Saratoga Investment Corp

Financial Results Conference call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henry Steenkamp. Please go ahead, sir.

Thank you. I would like to welcome everyone to Saratoga Investment Corps Fiscal Third Quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today we will be referencing a presentation during our call. You can find our fiscal third quarter 2026 shareholder presentation in the events and presentation section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year end is February 28th, so any reference to Q3 results reflects our November 30th quarter end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henry, and welcome, everyone. Saratoga Investment Corp. highlights this quarter include continued NAV growth from the previous quarter and year, with stable NAV per share, an increase in NAI of 3 cents per share from the previous quarter, a strong 13.5% return on equity beating the industry, net originations of $17.2 million, including three new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of 25 cents per share or 75 cents per share in aggregate for the fourth quarter of fiscal 2026, which when annualized represents a 12.9% yield based on the stock price of 2319 as of January 6th, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NAI of 3 cents per share from the previous quarter, Our third quarter NII of 61 cents per share continues to reflect the impact of the last 12 months' trend in decreasing levels of short-term interest rates and spreads on Saratoga Investments' largely floating-rate assets, as well as continued high levels of repayments. Strong originations outpaced repayments during the third quarter, which, when coupled with the repayment of a $12 million baby bond, resulted in our cash positions quarter end decreasing to $169.6 million. though we still have significant cash available to be deployed accretively in investments or to repay existing debt. During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. Our portfolio again saw multiple debt repayments in Q3. We had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in three new investments, and nine follow-ons, as well as closing on new investments in multiple BBB and BBB structured credit securities. Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create attractive investment opportunities from high-quality sponsors, which is continuing post-quarter end with four new portfolio company investments, either closed or in closing in Q4 so far, which further improves our run rate earnings. We continue to remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high quality nature and resilience of our 1.016 billion portfolio with all four historically challenged portfolio company situations resolved. Our current non-core CLO portfolio was marked up, including realized gains, by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million, driven primarily by a $.5 million decrease in interest expense reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first, average non-CLO assets increasing by approximately 0.9% to $962 million, and second, this quarter's repayments resulting in various accelerated OID recognitions. This was largely offset by two factors. First, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter, and second, the timing of new originations and repayments in Q3. In addition, the full period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3 resulted in a one cent per share dilution to NAI per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on non-accrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost. With 83.9% of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stressed situations, we believe our portfolio and company leverage is well-structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and volatility in the broader underwriting, M&A and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure, and disciplined underwriting standards to continue steadily increase the size, quality, and investment performance of our portfolio over the long term and deliver compelling risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, Balance sheet strength, liquidity, and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our two revolving credit facilities, and $169.6 million in cash. This level of cash improves our current regulatory leverage of 168.4% to 183.7% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments' fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024 and August 31, 2025. Our quarter-end NAV was $413 million, up 10.2%, from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NAI was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was 61 cents this quarter, down 32.2% from last year, and up 5.2% from last quarter. Adjusted NII yield was 9.5% this quarter, down from 13.3% last year, and up from 9% last quarter. And latest 12 months return on equity was 9.7%, up from 9.2% last year, and 9.1% last quarter, and above the industry average of 6.6%. While last year saw markdowns to a small number of credits in our score BDC, slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months, above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade, plus beating the industry nine of the past 12 years and consistently positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just one recently restructured investment remaining on non-accrual, Pepper Palace. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henry to review our financial results, as well as the composition and performance of our portfolio.

Thank you, Chris. Slide five highlights our key performance metrics for the fiscal third quarter ended November 30th, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year, and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with a recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees, and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis unchanged from last quarter, and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past two years, we have again added the KPI slides 26 through 29 in the appendix at the end of the presentation. Slide 30 is a new slide that we recently added, comparing our non-accruals to the BDC industry. You will see that our non-accrual rate of 0.4% of cost is eight times lower than the industry average of 3.2%. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to slide six, NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter, and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 33 quarters. Over the long term, this metric has increased since 2011. and grown by $3.62 per share, or 16.5% over the past eight and a half years. On slide seven, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was up 3 cents in Q3. This is due to an increase in non-CLO net interest income during the quarter of 2 cents primarily driven by accelerated OID on repayments, the increase in BB Investments' interest income of 2 cents from higher assets, and the increase in other income of 3 cents from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of 3 cents, reflecting expenses related to the recent annual meeting and increased deal expenses, and dilution from the increased DRIP and ATM program share count of one cent. On the lower half of the slide, NAV per share decreased by two cents, with the 14 cent under-earning of the dividend fully offset by net realized gains and unrealized depreciation of 14 cents, including deferred tax benefits. This leaves a two cent net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing. with $170 million of quarter-end cash available and thus fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt, is callable now. providing us the option to refinance them, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. This quarter, we also repaid our $65 million Encina credit facility, refinancing it with the issuance of an upsized $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same, while cutting the spread cost by approximately 150 basis points and extending the maturity to three years. We do have our $175 million 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity, and especially taking into account the overall conservative nature of our balance sheet and that most of our debt is long-term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times. especially important in the current economic environment. Now we'd like to move on to slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.016 billion of AUM at fair value, and this is invested in 46 portfolio companies, one CLO fund, one joint venture, and numerous new BBB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% is in first lien last out positions. On slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 10.6% from last quarter's 11.3%. with three-fifths of the decrease reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BBB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%. Slide 11 shows how our investments are diversified through primarily the United States. And on slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries, in addition to our investments in the CLO, JV, and BBB and BBB CLO debt securities, which are included as structured finance securities. And finally, moving on to slide 13, 8.3% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy. This slide shows that for the past 13 plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV, and is reflected in our healthy long-term ROEs. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grishas, will now provide an overview of the investment market.

Thank you, Henry. I'll give an update on the market since we last spoke in October, and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in, but the biggest driver of our increased production is the success we are seeing in our own business development efforts. as seen by the fact that five of the seven most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first, stay disciplined on asset selection. Second, invest in and generally expand our business development efforts in a market that is still largely under-penetrated by us. And third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Now, before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust, The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger, and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Our underwriting bar remains high as usual in a very tough market, yet we continue to find opportunities to deploy capital. As seen on slide 14, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in seven new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just one investment still on non-accrual status, Pepper Palace, and now only 0.2% of the portfolio at fair value and 0.4% at cost are on non-accrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolios comprise the businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Now, looking at leverage on this same slide, you can see that industry debt multiples move closer to six times, with Unitranche in the mid fives. Total leverage for our overall portfolio is down to 5.05 times, excluding Pepper Palace. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase of deals sourced is as a result of our recent business development initiatives with 25 of the 79 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this fiscal quarter totaled $72.1 million, consisting of three new investments totaling $40.5 million, nine follow-ons totaling $25.6 million, and BBB and BBB CLO debt investments of $6 million. Two of the three new portfolio companies closed in the quarter are with new relationships. Subsequent to quarter end, We closed or currently have been closing in our core BDC portfolio approximately $89.3 million of new originations in four new portfolio companies and six follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these four new portfolio companies are with new relationships. As you can see on slide 16, Our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the non-accrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise values of the businesses will sustainably exceed the last dollar of our investments. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just three realized economic losses on these investments. Over that same timeframe, we've successfully exited 85 of those investments achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across two portfolio companies, and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we now have only one investment on non-accrual. Although Pepper Palace has been restructured, we are still classifying it as RED with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remains strong, as seen by our track record on this slide. Moving on to slide 17, you can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons. And we are currently ramping up our new SBIC 3 license with $136 million of lower-cost, undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market. And I'd like to turn the call back over to our CEO, Chris.

Thank you, Mike. As outlined on slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025, was paid in three monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a 25 cents per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings. Moving to slide 19, our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC index's negative 4%. This places us in the top six of all BDCs for calendar 2025. Our longer-term performance is outlined on the next slide, slide 20, which shows that our five-year total return places us above the BDC index, and our three-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851% has been almost three times the industry's 283%. On slide 21, you can further see our last 12 months' performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics, such as return on equity, NAV per share, NII yield, and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth has lagged this past year, This is largely due to last year's two discrete non-accrual investments previously discussed. With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long-term, We also continue to be one of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity, with our long-term return on equity at roughly 1.5 times the industry average and latest 12 months return on equity also beating the industry by 310 basis points. Moving on to slide 22, all of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 10.8 percent, ensuring that we are strongly aligned with our shareholders. Looking ahead on slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, We began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards the private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals. In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting, and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance, and deliver compelling risk-adjusted returns for our shareholders over the long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

Thank you. As a reminder, if you would like to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for our first question. Our first question comes from the line of Eric Zwick with Lucid Capital Markets. Your line is open. Please go ahead.

Thanks. Good morning, guys. Good morning. Hi, Eric. Wanting to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter, and I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries, and do you expect that to continue into 2026 here?

Well, you know, I guess we're not really equipped to talk about the entire M&A marketplace, but I think, you know, clearly, just take the large end of some mega, mega deals done last year and that are fairly new to the, you know, new to the market recently. So large M&A has picked up substantially. And then in the world that we're focused on, we're just seeing more deals, you know, more, you know, more people getting ready to transact and, you know, on both sides, sellers and buyers. And I think as Mike mentioned his remarks, and I'll turn it over to Mike to talk more specifically, I think, you know, we're also seeing, you know, even though the M&A is up, we're seeing a lot more competition. So there's just a lot of interest in all these M&A transactions. So we are hopeful that this is the beginning of a, you know, sort of back to more of a normalization of the level of M&A that we've seen in general that has been, you know, missing over the last couple of years. Mike?

Yeah, let me expound on that. When we look at the deal flow that we're getting from our relationships that we've had for years, we view that as kind of more of an indicator of the M&A market moving, because we're already seeing deal flow from that group. And if their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing. It's a little too early to say with certainty, but certainly we do see a pickup there and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal doers and investors in these small end of the market, you can drive a lot more deal flow. And that deal flow doesn't necessarily move one-to-one with the larger M&A activity. Some of these businesses get uh, you know, involved in a change of control transaction because, um, there's somebody's, you know, retiring and, and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature. And so we're in a position where certainly we're affected by M and a activity. Um, and we're, we are seeing a pickup there, but we also feel like our destiny is in our own hands, which you see in, in, uh, the, uh, the origination activity that we've been successful with recently. A lot of that's just based on us, you know, doubling down on our outreach in the marketplace.

That's great color. Thank you. And then moving to slide 13, where you outlay kind of the historical trends for realized gains. It's nice to see over the past three quarters, you've returned to your longer term trend of positive gains there. And I know it's hard to have too much of a forward looking view there, but Anything expected in the near term, either in the current quarter or maybe a quarter out, where you might see some more realizations there?

As you can appreciate, we're not in control of that, and so it's hard for us to make a prediction. I mean, there are some processes underway in some of our portfolio companies, but how they'll wind up is not something we're in a position to predict at this moment.

Eric, I would say just, you know, timing is hard to say, but what we are, you know, really happy about is that on the non-core, sorry, our core non-CLO BDC business, our fair value is about 2% above our cost. So that's just from an overall perspective, which obviously we're happy to see.

Got it. Thanks. And last one for me, just thinking about the impact of, you know, lower short-term interest rates, and you noted that several times during Your comments, you've got a slide addressing that. I think the November cut probably has not been fully realized in the portfolio and not the December cut as well. And futures market is looking at another 50 as well as spreads remaining tight. Henry, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported is holding the line there. Would you consider that a success, kind of given the headwinds there, or is the opportunity to put some of the liquidity to work that you've mentioned to provide you the opportunity to potentially grow NII dollars over the next few quarters?

Well, I think you laid out pretty much a number of our considerations. One thing to add, perhaps, is capital deployment. We've got a lot of capital that hasn't been deployed yet. We have a growing pipeline, and so I think you know, the mix of all those things you've described, including, you know, incremental deployment, you know, those are all, you know, the factors that we're looking at and working on. And I think our quarterly progression this year, we think this is very positive and, you know, sort of on all fronts. And so, you know, we're hopeful that that will continue. We obviously can't predict it. We do have those headwinds, but we've had those headwinds all year, and we're still going to continue to make progress and we hope to. Again, I think that capital deployment is probably the place to look for. And I think also as the M&A market expands, you know, we're hopeful that maybe the spread compression will go another direction. I mean, you know, there's lots of, you know, you know, there's AI, there's mega deals, there's all sorts of things happening in the M&A marketplace that hopefully are going to result in, and then maybe, you know, private credit, you know, that blooms off the rose a little bit. There's some bad press out there. So maybe, you know, Maybe the flow of money into it isn't quite the magnitude it was before. So hopefully the whole thing settles out to a much more normalized place. I mean, we personally, you know, I think in our opinion, we think spreads are tighter than they should be relative to, you know, all the factors out there. And we think that's more of a temporary thing. And so, you know, as interest rates go down, spreads may widen as they have generally historically. So I think putting all that mixed together, you know, we feel, you know, we feel we're well equipped and well positioned to make the best of the opportunities ahead.

Thanks for taking my questions today.

Thanks, Eric.

Thank you, and one moment for our next question. Our next question comes from the line of Casey Alexander with Compass Point Research and Trading. Your line is open. Please go ahead.

Yeah, hi. Good morning. First, I want to just make sure you can hear me because I'm out traveling. Can you hear me? I hear you fine. Yeah, you're welcome. Okay. Okay, great. Mike, this is for you. I probably heard five or six times during the prepared remarks about tighter spreads on new investments. And I'm interested, what's the trade-off to make sure that you're receiving an adequate risk-adjusted rate of return? Is the spreads allowing you to still capture the covenants? Is that a competitive aspect? Is it being the spread allowing you to capture a new relationship? or is the spread allowing you to capture a little additional equity on the deal? How do we get comfortable with that you're still earning an adequate risk adjusted rate of return when spreads get tight like this as they have been?

Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is, do we feel like the fundamental risks of the investment that we're making are level set? That is, are we getting a return where we feel like it's appropriate from a risk adjusted standpoint? Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time? And is that going to be accretive to our shareholders relative to our cost of capital? So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure. I would also point out One of the things that's really nice about being in our end of the market, which you don't see in the middle market so much, is we referenced the seven deals that we closed or have in closing right now. Six of the seven of those deals, we have an equity co-investment. And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys.

Okay, thank you for that. My last question is, it seems like over the last two or three years that the majority of the new portfolio companies have come from new relationships. You know, while I understand that you want to broaden the platform, at the same point in time there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong. And, you know, so I want to get a feel for how you feel about that effort.

Yeah, and that's a very fair question and something that we spend a lot of time thinking about as well. I would remind you that for us, what's so neat about our business model and our investment approach is that most quarters, our follow-on activity exceeds our new origination, new platform activity. So most of the investments that we're making, we're sort of coming in with a relatively small bite-sized And then we're watching the performance of the asset. And then we're supporting their growth over time. And it gives us sort of option value, if you will. And most of that historically has really been candidly with existing relationships. This progress that we've been making with new relationships is a relatively new thing. And it's been a result of a lot of the business development efforts that the whole team has embarked upon, I'll call it in the last year to 18 months. The gestation period of getting a deal done with a new relationship is quite long. In a lot of ways, we wish it were shorter, but ultimately it's quite long and it's one of the reasons you have some pretty healthy barriers to entry in developing new relationships. But typically, when we're cultivating a new relationship, We have a really good sense of the sponsorship's reputation in the marketplace. We have a really good sense of the portfolio that they've constructed, how it's performed. We have a really good sense of the key team members. They generally have been in the market for a long time. We do a lot of work trying to get comfortable that the ownership group is the right one for the asset that they're investing in and that we're supporting. So it is something that we take into account. And I would tell you the bar is a bit higher, as you correctly pointed out. When you know a group and you know exactly how they behave and where they're really good and maybe where they don't have as strong an investment perspective, it can make it easier to make investment decisions. When you don't have that history, you've got to do a lot more work, which is something that we you know, we have done and will continue to do.

The other thing I would add, Casey, is that the opportunity side of this, which is these are new relationships for doing a deal. We've been courting these people for a long time. And so in many instances, you know, we've been tracking them. So it's not like they're, you know, brand new parties. And, you know, if you look at how we grow and our market opportunity, you know, across the small or middle market, Each one of these new relationships can all of a sudden lead to, as Mike was describing, a series of investments with follow-ons and sort of a compounding growth effect in terms of the opportunity flow and the relatively, I'm not going to say proprietary because that might be too strong a word, but certainly preferred flow in our direction with us having a lot more control over our participation in the follow-ons and the new deals.

All right, thank you. Thanks, Casey.

Thank you. And one moment for our next question. Our next question comes from the line with Raymond James. Your line is open. Please go ahead. Morning.

Thanks for the question. So obviously, in the same tune as Eric and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus non-sponsor, incumbent versus new borrowers, or LTVs?

Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's a Still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we're seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have in closing are non-software deals that are kind of core, lower middle market businesses generally. Outside of that, I think the flavor is is what it typically is a mix of mostly sponsored deals, but also some deals where they're, you know, an independent sponsor, or we're backing a management team directly. And that's been a core part of our business as well. And it's been an area where we've invested very successfully.

That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas what industries you would say are vulnerable to AI outside of tech?

Yeah, that could be a much, much longer answer than I could give on this call. But I would say When we're looking at any business, we're always evaluating it from a perspective of what is it that AI brings to the table? And could AI change the business in a very significant way where it could get disrupted? And if the conclusion is that it's hard to say how the impact is going to be, we're going to steer away from those deals. So I think the AI... Development is relatively new, but it's something that we're highly attuned to and evaluating for every single deal that we look at. I would say there's also some portfolio companies that we have where they're incorporating AI and they're using it to improve their business in a way that is improving the credit profile of some of our portfolio companies as well. So it's a double-edged sword, but it's something that we're very much focused on.

And we're definitely staying away from taxing medallions.

Perfect. Thank you so much. And then one last quick one. Could I get the spillover balance as of the end of the quarter?

In per share, Haley, it's probably around approximately $2 per share at the moment.

Okay. Got it.

Thank you so much. Hugh and I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks.

Well, we'd like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.