Capital Southwest Corporation

Thank you for joining today's Capital Southwest second 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 material from such statements. For information concerning these risks and uncertainties, see Capital Southwest 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 second 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 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 64 cents per share, which fully covered our regular dividend of 58 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. As we look forward to the December quarter, we are pleased to announce that our Board of Directors has declared a regular dividend of 58 cents per share for the quarter ended December 31, 2024. Our Board has also declared a supplemental dividend of 5 cents per share, bringing total dividends declared for the December quarter to 63 cents per share. Deal flow in the lower middle market continued at a healthy pace this quarter. while competition in the market from both bank and non-bank lenders for quality deals continued to be fierce. This has resulted in tighter spreads on quality new deals as well as slower net portfolio growth over the last two quarters for Capital Southwest as we have maintained our credit discipline. That said, our current backlog of deals in which we have either signed up or have received an indication that we are likely to win would indicate that net portfolio growth should be very strong in the December quarter. The deals we are currently underwriting continue to have loan-to-value levels ranging from 35% to 50%, resulting in significant equity capital cushion below our debt and reasonable leverage levels of around three times debt to EBITDA. Deal closings in the lower middle market have always been lumpy from quarter to quarter, and that is certainly the case these past few quarters. 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. Josh Weinstein 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 $89.8 million in new commitments to four new portfolio companies and 11 existing portfolio companies. as add-on financing continued to be an important and highly attractive source of originations for us. Portfolio growth for the quarter was offset by $45.2 million in proceeds from four debt prepayments, which generated a weighted average realized IRR of 14.5%. On the capitalization front during the quarter, we increased our IMG-led corporate credit facility to $485 million from $460 million with the addition of one new bank lender. Additionally, we raised approximately $21 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $24.49 per share, or 148% of the prevailing NIV per share. We have remained diligent in ensuring that 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. Balance sheet liquidity at Capital Southwest remains robust, 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 both growth capital and add-on acquisition for our existing portfolio companies. We believe this strategy allows us to continue to grow our balance sheet through any capital markets environment while also maintaining the flexibility to opportunistically repurchase our stock if it were to trade meaningfully below MAV. On slide 7 and 8, 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 almost 10 years ago, we have increased our quarterly dividend, 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 $26 Special or supplemental dividends totaling $4.06 per share, all generated from 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 the absolute alignment of all our decisions with the interest of our fellow shareholders. As a reminder, slide nine lays out the core tenets of our investment strategy in lending and investing in the role of the market. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, 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, parity 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 72 investments with a total fair value of $134 million, representing 9% of our total portfolio fair value. Our equity portfolio was marked at 132% of our costs, representing $32.5 million in embedded, unrealized appreciation, or $0.68 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower-than-the-market businesses. often resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential of strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest over time. As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.4 billion representing year-over-year growth of 17% from the $1.2 billion as of September 2023. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured. As of the end of the quarter, 98% of the credit portfolio was first lien senior secured, with weighted average exposure per company remaining 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 this metric will continue to improve in our asset-based growth. I want to 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.