Quarterly report pursuant to Section 13 or 15(d)

EXTERNAL INVESTMENT MANAGER

v3.22.2.2
EXTERNAL INVESTMENT MANAGER
 9 Months Ended
Sep. 30, 2022
Investment Company [Abstract]  
External Investment Manager EXTERNAL INVESTMENT MANAGER
As discussed further in Note A.1—Organization and Basis of Presentation—Organization and Note C—Fair Value Hierarchy for Investments—Portfolio Composition—Investment Portfolio Composition, the External Investment Manager provides investment management and other services to External Parties. The External Investment Manager is accounted for as a portfolio investment of MSCC since the External Investment Manager conducts all of its investment management activities for External Parties.
The External Investment Manager serves as the investment adviser and administrator to MSC Income pursuant to an Investment Advisory and Administrative Services Agreement entered into in October 2020 between the External Investment Manager and MSC Income (the “Advisory Agreement”). Under the Advisory Agreement, the External Investment Manager earns a 1.75% annual base management fee on MSC Income’s average total assets, an incentive fee equal to 20% of pre-investment fee net investment income above a specified investment return hurdle rate and a 20% incentive fee on cumulative net realized capital gains in exchange for providing advisory services to MSC Income.
As described more fully in Note L – Related Party Transactions, the External Investment Manager also serves as the investment adviser and administrator to MS Private Loan Fund I, LP, a private investment fund with a strategy to co-invest with Main Street in Private Loan portfolio investments (the “Private Loan Fund”). The External Investment Manager entered into an Investment Management Agreement in December 2020 with the Private Loan Fund, pursuant to which the External Investment Manager provides investment advisory and management services to the Private Loan Fund in exchange for an asset-based fee and certain incentive fees. The External Investment Manager may also advise other clients, including funds and separately managed accounts, pursuant to advisory and services agreements with such clients in exchange for asset-based and incentive fees.
The External Investment Manager provides administrative services for certain External Party clients that, to the extent not waived, are reported as administrative services fees. The administrative services fees generally represent expense reimbursements for a portion of the compensation, overhead and related expenses for certain professionals directly attributable to performing administrative services for clients. These fees are recognized as other revenue in the period in which the related services are rendered.
Main Street determines the fair value of the External Investment Manager using the Waterfall valuation method under the market approach (see further discussion in Note B.1.—Summary of Significant Accounting Policies—Valuation of the Investment Portfolio). Any change in fair value of the investment in the External Investment Manager is recognized on Main Street’s Consolidated Statements of Operations in “Net Unrealized Appreciation (Depreciation)—Control investments.”
The External Investment Manager is an indirect wholly-owned subsidiary of MSCC owned through a Taxable Subsidiary and is a disregarded entity for tax purposes. The External Investment Manager has entered into a tax sharing agreement with its Taxable Subsidiary owner. Since the External Investment Manager is accounted for as a portfolio investment of Main Street and is not included as a consolidated subsidiary of Main Street in its consolidated financial statements, and as a result of the tax sharing agreement with its Taxable Subsidiary owner, for financial reporting purposes the External Investment Manager is treated as if it is taxed at corporate income tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. Main Street owns the External Investment Manager through the Taxable Subsidiary to allow MSCC to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The taxable income, or loss, of the External Investment Manager may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. As a result of the above described financial reporting and tax treatment, the External Investment Manager provides for any income tax expense, or benefit, and any tax assets or liabilities in its separate financial statements.
Main Street shares employees with the External Investment Manager and allocates costs related to such shared employees to the External Investment Manager generally based on a combination of the direct time spent, new investment origination activity and assets under management, depending on the nature of the expense. The total contribution of the External Investment Manager to Main Street’s net investment income consists of the combination of the expenses allocated to the External Investment Manager and the dividend income earned from the External Investment Manager. For the three months ended September 30, 2022 and 2021, the total contribution to Main Street’s net investment income was $5.0 million and $4.2 million, respectively. For the nine months ended September 30, 2022 and 2021, the total contribution to Main Street’s net investment income was $15.2 million and $11.6 million, respectively.
Summarized financial information from the separate financial statements of the External Investment Manager as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021 is as follows:
As of As of
September 30, 2022
December 31, 2021
(dollars in thousands)
Cash $ 309  $ — 
Accounts receivable - advisory clients 5,917  5,595 
Intangible Asset 29,500  29,500 
Total assets $ 35,726  $ 35,095 
Accounts payable to MSCC and its subsidiaries $ 4,588  $ 3,288 
Dividend payable to MSCC and its subsidiaries 1,638  2,307 
Equity 29,500  29,500 
Total liabilities and equity $ 35,726  $ 35,095 
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022 2021 2022 2021
(dollars in thousands)
Management fee income $ 5,472  $ 4,592  $ 16,337  $ 12,707 
Incentive fees (182) 19  45  19 
Administrative services fees 154  —  458  — 
Total revenues 5,444  4,611  16,840  12,726 
Expenses allocated from MSCC or its subsidiaries:
Salaries, share-based compensation and other personnel costs (2,660) (2,278) (7,572) (6,394)
Other G&A expenses (674) (450) (2,041) (1,286)
Total allocated expenses (3,334) (2,728) (9,613) (7,680)
Pre-tax income 2,110  1,883  7,227  5,046 
Tax expense (472) (424) (1,605) (1,138)
Net income $ 1,638  $ 1,459  $ 5,622  $ 3,908