asset coverage ratio was 2.26 and its net debt to NAV ratio was 0.74. This remains below the Fund’s targeted leverage levels, primarily due to the proceeds received in connection with the follow-on equity offering completed in January in connection with the listing. In addition to the equity offering in January, the fund took several actions to strengthen its debt capital structure during the quarter.

including an amendment of its corporate facility to increase total commitments by $80 million and an amendment of its SPV credit facility to reduce the interest rate spread by 80 basis points and extend its maturity date by two years to 2030. As Dwayne mentioned, the Fund’s focus remains on achieving and maintaining a fully invested portfolio within its current leverage limits through January 2026, at which point the fund will benefit from expanded regulatory leverage capacity as previously approved by the Fund’s Board in January 2025. With that, I will now turn the call back to the operator so we can take any questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mark Hughes with Truist Securities. Please proceed with your question.

Mark Hughes: Yes, good morning. Thank you. I know early the post-Liberation Day, maybe the unwinding of that perhaps. But do you think with the recent events, you might see an uptick in activity perhaps sooner than you might have thought a week or two ago?

Dwayne Hyzak: Sure, Mark. I’d say that from my standpoint, it’s probably too early to tell. Obviously, the events over the weekend changed things fairly significantly. But I think right now, it looks like it’s still a temporary change. There’s a 90-day window for continued discussions and negotiations. So, I think net-net, it’s a positive. But I would say as we sit here today, probably not significant enough of a positive to have a meaningful impact. But I’ll let Nick and David add on if they have a different view or opinion on it.

Nick Meserve: No, I’d say the same thing. I think it’s a positive, but it’s still temporary and really TBD on how long that lasts and how quickly we can move.

Dwayne Hyzak: Clearly, Mark, I think we view it as a positive. We just hopefully see additional progress from here forward because the longer-term resolution to the matter is really going to be the driver from our standpoint, just trying to take that uncertainty out of the marketplace so that activity can resume to normal.

Mark Hughes: Yes. Okay. And then latest thoughts on leverage, how you might see that progressing through the year? I guess it’s a related question to what happens in terms of the capital markets, but any updated thoughts on the leverage trajectory?

Dwayne Hyzak: Sure. So, I’ll give a couple of quick comments, and I’ll let Cory add on anything that he wants to add on. But I think the biggest driver in the Fund’s ability to get to its leverage targets, obviously, we’re very, very focused on deploying capital, deploying the liquidity, both that we received through the equity offering and also the additional leverage capacity that was provided to the fund given that equity raise and then the activities we’ve completed since then to expand leverage capacity or availability. But I think the biggest driver in the fund getting to its leverage targets over the next couple of quarters really is going to be the overall marketplace, the uncertainty we just talked about and the receptiveness of private equity sponsors to be active. But Cory, if you want to give any additional updates there?

Cory Gilbert: Yes, sure. We came in with a leverage of 0.79 at the end of March. That’s a little below our target. Primarily, that was driven due to the IPO proceeds we received in January as we try to redeploy them. We try to be working at our leverage target that’s anywhere between 0.85 and 0.95, but we won’t work to the high end of that target range until we get closer to next January.

Dwayne Hyzak: Just as a reminder, Mark, I think you likely recall this, but the benefits of the listing and the equity offering, one is you got the immediate additional liquidity from the equity proceeds. You get a benefit of 1 times that from the debt capacity. But just as a reminder, the Board, subsequent to the listing, voted to adopt the expanded leverage. So, at the end of January of 2026, the Fund’s leverage capacity will expand significantly, in line with where you see most of the other BDCs in the externally managed model, where you see them execute from a leverage capacity standpoint.

Mark Hughes: Thank you very much.

Dwayne Hyzak: Thank you, Mark.

Operator: Our next question comes from Haley [indiscernible] with Raymond James. Please proceed with your question.

Unidentified Analyst: Hi, good morning. Thanks for the question. Just a quick one on M&A. Based on your conversations with private users [ph], any sense on when M&A recovery will be happening? Do you feel like it’s back end 2025 loaded or further out in 2026?

Dwayne Hyzak: Yes. So, I think if I heard your question correctly, it was around M&A. I think when we look at it, we continue to believe that there should be a fair amount of pent-up demand, both from the fact that private equity funds, in general, you have a fairly significant amount of liquidity that’s available, the M&A marketplace as a whole, which I’m sure you’ve heard this from everybody that you talk to, the M&A overall has been a little bit subdued for the last couple of years. So, I think as you likely heard from us last conference call or last quarter, we were expecting a significant amount of activity in 2025. So I do think that whenever there’s a resolution a long-term resolution to the current tariff situation. I think there continues to be a significant amount of capital that’s available, a significant amount of pent-up demand in the overall marketplace that should drive significant amounts of activity.

We just have to get through the current situation, get some resolution, get some of the uncertainty out of the marketplace, so we can see the markets from an M&A and an investment standpoint resume to more of a normal operating situation, but that would be our view on our side.

Unidentified Analyst: Thank you so much.

Dwayne Hyzak: Thank you.

Operator: [Operator Instructions] Our next question comes from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Kenneth Lee: Hey good morning and thanks for taking my question. Just staying on the topic of the private loans and within the pipeline there. Could you talk about what you’re seeing in terms of spreads on new investments? And just given all the market dynamics, where do you think they could trend over the near-term there? Thanks.

Dwayne Hyzak: Sure. Hey good morning Ken, thanks for the question. I’ll give some initial comments. I’ll let Nick add on. But I think when you look at spreads, and I’ll kind of give a little commentary going back a little bit further. I think as you look at spreads, clearly, second half of 2024, there was some downward pressure on spreads just from a competitive dynamic standpoint. I think that was something you definitely saw in the upper middle market. You also saw it to some extent in our part of the marketplace. I think you started to see that downward pressure start to flatten out a little bit or stabilize. I think here more recently, post-Liberation Day, I think we’ve seen it continue to be stable. I think our expectation is that some of those spreads would actually start to widen a little bit, just acknowledging the uncertainty and the heightened level of risk that’s in the marketplace.

But honestly, when you look at the investment activity, it has been muted for all the reasons we just talked about. A lot of our existing activity, both here recently and in the pipeline is more follow-on or add-on investments to existing positions. So, you don’t see as much of a clear read-through to the market in terms of where spreads are going. But I think things are stabilized. But as you continue to see market uncertainty and higher risk, I think in general, you would expect to see spreads to be a little bit wider. So, that’s my quick comments. I’ll let Nick add on anything else he has.

Nick Meserve: I agree. I think we’re expecting to see kind of flat spreads with some potential widening depending on where the stabilization goes over the next six to 12 months. But like Dwayne said, we’ve really seen it tighten up over the last 12 months. That’s really flattened out over the last 30 to 60 days.

Kenneth Lee: Great. Very helpful there. And just one follow-up, if I may, just in terms of the dividend income from the portfolio, and I realize that it could fluctuate from quarter-to-quarter. But any line of sight over the next few quarters in terms of how dividend income could trend? Thanks.

Dwayne Hyzak: Sure, Ken. So, the dividend income is always going to be the piece that is going to be the biggest variable. Obviously, it’s not contractual like interest income would be on loans. So, it really is much more directly tied to the actual performance of the portfolio companies. And then secondarily, their decisions on capital allocation, do they have reasons to deploy that capital back into the business either for organic or acquisition growth activities. So, it’s — there’s a lot of variables there. But as you’ve heard us say in the past and as we said late last week on the Main Street Capital Corporation conference call, the lower middle market portfolio as a whole continues to perform very well, and that’s despite the current uncertainty.

Maybe in today’s environment, there are less opportunities to invest back into the business from an acquisition standpoint for all the reasons that we talked about. So, we’ve seen a significant amount of dividend income contributions from those high-performing lower middle market portfolio companies. And at least based upon the current dialogue we’ve been having with those companies, we expect that to continue to be the case in the second quarter. Obviously, longer term, Q3 and Q4, it’s going to come down to the overall economy and then specifically how our portfolio companies are performing. But as we sit here today, we continue to feel pretty good about it.

Kenneth Lee: Great, very helpful. Thanks again.

Dwayne Hyzak: Thank you, Ken.

Operator: Our next question comes from Doug Harter with UBS. Please proceed with your question.

Cory Johnson: This is actually Cory Johnson on for Doug.

Dwayne Hyzak: Morning Cory.

Cory Johnson: Morning. So, it looks like there were maybe about $20 million in realized losses from the middle market portfolio. I guess like what can we expect maybe in terms of the — in regards to the pace of decline in the middle market portfolio and the potential for additional realized losses, sort of like what kind of goes into the decisions when determining how and when to exit the middle market portfolio position?

Dwayne Hyzak: Sure, Cory. I’ll get a couple of comments. I’ll let Nick again add on anything on his side. I’d say in the first quarter, the realized losses that we had, which is, as you said, were concentrated in the middle market portfolio. They were also concentrated really in two larger kind of longer-term historical underperforming names, the largest of which I think have been written down almost to zero fair value for a long time, several years. So, it’s not something that had deteriorated here in the most recent quarter and definitely hadn’t even really deteriorated over the last 12 months or so. When you look at the middle market, just as a reminder, we historically were in that marketplace, we made the decision strategically to exit it because we were not seeing the net returns over the investments we are making in that strategy, not just from a current income standpoint, but from a net return after impairments and realized losses.

So, we decided five, six years ago, maybe seven years ago actually now to exit that business and have been continuing to do so to the point that MSC Income Fund exposure to the middle market is de minimis now, less than 3%, might be less than 2% off the top of my head. But any time you’re winding down a portfolio, as I think you would expect, the A students, B students, they either graduate earlier or they graduate on time. So, as you kind of go through this process, you end up with the investments that either have decided to stay with the current facility for a long time or they don’t have a choice. They’ve underperformed. And as a result, the investment is going to sit out there. And I’d say that definitely was the case with the two realized losses we had in the quarter.

But we continue to decrease that portfolio to the point that it’s very small now. We feel good about our fair value marks. But obviously, the ultimate resolution of those portfolio companies’ performance and our investments in them, some of which will be driven by the overall economy, it will be lumpy as we exit those positions and either have good outcomes, get our money back or have a good recovery or have kind of less optimal outcomes, you could see more realized losses. But I think the thing that I would point out on my side is that we feel good about where the fair value marks are. And even when you see the realized loss, it’s not really having a big NAV impact. We’re just realizing the prior unrealized depreciation. But Nick, feel free to add on.

Nick Meserve: The other thing I’d add there is that the main one of those was really just when the legal and tax restructuring could be taken. And so like Dwayne said, the fair value on both of those are really taken a year or two or three before this. And so really just when we could legally take the restructuring and book the full loss.

Cory Johnson: Thanks. And then I guess just similarly, regarding the lower middle market portfolio, I guess you guys are still making follow-on investments into that. But over time, that’s supposed to, I guess, wind down as well. So, I guess like how are you thinking in regards to the exit from non-middle market positions? Is that more just going to be as some of those companies have exited events? Or would you be a little bit more active at times in terms of winding down some of the positions in there as well?

Dwayne Hyzak: Yes, Cory, I’d say that we view the lower middle market existing investments that the fund has, we view those to be very significant positives. So, I think the ultimate resolution of the lower middle market portfolio declining over time and then eventually being zero, it’s going to take a long time. We look at the Main Street lower middle market strategy as one that is a long-term to permanent strategy. It won’t be permanent because our partners in those businesses, which again are the management teams, the individual owner operators of the business, they will ultimately decide what the exit plan, timing and event is. We’re just going to be as good a partner for those companies and those individuals as we can be, but we don’t control the outcome.

We’re typically a significant or a meaningful equity investor, but we’re not control. The control is maintained by the individual owner-operator in most situations. So, we think it’s going to be a long tail. Obviously, the portfolio as a percentage of the overall portfolio will decline over time because for all intents and purposes, the lion’s share of new capital will be deployed into the private loan strategy, but we will periodically have some opportunities to have add-on or follow-on investments in those lower middle market companies. And when we have those opportunities, I would say we’re going to embrace them because they typically end up being very attractive, very significant value creation events or opportunities. But it’s really, really difficult to predict the timing just because one, we’re not in control and because we do try to provide a long-term to permanent solution to the companies that we invest in.

So hopefully, that gives you a little color there.

Cory Johnson: Yes, thank you.

Dwayne Hyzak: Thank you.

Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Dwayne Hyzak: Yes. We just want to say thank you again to everyone for joining us this morning. We appreciate the continued support of the Fund shareholders, and we look forward to our next update call in early August after the release of the Fund’s results for the second quarter.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.