Capital Southwest Corporation

Thank you for joining today's Capital Southwest third quarter fiscal year 2025 earnings call. Participating on the call today are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Chris Rehberger, Executive Vice President, 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 guarantees of future results that 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 publicly available filings with the SEC. The company does not undertake any obligation to update and 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, Bo Engage.

Thanks, Chris. And thank you, everyone, for joining us for our third 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 64 cents per share, which fully covered both our regular dividend of 58 cents per share and our supplemental dividend of 5 cents per share paid during the quarter. Portfolio earnings continued to be strong, and as of the end of the quarter, we estimate that our undistributed taxable income was 68 cents per share, which is up from our prior quarter estimate of 64 cents per share. As we look forward to the March quarter, we are pleased to announce that our Board of Directors has declared a regular dividend of 58 cents per share for the quarter ending March 31, 2025. Additionally, our Board has declared an increase to the supplemental dividend to 6 cents per share from the 5 cents per share in the December quarter, bringing total dividends declared for the March quarter to 64 cents per share. Deal flow in the lower middle market was very strong this quarter, and the competitive environment around quality deals continued at the feverish pace we have seen for the past few quarters. Portfolio activity during the quarter consisted of 317.5 million in new commitments to nine new portfolio companies and 20 existing portfolio companies. Add-on financings continued to be an important component of many private equity firms' investment and a highly attractive source of originations for us. In fact, over 41% of total capital commitments during the quarter were follow on financing and performing companies. 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 and a half times debt to EBITDA. Josh Weinstein will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks. On the capitalization front during the quarter, we issued $230 million in aggregate principal of convertible notes with a coupon of 5.125% and an initial conversion price of $25 per share. Net proceeds from these convertible notes were used to redeem in full the $140 million January 2026 notes, as well as pay down our senior secured revolving credit facility. Importantly, there was no make-hold payment associated with the repayment of the January 2026 notes. Michael will walk through some additional important mechanics of the convertible bond offering in a moment. Additionally, we received a green light letter from the FDA, allowing us to submit our final application for our second SBIC license. and we have been informed by the SBA that we will receive final approval any day. We are excited about our continued participation in the SBA program as this program has been and will continue to be a very important component of our capitalization strategy. Finally, we raised approximately $54 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22.68 per share or 137% of the prevailing NAV 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 both unsecured debt and 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. 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 acquisitions 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 NAV. On slide 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, 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 27 special or supplemental dividends totaling $4.12 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 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 fellow shareholders. As a reminder, slide nine lays out the core tenets of our investment strategy in lending and investing in the lower middle 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 94% 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 do 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 77 investments with a total fair value of $159 million, representing 9% of our total portfolio fair value. Our equity portfolio was marked at 143% of our cost, representing 47.9 million in embedded unrealized appreciation, or 96 cents per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle 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. To that end, I would note that we have two equity investments currently in the final stages of sale processes, which should provide meaningful realized gains for Capital Southwest in the March 2025 quarter. Additionally, we are seeing some increased visibility in our portfolio on companies' beginning sales processes in 2025, several of which could result in material realized gains later this year for Capital Southwest. We look forward to providing you updates as appropriate as they develop. As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.5 billion, representing year-over-year growth of 31% from $1.2 billion as of December 2023. For the current quarter, 100% of our 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 secured with weighted average exposure per company of only 0.9%. 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. 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.