Main Street Capital Corporation (MAIN) Q3 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the Main Street Capital Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Zach Vaughan. Thank you, Zach. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's Third Quarter 2026 Earnings Conference Call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; and Ryan Nelson, Chief Financial Officer. Also participating in the Q&A portion of the call is Nick Meserve, Managing Director and Head of Main Street's Private Credit Investment Group. Main Street issued a press release yesterday afternoon that details the company's third quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 13. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's home page. Please note that information reported on this call speaks only as of today, November 6, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will 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 company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income, or DNII, and DNII before taxes. DNII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of non-cash compensation expenses. The DNII before taxes is NII as determined in accordance with GAAP, excluding the impact of non-cash compensation expenses and any tax expenses included in NII. Management believes that presenting DNII and DNII before taxes and related per share amounts is useful and appropriate supplemental disclosure for analyzing Main Street Capital Corporation's financial performance since non-cash compensation expenses do not result in a net cash impact to Main Street upon settlement and tax expenses included in NII may include excise tax expense, which is not solely attributable to NII and deferred taxes which are not payable in the current period. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are 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. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. 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. And now, I'll turn the call over to Main Street's CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation in this morning's call. We hope that everyone is doing well. On today's call, we will provide our key quarterly updates, after which, we'll be happy to take your questions. We are pleased with our performance in the third quarter, which resulted in an annualized return on equity of 14.7%, DNII Before taxes per share in line with our guidance from last quarter's call and an increase in NAV per share. We believe that these results continue to demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies and the continued strength and quality of our portfolio companies. We're also pleased to have further enhanced our liquidity position and strengthened our capital structure as a result of an increase in SBIC debenture borrowing capacity through our SBIC funds in the third quarter. And again, through our recent investment-grade debt offering in October, both of which Ryan will discuss in more detail. Given our strong liquidity position and conservative leverage profile, we are very well positioned to continue the growth of our investment portfolio for the foreseeable future, and we're excited about the current opportunities we are seeing. We remain confident that our unique investment income and value creation drivers, together with our cost-efficient operations and conservative capital structure, allow us to continue to deliver superior results for our shareholders in the future. Our favorable results for the third quarter, combined with our continued positive future outlook, resulted in our most recent dividend announcements, which I will discuss in more detail later. Our NAV per share increased in the quarter primarily due to the impact of significant net fair value appreciation in our lower middle market investment portfolio. Ryan will also discuss our NAV per share increase in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of meaningful dividend income contributions and net fair value appreciation in our lower middle market equity investments. Consistent with my comments over the last few quarters, we continue to see increased impacts from higher levels of performance variances versus expectations for both our overperforming and underperforming portfolio companies, and those impacts are again reflected in our current results. As a result, we are focused on maintaining a disciplined approach that's consistent with our historical practice to managing our relationships with our overperforming and underperforming portfolio companies. Overall, based upon our current views of the investment portfolio and feedback from our portfolio company management teams, we continue to maintain a positive view regarding the expected future contributions from our lower middle market portfolio companies. We also continue to see significant interest from potential buyers in several of our lower middle market portfolio companies, which we expect will lead to favorable realizations over the next few quarters. We believe this interest further highlights the strength and quality of our portfolio companies and their exceptional leadership teams. Now turning to our investment activity. The third quarter was slower than our expected normal quarterly activity in both of our primary investment strategies. Our lower middle market investment activity included 1 new portfolio company investment, which, when combined with other investment activity, resulted in a net decrease in our lower middle market investments of $19 million, while our private loan investment activity resulted in a net decrease in our private loan investments of $2 million. David will discuss our investment activity in more detail. Now turning to our asset management business. We continue to produce positive results for the funds we advise through our External Investment Manager, with the continued favorable performance in the third quarter resulting in meaningful incentive fee income for our asset management business and, together with our recurring base management fees, a significant contribution to our net investment income. We remain excited about our plans for the external funds that we manage and are optimistic about the future performance of the funds and the expected returns for the investors of each fund. We also continue to be excited about our strategy and expectations for growing our asset management business within our internally managed structure. As part of these efforts, we remain focused on growing the investment portfolio of MSC Income Fund, a publicly traded BDC advised by our External Investment Manager, which is solely focused on our private loan investment strategy with respect to new portfolio company investments. MSC Income Fund's Third Quarter 2026 Financial Results Conference Call will be held later this morning, during which we will provide additional details. Based upon our results for the third quarter and our favorable outlook for the future, earlier this week, our Board declared a supplemental dividend of $0.30 per share payable in December, representing our 21st consecutive quarterly supplemental dividend, and an increase to our regular monthly dividends for the fourth quarter of 2027 to $0.27 per share. These first quarter regular monthly dividends represent a 3.8% increase from the regular monthly dividends paid in the first quarter of 2026. The supplemental dividend for December is a result of our favorable performance in the third quarter and our net realized gains over the last few years and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 38% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continue to declare future supplemental dividends to the extent DNII before taxes significantly exceeds our regular monthly dividends paid or we generate meaningful net realized gains, and we maintain a stable to positive NAV per share in future quarters. Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional significant supplemental dividend payable in March 2027. Now turning to our current investment pipeline. As of today, I'd characterize our lower middle market investment pipeline as average. Consistent with our experience in prior periods of broad economic uncertainty, we believe that our ability to provide highly flexible and customized financing solutions to lower middle market companies and their owners and management teams, together with our differentiated long-term to permanent holding periods, represents an even more attractive solution to the needs of many lower middle market companies. And we are excited about our expectations for the continued growth of our lower middle market investment portfolio. In our private loan investment strategy, we continue to see an improved lending environment, and we have recently experienced a significant increase in the volume of attractive and viable opportunities, which we believe has us well positioned to capitalize on new private loan investment opportunities and to generate growth for our private loan portfolio and our asset management business. And as of today, I would characterize our private loan investment pipeline as well above average. With that, I will turn the call over to David.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe that our third quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continues to be positive, which contributed to our third quarter financial results. Each quarter, we try to highlight different key aspects of our investment strategy and differentiated approach that allow us to consistently produce best-in-class results. For today's call, we thought it would be useful to spend some time discussing the support we provide to our lower middle market portfolio companies. In addition to our ongoing investment management activities and the managerial assistance we offer to our lower middle market portfolio companies, each year, we are excited to host an Annual President's Meeting event for the most senior leaders of our lower middle market portfolio companies. For those of you who are not familiar with our President's Meeting, it's an annual event that we host for our lower middle market portfolio company leaders to network, build relationships, share best practices, learn from each other and from third-party speakers and benefit from being part of Main Street's family of portfolio companies. This year marked the 10th time we have hosted this event. Based on post-event feedback from our lower middle market portfolio company executives, the event is highly valued by the participants and the event improves each year as we refine our agenda based on the feedback we receive. Topics covered at our most recent event included artificial intelligence use cases presented by a panel of our portfolio company executives, insurance and risk management best practices presented by our in-house Chief Risk Officer. The business case for strategic talent management presented by our in-house talent operating partner, beginning your AI journey presented by a third-party industry expert. We had an economist speak about his views on the U.S. economy, and our keynote speaker, a Hall of Fame football coach, who shared stories and strategies on leadership, talent development and how to build sustaining winning teams, both on and off the football field. As a result of this annual event, our portfolio companies have increasingly worked together, referred business to each other, utilized each other's operational resources and formed long-term relationships that we believe are invaluable. One important topic we covered this year was best practices for using artificial intelligence in lower middle market businesses. This session was led by 2 of our portfolio company CEOs, together with the individuals at their companies who lead their internal AI efforts. They presented specific case studies on how they have used AI in their businesses, how they got started, lessons they learned along the way and what they would do differently if they were launching an AI initiative today. The audience Q&A was very active, and we are highly encouraged by the potential benefits our lower middle market portfolio companies can achieve as they continue to adopt AI in the future. Two other important sessions that we had were led by Main Street executives and focused on risk management and human capital at the portfolio company level. We are pleased to have our Chief Risk Officer present on how we can support our portfolio companies with the implementation of enhanced risk management and insurance-related initiatives that we believe will benefit our companies going forward. Our in-house talent operating partner presented on how we can support our companies as they assess and strengthen their teams, compensation alignment, culture and organizational efficiency. She also addressed succession planning and management, which is a critical area of value creation and risk mitigation for our lower middle market companies. The engagement from the audience during the event was robust and led to post-event discussions that we believe will ultimately improve the future financial results and operating performance for our lower middle market portfolio companies. Given our primary focus on our lower middle market investment strategy and the unique benefits it can provide to us, our management team partners and their companies, we are excited to bring together the key leadership from our lower middle market portfolio companies at our Annual President's Meeting. We always leave this event very excited about the quality of the individuals leading our lower middle market portfolio companies and the future value creation that we expect they and their teams can generate for our mutual benefit in the future. We left this year's event more excited than ever. Now turning to the composition of our investment portfolio as of September 30. We continue to maintain a highly diversified portfolio with investments in 187 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the External Investment Manager, represented only 3.3% of our total investment income for the trailing 12-month period and 3.4% of our total investment portfolio fair value at quarter end. Majority of our portfolio investments represented less than 1% of our income and our assets. Our lower middle market investment activity for the third quarter included total investments of approximately $61 million, including an investment of $39 million in a new lower middle market portfolio company, which after aggregate investment activities resulted in a net decrease in our lower middle market portfolio of $19 million. In our private loan strategy, we completed $162 million in total private loan investments, which after aggregate investment activity resulted in a net decrease in our private loan portfolio of $2 million. At the end of the third quarter, our lower middle market portfolio included investments in 92 companies, representing $3.3 billion of fair value, which was 28% above our related cost basis and our private loan portfolio included investments in 86 companies, representing $2.1 billion at fair value. The total investment portfolio at fair value at quarter end was 117% of our related cost basis. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday. With that, I'll turn the call over to Ryan to cover our financial results, capital structure and liquidity position.

Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the third quarter, which included NII per share and DNII per share amounts that were in line with our prior guidance and another increase in NAV per share. Our total investment income for the third quarter was $142.5 million, increasing by $2.7 million or 1.9% over the third quarter of 2025 and decreasing by $7 million or 4.7% from the second quarter of 2026. Interest income increased by $8.6 million from a year ago and decreased by $800,000 from the second quarter of 2026. The increase from prior year was principally attributable to the impact of higher levels of income-producing debt investments, partially offset by the negative impact from investments on non-accrual status and a decrease in interest rates primarily resulting from decreases in benchmark index rates on our floating rate debt investments. The decrease from the second quarter was principally attributable to the impact of a decrease in prepayment activity and lower levels of income-producing debt investments, partially offset by an increase in interest income due to an additional day in the third quarter. Dividend income decreased by $5.7 million when compared to a year ago, after a $1.4 million increase in unusual or non-recurring dividends and decreased by $1.9 million from the second quarter, including a $300,000 decrease in unusual or non-recurring dividends. The decrease in dividend income from prior year is primarily due to a decrease in dividends from our lower middle market companies as a result of exits since the beginning of comparable period in prior year and changes in the performance and capital allocation decisions of our existing lower middle market companies relative to the prior period and decreases from our External Investment Manager, partially offset by an increase in dividend income from our private loan portfolio companies. The decrease in dividend income from the second quarter is primarily due to decreased dividends from our lower middle market portfolio companies as a result of changes in the performance and capital allocation decisions of our existing lower middle market portfolio companies, partially offset by an increase in dividends from our private loan portfolio companies -- other portfolio companies and the External Investment Manager. Fee income decreased by $100,000 from a year ago and by $4.4 million from the second quarter. The decrease in fee income from the second quarter is primarily due to a decrease in fee income from the refinancing and prepayment of debt investments, lower closing fees and lower middle market investments and other investment activity. Fee income considered non-recurring increased by $700,000 from a year ago and decreased by $1.9 million from the second quarter of 2026. The third quarter included income considered less consistent or non-recurring in nature, primarily related to dividend, accelerated interest and fee income, which totaled $6.1 million. These income items were $1.8 million or $0.02 per share higher than the third quarter of 2025, $3.4 million or $0.04 per share lower than the second quarter and fairly consistent with the prior 4 quarter average. The increase from the prior year was primarily due to higher non-recurring dividend income and fees. The decrease from the second quarter was primarily due to lower non-recurring fees and accelerated interest income. Our operating expenses increased by $6.7 million over the third quarter of 2025 and by $1.2 million in the second quarter. The increases in operating expenses from the prior year and second quarter were largely driven by increases in interest expense. The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund a portion of the growth of our investment portfolio and an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities, partially offset by a decrease in the weighted average interest rate on our credit facilities resulting from decreases in benchmark index interest rates. The increase in interest expense from the second quarter was primarily driven by an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.2% for the quarter on an annualized basis and 1.3% for the trailing 12-month period, and continues to be among the lowest in our industry. Our External Investment Manager contributed $8.4 million to our net investment income during the third quarter, which represents a decrease of $400,000 from the same quarter a year ago and a decrease of $300,000 from the second quarter. Our External Investment Manager earned gross incentive fees of $3.5 million during the third quarter and waived $600,000 in incentive fees from MSC Income Fund resulting in net incentive fees of $2.9 million. This net result represents a decrease of $1 million in net incentive fees from prior year and a decrease of $100,000 in net incentive fees from the second quarter of 2026. Our External Investment Manager ended the quarter with total assets under management of $1.8 billion. During the quarter, we recorded net fair value appreciation, including net unrealized appreciation and net realized losses on the investment portfolio of $40.9 million. This increase was primarily driven by net fair value appreciation in our lower middle market and private loan investment portfolios, partially offset by net fair value depreciation in our middle market investment portfolio and fair value depreciation of our External Investment Manager. The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies. The net fair value appreciation in our private loan portfolio is primarily driven by net appreciation on several specific portfolio equity investments, partially offset by depreciation primarily associated with increases in market spreads. The net fair value depreciation on our middle market portfolio was primarily driven by net depreciation on specific portfolio investments. The depreciation of our External Investment Manager was primarily driven by decreases in the valuation multiples of publicly traded peers, which we use as a benchmark for valuation purposes and average incentive fees, partially offset by increased base management fees. Additional details on our net realized fair value activity are included in the press release that we issued yesterday. We ended the third quarter with investments on non-accrual status, comprising 0.9% of the total investment portfolio at fair value and 3.5% at cost. Net asset value, or NAV, increased by $0.30 per share over the second quarter or 0.9% and by $1.44 per share or 4.4% when compared to a year ago, to a record NAV per share of $34.22 at quarter end. Our regulatory debt-to-equity leverage calculated as total debt, excluding our SBIC debentures divided by NAV was 0.7x, and our regulatory asset coverage was 2.42x. These ratios continue to be more conservative than our long-term target range of 0.8x to 0.9x and 2.25x to 2.1x, respectively. We continue to be active on capital activities, aided by our strong relationships as we continue to manage our overall capital structure diversity. In September, we received SBA approval to increase our SBIC debenture capacity by $75 million to a total of $425 million with the potential for at least $50 million of additional capacity under current SBA regulations. In October, we issued $500 million of investment grade unsecured notes maturing in January 2030 with a coupon rate of 6.55% and a yield of 6.8%. Given our current liquidity position and recent net investment activity, we were less active in our at-the-market or ATM program, raising net proceeds of $10 million from the equity issuances during the quarter. After giving effect to our capital activities, we entered the fourth quarter with strong liquidity, including cash and unused capacity under our credit facilities totaling $1.6 billion with our next term debt maturity of $400 million due in June 2027. We continue to believe that our conservative leverage, strong liquidity and continued access to capital are significant strengths that have proven to benefit us historically and have us well positioned for the future, allowing us to continue to execute our attractive investment strategies despite the current market uncertainty. Coming back to our operating results. DNII before taxes per share for the quarter of $0.98, was $0.09 per share lower than the third quarter of last year and $0.10 per share lower than the second quarter. Looking forward, we expect fourth quarter of 2026 DNII before taxes of at least $0.98 per share with the potential for upside driven by portfolio investment activity during the quarter. With that, I will turn -- I will now turn the call over to the operator so we can take any questions.

[Operator Instructions]

Congrats on the quarter again. Two questions, both related to pipelines, but the 2 different ones. On the private loan, I mean you characterized it well above average, and I think you said a significant increase in the pipeline. I mean that's quite good. How would you -- and I know when it's early in the pipeline, you don't necessarily know where pricing is going to shake out. That tends to come out at the end, right? And in the past, you've lost some deals at the end related to unacceptable pricing for your return expectations, right? So can you kind of give us a framework around that in terms of the pipeline being well above average, but I mean do you expect that -- do you believe that market pricing in the private loan market has moved sufficiently that, that pipeline and that would be at sufficient pricing for you to actually be willing to close it, i.e., is that well above average, potentially well above our average originations or just opportunities?

Sure, Robert. Good morning, thanks for the question. I'll give you a couple of comments, and I'll let Nick add on anything else that he wants to add. But I would say when you look at our discussion each quarter on pipeline, what we're talking about is transactions that are not finalized clearly. They're still subject to diligence and legal documentation and some other activities. But by the point we put it in the pipeline, I would say the general terms and conditions, size of facility, leverage loan-to-value and pricing are all pretty well defined. Everything that we have that we're quoting here would fit that category. Clearly, still subject to diligence and legal documentation and finalizing the transaction. But for all intents and purposes, most of the terms have been agreed to. And that's consistent with what we would have been giving to you in the past when we gave commentary on pipeline. Regarding pricing, I think we feel good about the pricing. It will be in line with what you've seen us execute historically. I don't think we've seen significant changes in pricing recently or in terms and conditions. I think overall, we feel good about the nature, types of companies, the transaction structure and pricing that would be in these transactions or investments in the pipeline if they get executed. But that would be my comments, but Nick add on any additional color?

Yes, Robert. I think the only thing I'd add there would be the pipeline we do quarterly is we kind of do a judgment call on -- consistent judgment call on how that moves forward. And so there's always the risk that either the sponsor doesn't win the transaction end of the day, they don't close or we don't finalize our financing, that's kind of baked into how we view the pipeline and expectations. So there's always a risk that we don't get to the finish line in close. But as of now, we feel really good about the pipeline.

And then flipping to the other side, the lower middle market average, average isn't bad. On that, it is an election year. I mean the elections are done, but it was only a couple of days ago, was any of the -- and there's obviously broad economic uncertainty, geopolitical issues with war, et cetera. I mean how would you characterize the likelihood of that lower middle market activity early-stage pipeline or pipeline accelerating given now the elections are behind us, but there's still a lot of other uncertainties. I mean, just trying to get a gauge on whether there was a temporary lull because of all that, and we could see a reacceleration above average or this is -- well, I mean, average is average. I mean we're going to stay here for a while.

Yes, Robert, I would say that it's too early to tell if there's going to be any impact from the election. I think the pipeline is average, as you said, it's not meant to be negative. We want it to be better, obviously. You always want to achieve as much positive outcome as you can, but the pipeline is average. And I don't think it's average because people are waiting on the election. I don't think we expect to see a big change post-election. If there's anything that drives activity to be slower than we would want it to be, I would say it's more just the continued uncertainty in the marketplace. There's a lot of moving parts and pieces across the U.S. economy, and that can cause transactions to either not come to market or if it does come to market and you get engaged in diligence, you can cause things to not go as planned just because of the uncertainty in the marketplace. But I wouldn't say there's anything that's impacted the pipeline as a result of the recent elections. But David, feel free to add on anything you want to add?

No, nothing to add.

Our next question is from Arren Cyganovich with Truist Securities.

Maybe touch on the credit quality side, how are you seeing the health of your portfolio companies, I guess, both on the LMM side and also on the private loan side?

Sure, Arren. Thanks for joining us, and thanks for the question. I would say it's consistent with what you've heard us say in the past. We're not seeing significant changes in the quality of the portfolio, whether it's the good high-performing companies or the number of companies that are underperforming. What I did include in my prepared comments, which I think we've been including for the last couple of quarters is that when you see overperformance or underperformance, you're seeing -- on both ends, you're seeing that variance versus expectations will be more significant. And I'd say that's continued in the current quarter, but outside of that, I wouldn't say there's any significant trends we're seeing.

All right. And I think you had touched on inbound interest in some of your LMM portfolios. Is that -- it seems like you always have some interest coming in on those. Anything in particular that seems like it would be more likely to move in the next 3 to 6 months?

Sure. I think to your point, Arren, we always do have some level of inbound interest. I think when we're giving that commentary, which we have given that commentary pretty consistently for the last couple of years. It is because not only is there interest, but I'd say that interest is potentially viable both for -- from our standpoint and our partners and the portfolio companies the management team and owners of the business. It's also viable from their perspective. So I'd say that's consistent with what we've been saying. We have seen elevated interest, and we do think that there's a good probability, high likelihood that something happens in the next quarter or 2.

Our next question is from Chris Muller with Citizens.

This is Neo on for Chris. Just maybe following up on the dividend commentary a little bit. The compounding nature of your guys' lower middle market portfolio has obviously been a pretty big differentiator for you guys over time, both through the equity appreciation and growing dividend income. I know in the prepared remarks, you mentioned changes in performance and capital allocation decisions at some of those companies. How should we think about those capital allocation decisions today, particularly maintaining the balance between dividend income and the reinvestment back into those businesses itself?

Sure. Thanks for joining us, and thanks for the question. I'll give a couple of comments. I'll let David add on. I would say that the commentary there is meant to just provide additional color into what the portfolio companies are seeing how they're acting. We have seen dividend income from the lower middle market companies come down some. We do share your view. It's been a fantastic value creation driver for Main Street and for our portfolio companies. We expect that to continue going forward. But we do think, given the current state of the economy going back to the uncertainty that I referenced earlier, in certain situations, companies are being more conservative in their capital allocation and some companies have seen their earnings and the cash flows decline some. So you're seeing both of those impacts -- both of those results impact the dividend income we're seeing from the portfolio companies. Overall, we still feel really good about the portfolio, but that's what we're communicating in those comments. But David, feel free to add on additional color.

Just a little bit of additional color. With this broad portfolio as we have with many industries that we cover, we see a lot of variability within those specific industries. So it's a moment in time as to which ones are reallocating capital versus more comfortable in making distributions. So we're always looking ahead, doing flashes, talking to our portfolio companies being proactive. But with an economy like it is now with some prices and such coming up on fuel prices and such, it has different impacts on different companies, which is what Dwayne was alluding to.

That makes a lot of sense. And I appreciate the color there. And then just quickly another, if I may. Given where base rates are today and how they're expected to keep moving higher, I think you guys might have some unique insight given that kind of partnership you guys tend to do with a lot of your companies, particularly, with that [ President's ] Meeting you guys had, are you guys seeing anything unique that might be helpful in terms of how your borrowers are going to absorb that and how you guys might be able to take advantage of that environment?

I wouldn't say anything that's new or unusual in this environment. Just as a reminder, when you look at our lower middle market investment strategy and practices, the majority of our investments on the debt side, the loans we have to those companies that we partner with, they're fixed rate. So as rates rise from a market kind of index or market rate standpoint, they don't have a direct impact on these companies. That's intentional from our side. That's been the case for over 20 years now since we've been executing this consistent lower middle market strategy. So we want to make sure we put in place a structure that allows our management team, kind of owner-operator partners in these businesses. They can focus on managing the business, dealing with customers, vendors, employees, et cetera, and not worry about their capital structure moving around. So we think it's been a strength historically. We think it will continue to be a strength going forward. So that's something that's been consistent with our practice on the lower middle market side since we've been involved going back to the early 2000s.

[Operator Instructions] Our next question is from Melissa Wedel with UBS.

This is actually Cory Johnson on for Melissa. I did have a question in regards to -- you had mentioned earlier that you're receiving interest in your lower middle market portfolio companies from sponsors. Is there any particular like industries or any type of businesses where you're seeing any type of like elevated interest at all?

Yes. Just to make sure we're clear, it's not necessarily always from sponsors. It could be a wide range of different potential buyers or borrowers. I'd say in terms of the industry, I wouldn't say it's concentrated in any particular area. We've got a diversified portfolio and a wide range of these companies are doing well performing at high levels. And as they grow, and particularly, they get above $10 million, $15 million of EBITDA. They just become more viable as a candidate for other people that want to acquire those companies. So we're not seeing anything different in terms of that interest from third parties.

And just as a follow-up, at your President's Meeting, you mentioned how AI is one of the -- AI use cases was one of the things that was discussed. I was wondering maybe how those AI conversations have evolved from, say, the meeting that you had last year versus this year? Like what is adoption sort of looking like in those portfolio companies. And obviously, it'd be hard to size that now, but what are -- do you have any thoughts at all on like some of the benefits -- some of the benefits that the companies may get and like how -- where you might be able to see like realizations from them over time? Like how might that expand some of their -- the value? Just maybe what your broad sort of thoughts on those?

Like I did earlier, I'll give a couple of comments and David can add on if he has additional views or your thoughts on it. But I'd say like we said in the past, most of our lower middle market companies are more mature basic industries. We view that description in a very positive way, not a negative way, but they're not technology software heavy businesses. As a result, when we look at AI, we do not think it's going to be a massive change to these companies. I think we've said that before, and I think that continues to be the viewpoint today. But can they become more efficient, more effective in certain areas, whether it's back office accounting administrative, whether it's kind of in their sales channels or for companies that are doing manufacturing, making -- putting new technology or processes, tools in place that allow them to be more efficient but also be safer in the way they operate their business. So we're definitely seeing that across the board. So our goal at the President's Meeting is just to share best practices, and we prefer not to have a third-party share those best practices. We want it to be their peers across the portfolio. So we had a couple of our companies that are more advanced in their use of AI, give specific examples and case studies for what they're doing. So we do think the adoption is increasing. We think it will continue to increase just like it is likely across the entire U.S. economy. But still, we're measured in what we think the kind of the real outcome would be just because most of our companies are more basic, mature businesses or industries. But David, add on any additional comments.

I'll say to your question about themes, I'd say last year, we were looking at AI tools that were leverageable and already developed by others across the whole portfolio for various back-office and other functions and shared resources there. This year, we had a couple of specific examples of how portfolio companies and their teams had developed customized AI tools to make their business more efficient or to get better information flow off of existing systems. And having that discussion in front of the group context with open Q&A for people to ask about their journey with AI was really, really helpful and stimulated a lot of discussion and undoubtedly after the meeting we'll have a follow-up with those portfolio companies to stimulate that dialogue.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to management for closing comments.

I just want to say thank you again, everyone, for joining us this morning. We appreciate the continued support of our shareholders, and we look forward to our next call in February after the release of our fourth quarter results. Thank you.

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