Friday, April 25, 2014

MAIN: April 2014 Report


Main Street Capital (MAIN) is a component in my suggestedTotal Return’, ‘Risk Averse’ and ‘General’ BDC portfolios due to having the highest risk adjusted return ratio.  When I first started to invest in BDCs I was mostly attracted to yield as well as the function that these companies play in the economy.  Most BDCs sort through 1,000 companies or more a year and choose a select handful to invest in and create a partnership.  BDCs are required to provide hands on managerial assistance to portfolio companies and ideally have an equity position or skin in the game to further promote aligned interest.  Quality BDCs focus on this approach and it benefits investors and the company in many ways including increased net asset value (“NAV”) per share growth, lower amounts of non-accruals and less portfolio turnover.  During the financial crisis MAIN had a stable NAV per share and was one of the only BDCs not to cut dividends.

MAIN is an internally managed BDC which means that all operating expenses, including compensation, are paid directly by the company, and shareholders have the ability to vote on compensation issues.  Generally total operating expense ratios are lower than externally managed BDCs. Investing in a well-managed internal BDC has many advantages due to a higher degree of shareholder alignment.  Externally managed BDCs pay a base management fee that is calculated as a percentage of total assets and an incentive fee that is paid on income and capital gains.  The external manger or ‘investment adviser’ generates higher fees by having more assets that sometimes includes idle cash.  Some of these BDCs are constantly issuing shares to grow assets and income with little benefit to shareholders due to diluted earnings and flat EPS and NAV growth.  MAIN has the lowest operating cost of any BDC (see page 6) and this is a stated goal of the company but management is aligned with shareholders in other ways including higher amounts of insider ownership.  Having a low cost structure and giving more to shareholders benefits them as well and each quarter management purchases $700,000 in shares through its dividend reinvestment plan.

The company has a perfectly blended portfolio of safe senior debt investments to support reliable and growing dividends along with equity participation in many of its portfolio companies to support special dividends and NAV growth giving it the highest total return compared to other BDCs (see page 21).  MAIN is uniquely positioned with access to some of the lowest cost of capital for debt and equity and combined with its efficient cost structure gives it the ability to distribute more to shareholders with lower amounts of risk.

This report includes updated projections, recommendations, pricing, rankings, total return and earnings estimates for dividend sustainability including the best and worst case scenarios along with the potential impacts to dividend growth. It also includes an interest rate sensitivity analysis that discuss the potential impacts to income and expenses if interest rates begin to rise with a side by side comparison to other BDCs.  There is a new section covering the potential impacts from being excluded from the Russell 2000.

This report is not publicly available, will not be published on Seeking Alpha. If you would like to become a premium subscriber please visit “Premium Subscriber”.

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