MSD Investment Corp. Annual Report - How They Did This Year

This guide explains how MSD Investment Corp. performed in 2025. I have broken down the facts into plain English to help you decide if this company fits your portfolio.

1. What does this company do?

MSD acts as a business lender for private, mid-sized companies that earn between $10 million and $50 million in annual profit. They provide capital to help these businesses grow, mostly through "senior secured loans." These are generally the safest loans because MSD is first in line to be repaid if a borrower struggles. These loans are usually backed by the borrower’s physical assets or intellectual property.

2. How they make money

As a "Business Development Company," MSD must pay at least 90% of its taxable profit to shareholders as dividends. They pay their managers in two ways:

• Management Fee: A flat fee of 0.75% of total assets. This cost about $48 million in 2025 based on their $6.4 billion portfolio.
• Incentive Fee: A 15% "performance bonus" on profit. This kicks in once the company hits a 6% annual return on net assets.

3. Major wins and changes this year

The company grew quickly in 2025. Their investment portfolio jumped from $4.5 billion to $6.4 billion, a 42% increase. However, there is a trade-off. Their average interest return on loans dipped from 11.77% in 2024 to 10.61% in 2025. This happened because lending is more competitive and they are now lending to safer borrowers who pay lower interest rates. They are managing more money, but earning a smaller percentage of profit on each dollar.

4. How safe is their money?

MSD uses a 5-level rating system to track loans, where 1 is the best and 5 is a total loss. While 95% of their loans are performing well, risk is rising:

• Rating 4 (Below expectations): This grew from $58.5 million to $166.4 million. This shows more borrowers are struggling to pay their interest.
• Non-accrual loans: These are loans where the borrower has stopped paying interest. This remains very low at 0.14% ($8.96 million), though it is a slight increase from 0.08% in 2024.

5. Key risks

• The "Paper Profit" Trap: MSD pays managers bonuses based on "unrealized" gains—money they’ve earned on paper but haven't collected in cash. In 2025, managers received $12 million in bonuses based on these paper gains.
• The Valuation Guessing Game: Since 92% of their investments aren't traded publicly, the company uses internal estimates to value them. A small change in their assumptions could swing the company’s total value by $64 million.
• Restricted Shares: You cannot easily sell your shares. You are locked in, as redemptions are limited to quarterly windows and require board approval.
• Rising Costs: Operating costs, including interest on their own $3.2 billion debt, rose from $222 million to $302 million. Their interest expenses grew by 28% as they borrowed more to fund their expansion.

6. The Bottom Line

MSD is growing fast, but it is a high-stakes, illiquid investment. While they keep defaults low, rising costs, lower interest returns, and the inability to easily sell your shares make this complex. This is not a "set it and forget it" investment. It requires a high risk tolerance and a long-term view. Before investing, consider whether the potential dividend yield outweighs the risks associated with internal valuations and limited liquidity.