Capital Southwest Corporation

Thank you for joining today's Capital Southwest fourth quarter and fiscal year 2024 earnings call. Participating on today's call are Bowen Deal, CEO, Michael Sarner, CFO, Josh Weinstein, CIO, and Chris Rehberger, EVP Finance. I will now turn the call over to Chris Rehberger.

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions currently available information, and management's expectations, assumptions, and beliefs. They are not guaranteed the future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements. whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law. I will now hand the call off to our President and Chief Executive Officer, Owen Deal.

Thanks, Chris. And thank you, everyone, for joining us for our fourth quarter and fiscal year-end 2024 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio over the last quarter as well as highlights of our performance over the last year. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found in the investor relations section of our website at www.capitalsouthwest.com. You will also find our quarterly earnings press release, issued last evening, on our website. Before we begin, I would like to take the opportunity to mention two recent promotions which will broaden our executive team here at Capital Southwest. Josh Weinstein, who joined Capital Southwest in 2015 and manages all our deal sourcing and underwriting activity, has been promoted to Chief Investment Officer. And Chris Rehberger, who also joined Capital Southwest in 2015 and manages all our treasury and valuation activities, has been promoted to Executive Vice President, Finance and Treasury. Both of these gentlemen have been integral contributors to Capital Southwest in generating our strong track record over the last nine plus years. Core to our culture is continually cultivating talent up and down our organization, and these additions to our executive team illustrate the deep bench strength that our company has developed over the years. We'll now begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the March 31, 2024 fiscal year. During the fiscal year, we grew our total investment portfolio at fair value by 22% to $1.5 billion, up from $1.2 billion at the end of the prior fiscal year, while increasing our pre-tax net investment income by 18% to $2.72 per share, up from $2.30 per share in the prior fiscal year. We increased our regular dividends paid to shareholders to $2.24 per share for the fiscal year, representing an increase of 10% compared to $2.03 per share of regular dividends paid in the prior fiscal year. We continued our strong track record of covering our regular dividends with pre-tax net investment income, achieving coverage for the year of 121%. In addition to our regular dividend, we paid a total of 23 cents per share in supplemental dividends during the fiscal year, compared to 10 cents per share in supplemental dividends paid in the prior fiscal year. For our March 2024 fiscal year, assuming reinvestment of our quarterly dividends, we generated a total return for our shareholders of 56%, which was among the top-performing public BDCs during this time period. During the year, we strengthened our balance sheet through a variety of capital markets activities, which raised over $500 million in additional capital while reducing our regulatory leverage to 0.82 debt-to-equity as of the end of the fiscal year. Capital raised during the year included $184 million in gross equity proceeds through our equity ATM program, a new senior secured SPV credit facility led by Deutsche Bank, and an increase in commitments on our existing corporate credit facility led by ING. During the fiscal year, we also completed an underwritten baby bond offering. We obtained approval for the final amount of leverage on our first SBIC license, and we began the licensing process for our second SBIC license. Michael will discuss further details around these capital raising activities later in our prepared remarks. Starting in slide seven of the earnings presentation, we have summarized key performance highlights specific to the March quarter. During the quarter, we generated pre-tax net investment income of 68 cents per share which more than covered both our regular dividend of 50 cents per share and our supplemental dividend of 6 cents per share paid during the quarter. Portfolio earnings continue to be strong, and as of the end of the quarter, we estimate that our undistributed taxable income was 64 cents per share. Net asset value per share ended the fiscal year at $16.77, which was flat compared to the prior quarter, and up 40 cents per share compared to the year-ago quarter. As we look forward to the June quarter, we are pleased to announce today that our Board of Directors has declared a regular dividend of 57 cents per share and a supplemental dividend of 6 cents per share, bringing total dividends declared for the June quarter of 2024 to 63 cents per share. Deal quality and activity in the lower middle market during the March quarter continued at a healthy pace as private equity firms and business owners continued to transact and we continue to source attractive investment opportunities. While we have continued to source and close deals at comfortable loan-to-value levels, averaging approximately 40%, and leverage levels of approximately 3.5 times debt to EBITDA, competition in the low-end of the market has increased, resulting in spreads tightening to levels last seen over 18 months ago. The increased competition for quality deals has come from both non-bank lenders and to some degree, traditional banks. Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments, and I'm highly confident we will continue our track record in the current environment. Portfolio growth during the quarter was driven by $157.5 million in new commitments to six new portfolio companies and five existing portfolio companies. offset by $13.7 million in proceeds from two debt prepayments, which generated a weighted average realized IRR of 16.5%. On the capitalization front during the quarter, in addition to closing the FPV credit facility, we raised nearly $50 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average price of $23.80 per share, or 142% of the prevailing NAV per share. Finally, consistent with our communication on last quarter's conference call, the I-45 Senior Loan Fund was dissolved and the assets were distributed to the joint venture partners in accordance with their respective ownership percentages. We have remained diligent in ensuring we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuances. We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity. Managing leverage to the lower end of our target range while ensuring strong balance sheet liquidity affords us the ability to continue to invest in new platform companies and to grow our balance sheet even in periods of volatile capital markets when risk-adjusted returns can be particularly attractive. Additionally, it allows us the ability to support our portfolio companies by either providing growth capital or by financing add-on acquisitions, all while maintaining the ability to opportunistically repurchase our stock if it were to trade meaningfully below NAB. On slides 8 and 9, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and solid value creation since the launch of our credit strategy back in January of 2015. Since that time, we have increased our quarterly regular dividend 28 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income. Additionally, over the same time period, we have paid or declared 24 special or supplemental dividends, totaling $3.95 per share, all generated through excess earnings and realized gains from our investment portfolio. Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates the strength of our investment and capitalization management strategies, as well as the absolute alignment of all our decisions with the interest of our shareholders. Prior to slide 10, as a reminder, we lay out our core tenets of our investment strategy. Our core strategy is lending and investing in the lower middle market, the vast majority of which is in first lien senior secured loans to companies backed by private equity firms. In fact, approximately 92% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as a potential source of new junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the portfolio company equity Perry pursued with the private equity firm, when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 65 investments with a total fair value of $132 million, which was marked at 141% of our cost, representing $38.5 million in embedded, unrealized depreciation for $0.85 per share. Our equity portfolio, which represented approximately 9% of our total portfolio fair value as of the end of the quarter, continues to provide our shareholders participation in the attractive upside of these growing lower middle market businesses, which will come in the form of NAV per share growth and supplemental dividends over time. As illustrated on slide 11, our on-balance sheet credit portfolio ended the quarter at $1.3 billion, representing year-over-year growth of 30% from $1 billion as of the end of March 23 quarter. By the current quarter, 100% of the new portfolio company debt originations were first lien senior secured, and as of the end of the quarter, 97% of the credit portfolio was first lien senior secured. During the year, we improved the granularity in our portfolio as the average investment exposure per portfolio company ended the fiscal year at 0.9%, compared to 1.3% as of the end of the prior fiscal year. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. We expect that this metric will continue to improve as our asset base grows. On slide 12, we detail the $157.5 million in capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $123.5 million in first lien senior secured committed to six new portfolio companies in which we also invested $2.8 million in equity. In addition, we committed a total of $31.1 million in first lien senior secured debt and $143,000 in equity to five existing portfolio companies. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the consistency of our origination activity and the broad array of relationships across the country from which our team is sourcing quality opportunities. As a point of reference, currently there are 70 different private equity firms represented across our investment portfolio. Since the launch of our credit strategy back in January of 2015, we have completed transactions with over 100 private equity firms across the country. including over 25% of which we have completed multiple transactions. Turning to slide 13, we continued our track record of strong returns on our exits, with two debt prepayments during the quarter. In total, these exits generated $13.7 million in total proceeds, generating a weighted IRR of 16.5%. Since the launch of our credit strategy, we have realized 74 company exits, representing 919 million in proceeds that have generated a cumulative weighted average IRR of 14%. On slide 14, we detail key statistics for our portfolios in the end of the quarter. The total portfolio fair value ended the quarter weighted 88.7% to first lien senior secured debt, 2.3% to second lien senior secured debt, 0.1% to sub debt, and 8.9% to equity co-investments. The credit portfolio had a weighted average yield of 13.3% and weighted average leverage through our security of 3.6 times EBITDA. Overall, we are quite pleased with the portfolio company performance across the portfolio. Cash flow coverage of debt obligations across the portfolio remains at a healthy 3.2 times despite the higher base rate environment. And quarter-over-quarter revenue and EBITDA growth on a weighted average basis was 3% and 5% respectively. As seen on slide 15, our total investment portfolio continues to be broadly diversified across industries with an asset mix which provides strong security for our shareholders' capital. On slide 16, we have laid out the ratings migration across our portfolio during the quarter. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rating. We had four loans representing almost $30 million in fair value upgraded this quarter, while having four loans representing about $14 million in fair value downgraded this quarter. The portfolio remains healthy with 94.7% of the portfolio at fair value, rated in one of the top two categories, a one or a two. I will now hand the call over to Michael to review some specifics of our financial performance for the quarter. Thanks, Bowen.