Dwayne Hyzak, CEO, Main Street Capital Corporation
In an interview with Invest:, Dwayne Hyzak, CEO of Main Street Capital Corporation, discussed the firm’s consistent lower middle market investment strategy, the value of flexible capital, and the opportunities he sees across Houston and in Texas generally. “We plan to do more of the same,” Hyzak said.
What changes over the past year have affected Main Street Capital and its priorities?
There have not been any changes to our strategy or priorities. We have maintained our consistent focus on investing in partnership with best-in-class owner-operators and management teams.
The changes we’ve been indirectly impacted by have been more related to the broader industry. As a publicly traded company, we are known as a BDC, or business development company, and we are also a participant in the private credit industry in one of our strategies. Both BDCs and the private credit industry have been under pressure because investors perceive the industry’s investment portfolios to have significant AI disruption risk and exposure and because of some capital structure issues recently experienced by some BDCs. We are not directly or significantly exposed to either of those issues, but we have had to deal with the negative market perception associated with them.
But from an operational standpoint, we have continued to have good success on the new investment side and with the performance of our existing investment portfolio.
How are portfolio companies navigating today’s uncertainty?
All companies are dealing with elevated uncertainty related to Iran, Ukraine, tariffs, inflation, and fuel prices, and our portfolio companies are no different. The good news for us is that we have the benefit of investing with best-in-class owner-operators and management teams. And consistent with our historical experience during similar periods of market uncertainty, our portfolio companies have largely been able to navigate the current challenges, and certain companies have been performing extremely well despite the broader uncertainty.
Our portfolio companies also benefit from the flexible debt and equity solutions we provide and our flexibility to be a long-term partner. We are not investing for short time periods — we have the flexibility to be a long-term to permanent partner. Having a flexible capital partner that can provide both debt and equity is especially beneficial in uncertain times. We are fortunate to partner with great individuals, and they benefit from our flexibility and long-term focus.
Where are lower middle market companies benefiting from onshoring and nearshoring?
More manufacturing activity has been coming back to the United States over the last few years, and the part of the market where we focus has benefited. The lower middle market companies we focus on have typically generated between $3 million and $20 million of annual EBITDA or operating cash flows. These companies are typically owned by individuals rather than institutions or private equity firms. Those owners may have started the business or owned and operated it before our investment, and they continue to own and manage it afterward.
Companies in the trades, including electricians, plumbers, HVAC, and mechanical companies, are benefiting from increased demand as a result of onshoring. We have seen significant growth and positive performance in those industries. Businesses related to building or maintaining critical infrastructure, including pipeline repair, maintenance, construction, and anything associated with the electric utility grid, are also growing. Many of our portfolio companies are benefiting from the onshoring trends.
What makes Houston and Texas attractive investment markets?
Main Street has a national focus, and we invest across the United States. In our lower middle market strategy, we are currently invested in over 90 companies across the country, and together with our private credit strategy, we are invested in close to 200 companies. That gives us broad exposure to the U.S. economy. But our only office is in Houston, and we love opportunities to invest in Houston and Texas. The local business climate has always been positive and continues to be positive today.
The outlook for companies we are partnered with in Houston and Texas is strong in part because of the favorable regulatory, compliance, and tax environment in Texas. We already have a good number of investments in Houston and Texas, and we would love to do more, because we believe the Houston and Texas business climate is about as good as you can find anywhere in the world. As a result, it remains an area we find highly attractive.
How are Main Street and its portfolio companies approaching AI?
We are encouraging our team at Main Street and our portfolio companies to embrace AI. In both cases, we believe it is an opportunity to become more efficient, but do not think it will change the core of what Main Street or most of our portfolio companies do to create value. We are not invested in many technology-focused companies. Most of our portfolio companies are mature businesses in basic industries, including industrials, manufacturing, contractors and construction, repair, and maintenance companies.
AI will not change the core products or services those businesses provide, but it can still create significant benefits in accounting, finance, treasury, sales, and operations. We are trying to help our companies by identifying portfolio companies that are using AI well and have specific practices or applications, and sharing those best practices so other companies across the investment portfolio can benefit from the same knowledge. We believe AI is having a positive impact and will continue to do so, and we want to encourage adoption where it improves efficiency and effectiveness.
What investments are you making in talent?
Talent is critical to Main Street and to our portfolio companies. We have hired a significant number of employees at Main Street over the past 12 to 24 months. We also added a chief human resources officer earlier this year, which is a role we did not previously have. That was intentional. We want to attract and hire the right people, then develop them through training and challenging work and opportunities. We also want our employees to understand the significant opportunities available across the firm. As Main Street has grown over the past several years, management of our talent across the firm has become even more important.
This is also critically important at our portfolio companies. We also recently hired a talent operating partner to work with our portfolio companies and help them succeed on the employee and human resources front. Any company’s success is dictated by the quality of its people, and we are excited about the progress those two roles at Main Street can support.
How is Main Street positioned for future opportunities?
Our core lower middle market strategy is different than other firms and other investors. We provide a capital solution that we believe is unique and beneficial to the companies that we partner with. During periods of increased economic uncertainty, we believe that our unique offering becomes even more attractive. As a result, we expect to see a robust set of opportunities over the next year and have positioned ourselves to pursue them. We intentionally have a conservative capital structure, significant liquidity, and the dry powder to make significant investments.
Over the past several years, we have also expanded the number of people focused on our investment activities, so our team can execute on an increased number of opportunities. We are confident that we can continue finding companies led by best-in-class management teams and owner-operators, provide a unique and flexible solution to meet their capital needs, and create great investment opportunities for Main Street. So we plan to do more of the same. Our unique strategy has been successful for more than 20 years, and we plan to continue executing it. And when we do, we are confident that both Main Street and our portfolio company partners will continue to succeed.
