M A I N NYSE Introduction to Business Development Companies (BDCs) - - PowerPoint PPT Presentation

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

• perating 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 M A I N NYSE

 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 M A I N NYSE

Retail Investors Public Equity Capital Markets

Accredited

Investors

Business Development Companies Small and Middle-Market Businesses

Investment Company Act of 1940

Private Equity Firms

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Benefits of BDCs as an Investment Vehicle M A I N NYSE

 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 M A I N NYSE

 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 $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

• fferings with combined gross proceeds in excess of $925 million*

* As of March 9, 2012.

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Non-Traded BDC Structures M A I N NYSE

 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 M A I N NYSE

 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 M A I N NYSE

 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 $25 Debt $50 Equity $50 Equity

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How do BDCs Value Their Assets? M A I N NYSE

 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 M A I N NYSE

 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: Morgan Keegan – BDC Weekly Update, March 16, 2012.

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BDC Market Statistics

Source: Morgan Keegan – BDC Weekly Update, March 16, 2012. (1) Dividend Yield uses the current dividend annualized.

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BDC Market Statistics

Source: Morgan Keegan – BDC Weekly Update, March 16, 2012.

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BDC Market Statistics

Source: Morgan Keegan – BDC Weekly Update, March 16, 2012.

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Main Street Capital Corporation Corporate Overview

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MAIN is a Principal Investor in Private Debt and Equity

 Publicly-traded on the New York Stock Exchange (NYSE: “MAIN”)  Internally-managed Business Development Company  IPO in October 2007  Over $800 million in assets under management  Primarily invests in the under-served Lower Middle Market (LMM)  Companies with revenue between $10 million - $100 million;

EBITDA generally between $2 million - $10 million

 Self-sponsored/self-originated orientation – partner with business

• wners and entrepreneurs

 Recapitalizations, buyouts, growth and acquisition capital  High level of management ownership/investment in MAIN  Headquartered in Houston, Texas

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MAIN is a Principal Investor in Private Debt and Equity M A I N NYSE

 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 Framework

 Operates 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 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)

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M A I N NYSE 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 M A I N NYSE

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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

• pportunities

 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%

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Diversified Total Portfolio (as a Percentage of Cost)

Growth Capital 22% Acquisition 19% Recapitalization/Refinancing 33%

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

J a n . 8 A p r . 8 J u l . 8 O c t . 8 J a n . 9 A p r . 9 J u l . 9 O c t . 9 J a n . 1 A p r . 1 J u l . 1 O c t . 1 J a n . 1 1 A p r . 1 1 J u l . 1 1 O c t . 1 1 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 Corporation 1300 Post Oak Blvd., Suite 800 Houston, TX 77056 713-350-6000 (main) 713-350-6042 (fax) www.mainstcapital.com

Vincent D. Foster Chairman of the Board and Chief Executive Officer 713-350-6039 vdfoster@mainstcapital.com Alejandro Capetillo Associate 713-350-6023 acapetillo@mainstcapital.com