Capital Southwest Corporation

Thank you for joining today's Capital Southwest first quarter fiscal year 2025 earnings call. Participating on the call today are Bowen Deal, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Chris Reberger, Executive Vice President of Finance. I will now turn the call over to Chris Reberger.

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 guarantees of 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 Chief Executive Officer, Bowen Deal.

Thanks, Chris, and thank you, everyone, for joining us for our first quarter fiscal year 2025 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 as we continue to diligently execute our investment strategy as stewards of your capital. 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. We'll now begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of 69 cents per share, which more than covered both our regular dividend of 57 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 50 cents per share. As we look forward to the September quarter, we are pleased to announce that our Board of Directors has declared a $0.01 per share increase to our regular dividend to $0.58 per share for the quarter ending September 30, 2024. Our Board also declared a supplemental dividend of $0.06 per share, bringing total dividends declared for the September quarter to $0.64 per share. Deal quality and activity in the Louisville market during the June quarter continued at a healthy pace private equity firms and business owners continued to transact. That said, liquidity in the market and competition from both bank and non-bank lenders for quality deals has increased meaningfully over the past couple of quarters. This has resulted in tighter spreads on quality deals and, to a lesser extent, slightly higher leverage levels. We have built a tremendous nationwide network of deal sources, and our team has been doing an extraordinary job sourcing deals in this market. We continue to close deals at loan-to-value levels of 40% to 50%, resulting in significant equity capital cushion below our debt and reasonable leverage levels of around three and a half times debt to even out. Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments, and I am highly confident we will continue our track record in the current environment. Josh Weinstein, our Chief Investment Officer, will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks. Portfolio activity during the quarter consisted of $108.1 million in new commitments to three new portfolio companies and 11 existing portfolio companies, as add-on financings continued to be an important and highly attractive source of originations for us. Portfolio growth for the quarter was offset by $77.2 million in proceeds from eight debt prepayments, which generated a weighted average realized IRR of 12.6%. On the capitalization front, we raised over $38 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average price of $25.60 per share, or 153% of the prevailing NAB per share. During the quarter, we also increased commitments under our SPV credit facility by $50 million to $200 million. 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 issues. We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity. In fact, balance sheet liquidity at Capital Southwest is at an all-time high, which Michael will provide additional commentary on in a moment. 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 as well as provide financing for growth capital and add-on acquisitions for our existing portfolio companies. This is especially true in periods of volatile capital markets when risk-adjusted returns can be particularly attractive. We also believe the strategy allows us to continue to grow our balance sheet while also maintaining the flexibility to opportunistically repurchase our stock if it were to trade meaningfully below NAV. On slides seven and eight, 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 2015. Since that time, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income. In addition, over the same period, we have paid or declared 25 special or supplemental dividends totaling $4.01 per share, including the newly declared $0.06 per share supplemental dividend for the September quarter, all generated from excess earnings and realized gains from our investment portfolios. 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. Turning to slide nine, we lay out the 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 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, how you pursue with a 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 69 investments with a total fair value of $133 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 134% of our cost, representing $33.8 million in embedded unrealized appreciation for $0.72 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, which will come in the form of asset value appreciation as well as equity distributions to Capital Southwest over time. In fact, over the past 12 months, we have received $5.6 million in cash distributions from our equity portfolio, representing $0.13 per share in pre-tax NII. As illustrated on slide 10, Our on-balance sheet credit portfolio ended the quarter at $1.3 billion, representing year-over-year growth of 20%, from $1.1 billion as of the end of June 2023. In the current quarter, 100% of the new portfolio debt originations were first lien senior security, and as of the end of the quarter, 98% of the credit portfolio was first lien senior security. Awaited average exposure per company remains granular at 1%. 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. I will now hand the call over to Josh to review more specifics of our investment activity, the market environment, and the performance of our portfolio for the quarter.