M A I N NYSE Introduction to Business Development Companies (“BDCs”) and Main Street Capital Corporation NASDAQ – GS: MAIN NYSE: MAIN
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 . NYSE: MAIN 2
M A I N NYSE Business Development Companies (“BDCs”) NYSE: MAIN 3
Overview Created by the Small Business Investment Incentive Act of 1980 (the “1980 Amendments”) as a result of a perceived crisis in the capital M A I N markets in the 1970s NYSE 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 NYSE: MAIN 4
Key Market Role M A I N Retail Investors NYSE Public Equity Capital Markets Accredited Investors Business Development Companies Private Equity Firms Investment Company Act of 1940 Small and Middle-Market Businesses NYSE: MAIN 5
Benefits of BDCs as an Investment Vehicle Access to public capital markets M A I N Shares are traded on national exchanges NYSE 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 NYSE: MAIN 6
BDC Industry Renaissance Prior to 2003, the largest BDCs were primarily internally managed M A I N Choice reflected the success of the internally managed, income NYSE 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 $591 million with the 10 largest BDCs having a combined Market Capitalization of $13.3 billion* Since the beginning of 2012, existing BDCs have completed 9 follow-on offerings with combined gross proceeds in excess of $925 million* NYSE: MAIN * As of March 9, 2012. 7
Non-Traded BDC Structures The first registered, continuously-offered unlisted BDC, FS Investment Corporation, commenced fundraising in 2008; since then, these fund M A I N vehicles have grown rapidly and gained the attention of potential sponsors NYSE 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) NYSE: MAIN 8
Eligible BDC Investments A BDC must invest 70% of its assets in “good” BDC assets M A I N 70% basket includes securities issued by an eligible portfolio company, as defined in Section 2(a)(46), which includes: NYSE 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) NYSE: MAIN 9
BDC Borrowing Limitations BDCs must have 200% asset coverage (Total Assets/Total Debt) M A I N For example, a BDC with $50 in equity can borrow up to $50 NYSE A BDC would be able to invest $100 in growing businesses $50 Debt $50 Equity $50 Equity Other investment companies are restricted to a 300% asset coverage requirement with respect to issuing debt $25 Debt $50 Equity $50 Equity BDCs may exclude leverage at the SBIC level if the SEC grants exemptive relief NYSE: MAIN 10
How do BDCs Value Their Assets? Investments are reported at fair value M A I N FASB ASC 820 – Fair Value Measurements and Disclosures NYSE 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” NYSE: MAIN 11
Tax Considerations for BDCs A BDC may elect to be taxed as a RIC under the Internal Revenue Code M A I N Taxation as a RIC NYSE 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 NYSE: MAIN 12
M A I N NYSE BDC Market Statistics NYSE: MAIN 13
BDC Market Statistics Source: Morgan Keegan – BDC Weekly Update, March 16, 2012. NYSE: MAIN 14
BDC Market Statistics Source: Morgan Keegan – BDC Weekly Update, March 16, 2012. (1) Dividend Yield uses the current dividend annualized. NYSE: MAIN 15
BDC Market Statistics Source: Morgan Keegan – BDC Weekly Update, March 16, 2012. NYSE: MAIN 16
BDC Market Statistics Source: Morgan Keegan – BDC Weekly Update, March 16, 2012. NYSE: MAIN 17
M A I N NYSE Main Street Capital Corporation Corporate Overview NYSE: MAIN 18
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