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Dwayne Hyzak

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call. We hope that everyone is doing well. On today's call, I will provide my usual updates regarding our performance in the quarter.
We're also providing updates on our asset management activities, our recent dividend declarations our expectations for dividends going forward, our recent investment activities and current investment pipeline and several other noteworthy updates.
Following my comments, David and Ryan will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and liquidity and our expectations for the second quarter, after which we'll be happy to take your questions.
We are pleased with our performance in the first quarter, which resulted in an annualized return on equity of 16.5% DNII per share, they continue to exceed the dividends paid to our shareholders and a new record for NAV per share for the 11th consecutive quarter.
We believe that these continued strong results demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business and the continued underlying overall strength and quality of our portfolio companies.
Additionally, we appreciate the continued support we receive from our long-term lender relationships as evidenced by the recent amendments and extensions of both our corporate facility and our SPV credit facility, which Ryan will discuss in more detail. As a result, we continue to maintain very strong liquidity and a conservative leverage profile providing us significant flexibility in the current uncertain market.
We continue to be encouraged by the favorable overall performance of the companies in our diversified lower middle market and private loan investment portfolios and remain confident that these strategies, together with the benefits of our asset management business, our significant available liquidity and our cost-efficient operating structure will allow us to deliver superior results to our shareholders.
And despite the significant current market uncertainty associated with tariffs and geopolitical events, we continue to be confident in the ability of our portfolio companies to successfully navigate the current environment, which David will discuss in more detail. Our favorable results in the first quarter, combined with our positive outlook for the second quarter, resulted in our recommendations to our Board of Directors for 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 net fair value increases in our investment portfolio and the accretive impact of our equity issuances, which Ryan will discuss in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in our lower middle market equity investments.
Over the last few quarters, we have commented about the increased interest we have been receiving from potential buyers in certain lower middle market portfolio companies. We are pleased to announce that yesterday, we closed the exit of our investments in one of our portfolio companies Heritage Vet Partners had a realized gain of over $55 million and a meaningful premium to our March 31 fair value.
Similar to the significant realized gain we recognized in the fourth quarter of 2024, and on the exit of our equity investment in Pearl Meyer, we believe our investment in Heritage Vet Partners is another great example of the highly unique benefits of our lower middle market investment strategy, which resulted in significant benefits for both Main Street in our Heritage management team partners.
The benefits from Main Street included significant dividend income, fair value appreciation and the realized gain, resulting in best-in-class returns on our equity investment. In addition to the opportunity to back this best-in-class management team by funding all of their growth initiatives with follow-on Main Street debt investments, which provided us highly attractive interest income. We look forward to sharing additional details on this realization in the near future.
Now turning back to the first quarter. Our lower middle market investment activity resulted in a net increase in our lower middle market investments of $57 million, and our private loan investment activity resulted in a net increase in our private loan investments of $26 million, which David will discuss in greater detail. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the future growth of our investment portfolio, and we are excited about the current opportunities we are seeing in our lower middle market investment strategy. We've also continued to produce positive results in our asset management business.
The funds we advised through our external investment manager continued to experience favorable performance in the first quarter resulting in significant incentive fee income for our asset management business for the tenth consecutive quarter 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 as we execute our investment strategies and explore other strategic initiatives and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund and about our strategy for growing our asset management business within our internally managed structure.
As part of our efforts to grow our asset management business, we are very pleased that MSC Income Fund, a BDC advised by our external investment manager and our largest asset management business client has been successful in growing its investment portfolio with a portion of the liquidity obtained through its listing on the New York Stock Exchange and its public equity offering in January.
We are also pleased with the fund's favorable performance in the first quarter. We remain excited about the opportunity for significant future benefits to both the fund shareholders and our asset management business from the listing and equity offering. Based upon our results for the first quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, earlier this week, our Board declared a supplemental dividend of $0.30 per share payable in June, representing our 15th consecutive quarterly supplemental dividend, and an increase in our regular monthly dividends for the fourth quarter of 2025 to [$0.255] per share.
The third quarter regular monthly dividends are payable in each of July, August and September, and represent a 4% increase from the regular monthly dividends paid in the third quarter of 2024. The supplemental dividend for June is a result of our strong performance in the first quarter, and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 40% paid to our shareholders in excess of our regular monthly dividends, and a current total yield we are providing to our shareholders of approximately 8%.
We currently expect to recommend that our Board continues to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV. Based upon our expectations for continued favorable performance in the second quarter, we currently anticipate proposing an additional supplemental dividend payable in September.
Now turning to our current investment pipeline. As of today, I would characterize our lower middle market investment pipeline as average with several new investments targeted to close before quarter end. We believe that the unique and flexible financing solutions that we can provide to lower middle market companies and their owners and management teams and our differentiated long term to permanent holding periods represent an attractive solution to the needs of many lower middle market companies.
And despite the current broad economic uncertainty, we are confident in our expectations for favorable lower middle market investment activity over the next few months. We also continue to be pleased with the performance of our private credit team and the significant growth they have provided for our private loan portfolio and our asset management business. And as of today, I would characterize our private loan investment pipeline as average.
With that, I will turn the call over to David.

David Magdol

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe that our strong first 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 attractive first quarter financial results.
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've seen limited negative impact on the overall portfolio, and we believe that our relationships with best-in-class managers and partners at the lower middle market portfolio companies along with our intentionally highly diversified investment strategy and portfolio will continue to serve us well as it has over the past two decades during times of market disruption. Each quarter, we try to highlight key different aspects of our investment strategy and differentiated approach that allow us to consistently produce best-in-class results.
For today's call, I'm going to spend some time discussing our private loan investment strategy which is the second largest part of our investment portfolio and is the primary driver of our asset management business. We believe this is a particularly timely topic given the recent public listing of MSC Income Fund which focuses all of its new investment activities on investments in our private loan investment strategy.
Over the last several years, we have grown the size and capabilities of our private loan investment team significantly. This has resulted in significant growth of our private loan investments, both on Main Street's balance sheet and to the third-party advisory clients that we manage through the external manager.
As a reminder, our private loan strategy targets investments in the senior secured debt of private equity-sponsored businesses. These investments are primarily originated by our internal investment professionals through strategic relationships they cultivate and maintain with a select group of private equity firms and their capital markets intermediaries.
Our private loan investments are typically first lien debt investments with attractive yield profiles and favorable terms. As of quarter end, 99.9% of our private loan secured debt investments were first lien loans and 97% bore interest at floating interest rates, which had an attractive weighted average yield of 11.4%.
Most of our private credit peers focus on the larger upper middle market part of the leveraged loan market. We intentionally focus on the smaller end of the market where we believe the opportunity exists for us to lead or co-lead the vast majority of our private loan investments, and whereby we are able to directly manage the due diligence process, loan documentation and post-investment lender interactions with the borrower.
We believe our niche focus on the smaller end of the market is less competitive and allows us to earn more attractive risk-adjusted returns for Main Street's investors and for the investors in the funds we manage. Main Street has also benefited from our ability to utilize our private loan investment strategy to grow our asset management business.
Through our external investment manager, our private loan strategy effectively allows Main Street to leverage our investment professionals time and our platform to benefit from the attractive and highly recurring fee-based income that we received from third-party clients while at the same time, providing highly attractive investment opportunities and returns for those clients.
Now turning to the overall composition of results from our investment portfolio as of March 31, we continue to maintain a highly diversified portfolio with investments in 189 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 3.2% of our total investment income for the trailing 12-month period and 3.7% 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 investment activity in the first quarter included total investments in our lower middle market portfolio of approximately $86 million, including investments of $62 million in two new lower middle market portfolio companies, which after aggregate repayments on debt investments resulted in a net increase in our lower middle market portfolio of $57 million, driven by the capabilities and relationships of our private credit team, we also made $138 million in total private loan investments, which after debt repayments and other investment activity resulted in a net increase in our private loan portfolio of $26 million.
At the end of the first quarter, our lower middle market portfolio included investments in 86 companies representing $2.6 billion of fair value, which was 31% above our related cost basis. We had investments in 90 companies in our private loan portfolio, representing $1.9 billion of fair value. The total investment portfolio at fair value at quarter end was 18% above our related cost basis.
In summary, Main Street's investment portfolio continues to perform at a high level and deliver on our long-term goals. 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.

Ryan Nelson

Thank you, David. To echo Dwayne and David's comments, we are pleased with our operating results for the first quarter, which included a new record for NAV per share for the 11th consecutive quarter and favorable levels of NII per share and DNII per share. Our total investment income for the first quarter was $137 million, increasing by $5.4 million or 4.1% over the first quarter of 2024 and decreasing by $3.4 million or 2.4% from the fourth quarter of 2024.
Interest income decreased by $2.1 million from a year ago and decreased by $11.9 million from the fourth quarter of 2024. The decrease from the prior year was driven primarily by the impact of an increase in investments on nonaccrual status and a decrease in interest rates on our floating rate debt investments primarily resulting from decreases in benchmark index rates. Partially offset by the impact of increased net investment activity over last year.
The decrease from the fourth quarter was primarily driven by the impact of an increase in investments on nonaccrual status, a decrease in net investment activity and a decrease in interest rates on our floating rate debt investments primarily resulting from decreases in benchmark index rates. Dividend income increased by $13.2 million when compared to a year ago with this increase after a $1.2 million decrease in unusual or nonrecurring dividends, and increased by $11.5 million from the fourth quarter, including a $300,000 increase in unusual or nonrecurring dividends. The increases in dividend income are a result of the continued underlying strength of our lower middle market portfolio companies.
Fee income decreased by $5.7 million from a year ago and by $3 million from the fourth quarter. The decrease in fee income from the prior year and the fourth quarter was primarily driven by a decrease from exit, prepayment and amendment fees from investment activity and lower closing fees on new and follow-on investments.
Prepayment and other fee income considered nonrecurring decreased by $3.5 million from a year ago and by $1.2 million from the fourth quarter of 2024. The first quarter included reduced levels of income considered less consistent or nonrecurring in nature in comparison to both the fourth -- the first quarter of 2024 and the fourth quarter of 2024, including dividends from our equity investments and accelerated prepayment, repricing and other activity related to our debt investments.
In the aggregate, these items totaled $2.4 million and were $2.2 million or $0.03 per share lower compared to the average of the prior four quarters. $5.2 million or $0.06 per share lower than the first quarter of 2024 and $1.3 million or $0.01 per share lower than the fourth quarter of 2024.
Our operating expenses increased by $5.4 million over the first quarter of 2024 and decreased by $2.9 million from the fourth quarter. The increase in operating expenses from the prior year was largely driven by increases in interest expense, general and administrative expense and share-based compensation expense, partially offset by a decrease in cash compensation related expenses.
The decrease in operating expenses from the fourth quarter of 2024 was largely driven by decreases in interest expense and compensation-related expenses partially offset by a decrease in expenses allocated to the external investment manager. The increase in interest expense from a year ago was primarily driven by an increase in the weighted average rate on our unsecured debt obligations and an increase in average borrowings to fund a portion of the growth of our investment portfolio.
Partially offset by decreased weighted average interest rate on our credit facilities, resulting from decreases in the benchmark index interest rates. The decrease in interest expense from the fourth quarter of 2024 was primarily driven by a decrease in our average outstanding borrowings and a decrease in the weighted average rate on our credit facilities, resulting from decreases in the benchmark index interest rates.
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 $7.8 million to our net investment income during the first quarter, a decrease of $800,000 from the same quarter a year ago and $900,000 from the fourth quarter of 2024. The manager ended the quarter with total assets under management of $1.6 billion.
During the quarter, we recorded net fair value appreciation, including net realized losses and net unrealized depreciation on the investment portfolio of $33.6 million. This increase was driven by net fair value appreciation in our lower middle market investment portfolio, partially offset by net fair value depreciation in our external investment manager, our private loan investment portfolio and middle market investment portfolio.
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 depreciation of our external investment manager was primarily driven by decreases in evaluation multiples of publicly traded peers which we use as one of the benchmarks for valuation purposes.
The net fair value depreciation in our private loan portfolio was driven by increases in market spreads partially offset by the impact of specific portfolio company performance. The net fair value depreciation in our middle market portfolio was driven by the impact of specific portfolio company performance. We recognized net realized losses of $29.5 million in the quarter, the realized losses recognized were primarily the result of the exit or restructure of several long-standing underperforming investments, partially offset by a realized gain on the exit of a private loan equity investment.
We ended the fourth quarter with investments on nonaccrual status, comprising 1.7% of the total investment portfolio at fair value and approximately 4.5% at cost. Net asset value, or NAV, increased by $0.38 per share over the fourth quarter and by $2.49 or 8.4% when compared to a year ago to a record NAV per share of $32.03 at quarter end.
Our regulatory debt-to-equity leverage calculated as total debt, excluding our SBIC debentures, divided by net asset value was 0.67 times and our regulatory asset coverage was [2.48 times] and and these ratios continue to be more conservative than our long-term target ranges of 0.8 times to 0.9 times and 2.1 times to 2.25 times, respectively.
Given our liquidity position, we were less active during the first quarter in our at-the-market or ATM program, raising net proceeds of $5.1 million from equity issuances. In April, we amended our corporate credit facility, decreasing the interest rate by 10 basis points prior to satisfying certain conditions or 22.5 basis points after satisfying certain conditions, increasing our total commitment to $35 million and extending the maturity to April 2030.
Additionally, we also amended our SPV credit facility by decreasing the interest rate by 40 basis points and extending the maturity to September 2030. After giving effect to the capital activities in the first quarter of 2025 and recent credit facility amendments in April 2025, we entered the second quarter with strong liquidity and including cash and availability under our credit facilities in excess of $1.3 billion with only one near-term debt maturity of $150 million in December 2025.
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.
As discussed last quarter, with this current level of liquidity, we currently expect to fund our new net investment activity in 2025 through a greater portion of debt financing and as such, we would expect leverage to continue to increase during the course of the year. However, we expect to continue to operate throughout the year at leverage levels more conservative than our long-term targets.
Coming back to our operating results. NII per share for the quarter of $1.07 decreased from DNII per share for the first quarter last year by $0.04 and decreased from the DNII per share for the fourth quarter by $0.01.
Looking forward, we expect headwinds on top line earnings related to the potential decrease in floating market rates and potential tariff impacts. But given the strength of our underlying portfolio we expect favorable earnings in the second quarter of 2025 with expected DNII of at least $1.03 per share, with the potential for upside driven by portfolio investment activity during the quarter and a favorable outcome to the current market uncertainty.
With that, I will now turn the call back over to the operator so we can take any questions.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session.(Operator instructions)
Robert Dodd, Raymond James.

Robert Dodd

Hi guys, I appreciate the commentary on the strength of the portfolio companies, but can you be any more explicit maybe on like what tariff exposure you have in the portfolio? I mean, obviously, you don't have like international businesses in there, but is the offshore manufacturing of some parts or anybody who's particularly exposed to imported raw materials or anything like that? Any color you can give us on that front on what the overall kind of feel for the exposure is there.

Dwayne Hyzak

Sure, Robert. Good morning and thanks for the question. We've talked about this before in the past. But if we look at our portfolio, I'll split the comments between lower middle market and private loan because we just have more visibility into the lower middle market portfolio companies given our position as a significant equity owner there.
But most of our companies, particularly in the lower middle market, they are US businesses. They're manufacturing is in the US. They're selling to US customers. They're buying or purchasing from US vendors. So we look at below lower middle market portfolio as a whole and think that we've got some limited exposure there.
As you would expect us to be doing, and as David, I think, commented in his script, we have been and continue to talk frequently with the management teams of our lower middle market portfolio companies to understand their risk and then help them collectively with us per ways to mitigate that risk. And as we went through that process, our view is that in the lower middle market, somewhere close to a high single-digit percentage.
And I give you that number as a percentage based upon looking at the portfolio a couple of different ways, looking at it by our actual portfolio count, look at it on both a cost or fair value basis. So on each of those different metrics, be a high single-digit percentage that we think has meaningful exposure to tariffs. And as you said, we think that the most significant exposure impacts would be from those companies that are directly importing finished goods.
So the good news on that side is we have some exposure there, but it is fairly limited, and we think it's very manageable. When we look at the portfolio more broadly, we would say that there's probably another 10% to 20% that has some level of exposure, and that's not specific to Main Street. We just think that's the result of the global nature of the economy and business today.
If you're in industrial businesses, manufacturing services related to industrial businesses, you're going to have some exposure. So we look at that and say that those companies have some level of direct or indirect exposure to tariffs.
But one of the things that we always look at is that just having exposure to tariffs on its own does not necessarily mean that there's going to be a negative result or impact. It just means that those companies that have that exposure, you have to be taking steps to mitigate it. And that's where we take comfort in the fact that our management teams of our portfolio companies have been through this type of a scenario before.
If you look back at the COVID-19 pandemic time period and the resulting supply chain issues and inflation that came out of it, they've been through that. So our -- we have the view that our management teams have dealt with this type of a scenario before and we're confident that they're going to do a good job in mitigating the risk, whether that means pushing through price increases or finding alternative sourcing. So we feel pretty good about where we sit, but we do acknowledge that we have some level of exposure there when you look across the portfolio.
On the private loan and middle market side, really the private loan side because that's where the remainder of our portfolio really sets outside of lower middle market. I'd say it's similar. Most of these companies are also predominantly US companies. So we think that the risk is a little bit is similar to what we have on the lower middle market side.
We do take comfort in the fact that we are largely first lien senior secured lenders. So you've got a lot of cushion in the capital structure beneath our position to help us mitigate our risk there and we're actively working with the portfolio of companies and the private equity sponsors similar to the lower middle market to understand what that risk is.
So when we look at the companies on that side of our portfolio that have meaningful direct exposure. The way we would quantify it is it's a handful of companies. We'll also note that a couple of those companies are already on nonaccrual and or they've had significant fair value depreciation.
So when we look at our results from an income standpoint or from an NAV or fair value standpoint. We think the fact that we've already got those are nonaccrual and some fair value depreciation further mitigates the risk to some extent.
So similar to the lower middle market, just because they have the exposure, it doesn't mean that they're going to have significant negative impact. So we look at trying to understand what those companies are doing to mitigate the risk again, either through pushing through price increases or looking for alternative sourcing or other activities to mitigate it.
But while we do have some risk there, we think it is still limited, and we feel good about the the manner in which our management teams and portfolio companies should be able to mitigate that risk. Obviously, if the situation becomes more significant or more negative than it is today or if the time period gets drawn out, obviously, that risk could change in the future. But as we sit here today, I think we feel pretty good about our risk and the steps that our portfolio companies are taking to mitigate it.

Robert Dodd

Thank you for that. Very helpful. On the private loan -- the pipeline, I mean, you characterized it as average. I mean it does seem like that's dealing with slightly larger what sponsor-backed companies. I mean, obviously, we've heard a lot about M&A is muted, et cetera, and maybe getting more so at the moment. So what's -- why is it still average like average it seems good in this environment. So can you give us any color on like why your pipeline there is still kind of average-ish given the amount of volatility and what seems to be pretty muted M&A market right now?

Dwayne Hyzak

Sure, Robert. I'll give you a few comments, and I'll let Nick who, as you know, leads our private credit business, I'll let him add on. But I'd say the reason we view it as average today is we've got a large portfolio there and we're seeing a number of those companies that despite the uncertain environment, their businesses are doing well, and they're having opportunities to grow, whether that's acquisition organic, and they're coming to us and they're looking for additional add-on loans or debt investments from us to help them facilitate that growth. So I think that's part of the reason we have it at average.
We're also continuing to see a number of new -- kind of new investment opportunities that we think despite the current uncertain environment, we think they're underwritten correctly they're priced correctly and all things being equal, if the transaction closes, we'll continue to find those opportunities attractive from a new portfolio standpoint.
But I'll let Nick add any additional color he wants to add to that.

Nicholas Meserve

Yes, Robert, I mean, I think you are right, it is a muted M&A environment. But with that is also less repayments I think from the pipeline perspective, it is average. I think we're seeing both new deals and add-ons. The add-ons in the portfolio has increased over the last two to three years is the number in the portfolio has increased. But I think what's TBD still is going to be -- and some of the uncertainty is do some of these transactions close or not. I think we'll know more in the next three or six months of where is the tariff noise go? Do we actually close and finish those transactions? Or they get pushed out a little bit.

Robert Dodd

Thank you.

Dwayne Hyzak

Excellent.

Nicholas Meserve

Thank you Robert.

Operator

Mark Hughes, Truist Securities.

Mark Hughes

Yeah, thank you. And thinking about your kind of nonrecurring income items, the dividend from investments, I think you've got some variability there. Is there any concern that those might slow down or the portfolio company is perhaps going to be a little more conservative with their balance sheet? Or is that not so much of an issue?

Dwayne Hyzak

Yes, Mark. Good morning and thanks for the question. I'd say that we do always have that concern. The dividend income component of our income stream is always going to be the most variable or most discretionary. But I'd say, as we sit here today, and as you've heard us say in the past, we have a number of our lower middle market companies that are not just doing well. They're doing really well, and they've been doing well for a long time.
And as a result, their capital structure is such that it's very kind of very conservative limited amounts of leverage. So as they continue to produce significant cash flow, that cash flow has to go somewhere. And it's increasingly coming out of those companies to us and the other equity owners of those businesses through dividend income.
So I think we -- it is something we watch. It is something that if the economy was to take a big step back, particularly if that step back was for an extended period of time. That dividend income would be at more risk. But as we look at the current portfolio, the current results we're seeing from the companies and more importantly, the dialogue we're hearing, while there clearly is a lot of uncertainty out there, the companies are still doing well and we expect, at least for the second quarter to continue to see good amounts of dividend income coming out of those companies.

Mark Hughes

Yeah. And then you obviously described a nice attractive what, $55 million gain here in the second quarter. And I think in earlier calls, you had alluded to the fact that there were some potential realizations in the pipeline. Is there more to come? Anything you've got visibility for? Or is it just kind of business per usual?

Dwayne Hyzak

Yes, Mark, I would say it's probably more in line with business as usual. There's always going to be some level of activity in the lower middle market portfolio, where you've got 80-plus companies. There's always going to be some level of activity ongoing, but after the very, very attractive realized gain that we had in late December with Promier and now the gain here in the second quarter, those were really the two large exit activities that we've been talking about.
Obviously, both of those are great companies. So we're a little torn on seeing them lead the portfolio, but at the same time, the realized gains and the returns from an equity investment standpoint, we consider them to be best-in-class.
So when you have that opportunity, it also makes sense if our partners in the businesses, the management teams of those companies want to pursue that transaction. We're going to help them pursue it to the best outcome possible. So we -- those are two of the primary transactions that we've been talking about for the last few quarters. So I would say that things are more back to kind of ordinary course from an exit activity expectation standpoint.

Mark Hughes

And then one other question. you've got a long holding period obviously with your equity investments. When you get to a period like this in the economy, does that create opportunity for you that you can look at something that perhaps is maybe a little more exposed or experiencing a little more volatility because you've got a longer horizon? Or alternatively, you tighten things up and certainly, you want to stay disciplined as you have been historically. But does this create opportunity where others don't step in, but you have the potential to do so?

Dwayne Hyzak

Yes, Mark, absolutely. I'd say that our view has always been, not just here recently, but for the last two decades that we want to make sure that we maintain a very conservative capital structure and, more importantly, a very significant amount of liquidity so that we can always be active in the marketplace. That includes time periods where the economy is humming and things are going really, really well.
But it also includes time periods where there's significant uncertainty. And just to give you a point of reference that you may recall, but just for your benefit, if you look at both Pearl Meyer and Heritage Vet or NVS vet partners or services.
Both of those transactions were executed during COVID. Pearl Meyer was from memory, was May of 2020. Heritage Vet Partners was December of 2020. Most firms -- from our perspective, we're not active during those time periods. They weren't traveling.
They weren't going to see people in person. We work to the extent we could. And those activities led us to two transactions that were just fantastic opportunities. They fit us really, really well in terms of us being a partner with the individual owner operators, the management teams of those businesses.
They were also fantastic businesses. And our ability and desire to continue to be active in all time periods led us into two transactions that obviously were really, really good transactions for us and not just for us, but they are really good transactions for those management teams. So you should expect us, just like we have been in the past great recession, COVID-19 pandemic, et cetera, you should expect us to seek to be active.
Obviously, the counterparty has to want to transact as well. But we feel good about our expectations to be active even if there continues to be significant uncertainty in the marketplace, the goal for us is to always first and foremost on the lower middle market strategy, just to find best-in-class individuals, management teams that have been in their business for a long time where we have opportunities to become their partner. So we've always found that super attractive, and we'll always find that super attractive in the future.
And I'll let David add on if he has any additional color or commentary there.

David Magdol

I think Dwayne covered most, but the last thing I'd add is that with the seasoned nature of our portfolio, those companies are naturally have less leverage than the rest of the portfolio. And those managers are waiting for opportunities in times. They're tracking acquisition targets over extended periods of time, having been in the industry took their partners for a very long period of time. So we do see more activity in those portfolio companies on doing strategic acquisitions and, or putting growth capital into the companies when the opportunity is right.

Mark Hughes

Appreciate that. Thank you.

Dwayne Hyzak

Thank you, Mark.

Operator

Douglas Harter, UBS.

Cory Johnson

Hi, this is actually Cory Johnson on for Doug. So you mentioned wanting to bring leverage up, but perhaps not to your target range. Can you just talk maybe a little bit about the pace of how you expect it to maybe trend throughout this year? And like what might be around like the high market you're looking to get maybe towards about -- around the low end of your target range?

Dwayne Hyzak

Sure, Cory. Thanks for joining us, and thanks for the question. I'd say that it's hard to really give a time period or even an amount of leverage we'll get to at the end of the year. It's obviously going to be highly dependent upon the investment activity, which as we just talked about, could be more uncertain or more muted, both on the lower middle market side and the private loan side just given what's going on in the economy.
But I'd say the guidance we are giving is that as we execute growth of the portfolio, both lower middle market and private loan. Our plan is to utilize more of our debt capacity as opposed to additional equity issuances over time to increase that leverage ratio so that it moves more in line with our range and continue to be conservative, but moving in the direction of increasing leverage to be closer to the target range. But again, the timing and the ability to do that is primarily going to be dependent upon the pace of new investment activity.

Cory Johnson

All right, thank you. And then additionally, so you had, you've had your operational expense ratio come down this quarter. Do you see like any -- is there any additional capacity that you think to be able to bring down your ratio as you continue to scale up?

Dwayne Hyzak

Sure, I think we always view there being an opportunity to continue to become more efficient. It's one of the biggest benefits of our structure as an internally managed BDC. But I would say that when you look at where we are today, realistically, there's not a ton of room there.
The variability quarter-to-quarter, year-to-year as we sit here today is going to be more focused on the incentive portion of our compensation and how are we performing from an operating performance standpoint, both the income statement, ROE performance as well as new investment activity. Those are going to be the biggest drivers just like they have been in the past that drive our incentive comp.
And if we're doing really, really well, there will be more incentive comp. If we're not doing as well there will be less and the variability in our incentive comp will be the biggest factor that drives that expense ratio. Again, we think that's one of the biggest strengths. If we outperform our team is going to have some additional comp.
If we head into a tough environment, there will be less incentive comp that again, directly aligns with the performance and the benefits we're providing to our shareholders. Again, one of the -- we think it's one of the biggest benefits of our structure. And one of the things that has served us so well for 20 years.

Cory Johnson

Great, thank you.

Dwayne Hyzak

Thank you.

Operator

Sean Paul Adams, B Riley Securities.

Sean Paul Adams

Hey guys, good morning. I dialed a little bit in late, so apologies if this already got answered. But can you talk about your current expectations for the scale growth and run rate for earnings from the MSC adviser going forward?

Dwayne Hyzak

Sure. Thanks for joining, and thanks for the question. On our contribution from MSA, I would say, as we sit here today, the biggest catalyst or biggest event was the transaction that happened in January of this year, where we were successful in completing a listing and an equity offering for MSC Income Fund.
Now that, that activity is behind us and we look forward, the future growth on the base side is really going to be focused on deployment of capital at MSC Income Fund. So as you see us have more activity, you'll see the base management fee come up. But that number will be directly correlated with the investment activity.
The incentive fee is by far the biggest variable, which again varies with our performance, not just at MSC Income Fund, but also at the private loan funds we have. But I think we feel pretty good about where we are with the performance of those vehicles and would expect to continue to see incentive fee income going forward.
But as you look out maybe one quarter forward, I think something in line with where we were in the first quarter would be a good number to expect for the second quarter. As you look out further than that, it's all going to be dependent upon our pace of investment activity and then just the overall economic performance and what that means for the performance of our portfolio of companies and our net investment income at those asset management business clients.

Sean Paul Adams

Thank you. And just a quick follow-up, if I can. Could you just walk us through some of the implied exit multiples embedded in the LMM equity portfolio versus where you see the market transacting today.

Dwayne Hyzak

Yes. If I understand your question, I -- one is there's details in our 10-Q that I'll give you those numbers. I'd say that there's not a lot of variability or movement quarter-to-quarter. So our goal with our kind of quarterly valuation process is that you're getting to a valuation multiple for each of the companies that is what that transaction, you should close that in a marketed process.
Obviously, you have transactions like Heritage Vet Partners and Promier, where as you enter and create a process, if that process goes well, you'll see significant value expansion, primarily not on EBITDA, but primarily on the multiple.
And if you look back at the history on both Promier and Heritage Vet Partners, you'll see there was significant fair value appreciation as we went to market kind of went through an auction or a sale process and got to a good outcome. But in general, the fair value process we have is the goal of that is to provide a valuation that you think it would transact at in the open marketplace.

Sean Paul Adams

Got it. Thank you for the color. I appreciate it.

Dwayne Hyzak

Thank you.

Operator

(Operator instructions) With no further questions, I would like to turn the conference back over to management for closing remarks.

Dwayne Hyzak

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 having everyone join us again for our next call in August after the release of our results for the second quarter.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.