Earnings call transcript: Capital Southwest Q2 2025 misses EPS forecast

Capital Southwest Corporation (CSWC) reported its second-quarter earnings for 2025, revealing a mixed financial performance. The company posted an earnings per share (EPS) of $0.57, falling short of the forecasted $0.5942, resulting in a negative surprise of 4.07%. However, the revenue came in at $56.95 million, surpassing expectations of $55.54 million, marking a positive surprise of 2.54%. Following the earnings release, CSWC’s stock saw a decline of 2.15% in regular trading hours, closing at $20.43.

Key Takeaways

• Capital Southwest’s EPS fell short of expectations, while revenue exceeded forecasts.
• The company’s stock price declined by 2.15% following the earnings announcement.
• Capital Southwest continues to focus on growing its investment portfolio and maintaining a strong market position.

Company Performance

Capital Southwest showed resilience in its overall company performance despite missing EPS expectations. The company reported a pre-tax net investment income of $34 million, or $0.61 per share, and total investment income increased to $56.9 million from $55.9 million in the prior quarter. The net asset value (NAV) per share saw a slight increase to $16.62 from $16.59. The company’s regulatory leverage rose to 0.91 to 1, up from 0.82 to 1 in the previous quarter.

Financial Highlights

• Revenue: $56.95 million, a slight increase from the previous quarter.
• Earnings per share: $0.57, below the forecast of $0.5942.
• Dividend: $0.58 regular + $0.06 supplemental, totaling $0.64.
• Dividend coverage: 104% for the 12 months ended September 30, 2025.

Earnings vs. Forecast

Capital Southwest’s EPS of $0.57 missed the forecasted $0.5942 by 4.07%, indicating a challenge in meeting analyst expectations. However, the revenue of $56.95 million exceeded the forecast of $55.54 million by 2.54%, suggesting strong sales performance.

Market Reaction

Following the earnings announcement, Capital Southwest’s stock price fell by 2.15%, closing at $20.43. This movement reflects investor disappointment in the EPS miss despite the revenue beat. The stock remains within its 52-week range, with a high of $23.86 and a low of $17.46.

Outlook & Guidance

Looking forward, Capital Southwest anticipates maintaining similar origination volumes in upcoming quarters, targeting growth of $150-$200 million in quarterly originations. The company is exploring the monetization of its investment platform and expanding its equity co-investment strategy.

Executive Commentary

Michael Sarner, CEO, highlighted the company’s robust deal volume growth, stating, "We’ve seen really remarkable growth on deal volume." He further emphasized the portfolio’s resilience: "Our portfolio is granular enough that no one credit is going to have a material impact." Josh Weinstein, CIO, noted the importance of partnerships with private equity groups: "We like to partner with private equity groups that have a lot of expertise."

Risks and Challenges

• Market competition in the lower middle market remains intense.
• The company’s increased regulatory leverage could pose financial risks.
• Potential caution in the healthcare sector may impact future investments.
• Macro-economic factors and interest rate changes could affect portfolio performance.
• Any major changes in capital structure could alter financial stability.

Q&A

During the earnings call, analysts inquired about the company’s cautious stance on the healthcare sector and the potential for platform monetization within the next 12 months. Executives reiterated their confidence in the current capital structure and the ongoing strong deal flow and pipeline.

Full transcript - Capital Southwest Corporation (CSWC) Q2 2026:

Conference Moderator, Capital Southwest: Thank you for joining today’s Capital Southwest Second Quarter Fiscal Year 2026 Earnings Call. Participating on the call today are Michael Sarner, Chief Executive Officer, Chris Rehberger, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Amy Baker, Executive Vice President, Accounting. I’ll now turn the call over to Amy Baker.

Amy Baker, Executive Vice President, Accounting, Capital Southwest: 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 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 over to our President and Chief Executive Officer, Michael Sarner.

Michael Sarner, Chief Executive Officer, Capital Southwest: Thanks, Amy. And thank you, everyone, for joining us for our Second Quarter Fiscal Year 2026 Earnings Call. We’re pleased to be with you today to discuss our second fiscal quarter, as well as share our observations on the current market environment. During the second fiscal quarter, we generated pre-tax net investment income of $0.61 per share. Additionally, we were able to increase our undistributed taxable income balance to $1.13 per share from $1 per share as at the end of the prior quarter. Over the last 12 months, we’ve harvested $44.8 million in realized gains from equity exits, which is the main driver of our growth in UTI per share from $0.64 in September 2024 to $1.13 today.

Furthermore, our Board of Directors has declared a total of $0.58 in regular dividends for the quarter, payable monthly in each of October, November, and December 2025, and has also declared a quarterly supplemental dividend of $0.06 per share, bringing total dividends declared for the December quarter to $0.64 per share. On the capitalization front, we successfully raised $350 million in aggregate principal of 5.95% notes due 2030. Subsequent to quarter-end, the proceeds from these notes were partially used to redeem, in full, our outstanding $150 million notes due October 2026 and our $71.9 million notes due August 2028. Importantly, the redemption of these notes did not require a make-whole premium to be paid in either case. We believe this new capital enhances the strength of our balance sheet and alleviates any concerns surrounding near-term bond maturities, with our earliest unsecured maturity now in fiscal year 2030.

Finally, we raised approximately $40 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22.81 per share, or 137% of the prevailing NAV per share. Deal flow in the lower-middle market continued to be robust this quarter, with $245 million in total new commitments to seven new portfolio companies and 10 existing portfolio companies. Add-on financings continued to be an important source of originations for us, as approximately 32% of the total capital commitments during the quarter were follow-on financings in performing portfolio companies. Over the last 12 months, add-ons as a percentage of total new commitments have been 39%. So this is clearly a strong source of origination volume in deals we know well and have experience with the management team and sponsor.

Additionally, the weighted average spread on our new commitments this quarter was approximately 6.5%, which we view as strong in a tight spread deal environment. I will now hand the call over to Josh to review more specifics of our investment activity and the market environment.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thanks, Michael. This quarter, we deployed a total of $166 million of new committed capital, including $162 million in first-lien senior secured debt and $3 million of equity across seven new portfolio companies. In addition, we closed add-on financings for 10 existing portfolio companies, consisting of $79 million in first-lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.7 billion, representing year-over-year growth of 24% from $1.4 billion as of September 2024. For the current quarter, 100% of the new portfolio company debt originations were first-lien senior secured, and as of the end of the quarter, 99% of the credit portfolio was first-lien senior secured, with a 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.

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, pari passu, 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 83 investments, with a total fair value of $172 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 126% of our costs, representing $35.8 million in embedded unrealized appreciation, or $0.63 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 from 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. Consistent with previous quarters, the lower-middle market continues to be quite competitive, as this segment of the market is highly attractive to both bank and non-bank lenders. While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to the macroeconomic uncertainty, the depth and strength of the relationship our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk-return profiles.

As a point of reference, currently, there are 85 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months, we closed 17 new platforms with financial sponsors with which we had not previously closed a deal, demonstrating our continued penetration in the market. Since the launch of our credit strategy, we have completed transactions with over 120 different private equity firms across the country, including over 20% with which we have completed multiple transactions. Our portfolio currently consists of 126 portfolio companies weighted 89.9% to first-lien senior secured debt, 0.9% to second-lien senior secured debt, and 9.1% to equity co-investments. The credit portfolio had a weighted average yield of 11.5% and weighted average leverage through our security of 3.5 times EBITDA. We continue to be pleased with the operating performance across our loan portfolio.

All our loans upon origination are initially assigned an investment rating of two on a five-point scale, with one being the highest rating and five being the lowest rating. Overall, the portfolio remains healthy, with approximately 91% of the portfolio at fair value rated in one of the top two categories, a one or a two. Cash flow coverage of debt service obligations has reached 3.6 times, the strongest level in the past three years, reflecting an improvement from the 2.9 times low observed during the peak of base rates. This enhanced coverage underscores the strength of our portfolio, with our loans averaging approximately 43% of portfolio company enterprise value. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than one% of investment assets, which gives us great comfort in the overall risk profile of our portfolio.

For the new platform deals we closed in the September quarter, the weighted average senior leverage level was 3.6 times debt to EBITDA, and the weighted average loan-to-value level was 36%, resulting in significant equity capital cushion below our debt. Over the past 12 months, new platform originations have averaged senior leverage of 3.5 times debt to EBITDA and 38% loan-to-value, which highlights our consistent track record of conservative underwriting on new originations. As Michael mentioned earlier, we believe our balance sheet is well-positioned with low leverage and significant liquidity, which allows us to continue to be active and opportunistic in all economic environments. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.

Michael Sarner, Chief Executive Officer, Capital Southwest: Thanks, Josh. Specific to our performance for the quarter, pre-tax net investment income was $34 million, or $0.61 per share. For the quarter, total investment income increased to $56.9 million from $55.9 million in the prior quarter. The increase was driven primarily by a $1.3 million increase in fees and other income, which was offset by a decrease of approximately $500,000 in PIC income compared to the prior quarter. Importantly, PIC, as a percentage of our total investment income, decreased to 4.9% as compared to 5.8% in the prior quarter. Additionally, as of the end of the quarter, our loans on non-accrual represented 1% of our investment portfolio at fair value. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend.

For the December 2025 quarter, our board has declared a total of $0.58 per share in regular dividends, payable monthly in each of October, November, and December 2025, while also maintaining the supplemental dividend at $0.06 per share, bringing total dividends to $0.64 per share for the December 2025 quarter. We continued our consistent track record of regular dividend coverage, with 104% coverage for the 12 months ended September 30, 2025, and 110% cumulative coverage since the launch of our credit strategy. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1.13 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity portfolio. LTM operating leverage ended the quarter at 1.6%, a slight decrease from the prior quarter.

Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed-cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage at best-in-class BDC. The company’s NAV per share at the end of the quarter was $16.62 per share, an increase from $16.59 per share in the prior quarter. The primary driver of the NAV per share increase was the accretion from the ATM equity program during the quarter. As Michael mentioned, during the quarter, we successfully raised $350 million in new 5.95% unsecured notes due September 2030.

Subsequent to quarter-end, the proceeds from these notes were partially used to redeem in full our $71.9 million August 2028 notes and $150 million October 2026 notes, with no make-whole payment required on either redemption. The cost of the $350 million notes at 5.95% fixed was approximately break-even with the cost of the debt we subsequently paid off, inclusive of the secured credit facilities. We view this capital raise as a highly favorable outcome for both the company and its shareholders, as it strengthens our balance sheet and positions us to thrive across a wide range of capital markets environments. We are pleased to report that our balance sheet liquidity is robust, with approximately $719 million in cash and undrawn leverage commitments on our two credit facilities, which represents over two times the $334 million of unfunded commitments we had across our portfolio as of the end of the quarter.

Our regulatory leverage ended the quarter at a debt-to-equity ratio of 0.91 to 1, up from 0.82 to 1 as of the prior quarter. However, given that the $350 million bond issuance occurred during the September quarter and the bond redemptions occurred subsequent to quarter-end, we ended the quarter with significant cash on the balance sheet. Net leverage, which assumes paying down outstanding debt liabilities with cash on hand as of 9/30, would result in pro forma regulatory leverage of 0.82 times. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we continue to weigh the impacts of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion, which will mitigate capital markets volatility.

We will continue to methodically and opportunistically raise secured and unsecured debt capital, as well as equity capital, through our ATM program to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant cushions. I will now hand the call back to Michael for some final comments.

Thank you, Chris, Josh, and Amy, and all the employees who help us tell this story each and every quarter. And thank you, everyone, for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you’ll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brian McKenna of Citizens. Your line is now open.

Thanks. Good morning, everyone. So it’s clearly a strong quarter of origination activity. It does feel like industry-wide M&A has picked up pretty meaningfully, even since the last earnings call. So what does the pipeline look like heading into year-end? And then is there a way to think about the size of the pipeline today relative to the last quarter or two or even a year ago?

Michael Sarner, Chief Executive Officer, Capital Southwest: Yeah. Look, we definitely have seen, at least in these four walls, a significant uptick just in the size of the pipeline, top of the funnel. I think we did $248 million this past quarter and had seven platform companies and 10 add-ons. I think the add-ons has been a steady drip, and that’s been pretty consistent. I think we’ll continue to see 8 to 12 transactions a quarter. From the new origination side, I think this coming quarter, the 12/31, is probably going to look, based on what we’re seeing today, similar volume to what we saw in the 9/30 quarter. And then looking ahead, it just feels like our principals, MDs, we’ve made significant headway with sponsor activity, and we continue to see a lot of their quality deals. We don’t really see any reason for the growth to slow down.

I think where we used to originate $100-$125 million a quarter, I think we’re doing something closer to $150-$200 million on a normal quarter.

Okay. That’s helpful. And then just for my follow-up, Michael, you’ve been CEO for a few quarters now. Can you just remind us of your top priorities for the firm heading into calendar 2026? You’ve also made some early changes, like moving to a monthly regular dividend. But is there anything else you can do that ultimately benefits shareholders?

Yeah. We’ve mentioned on previous calls that we’re looking to monetize our investment platform to enhance our competitive position in the market, as well as potentially bring in fees and additional economics for what we do. So certainly, we spent quite a bit of time on the road. We think that, I think I said in a previous call, that we have potential opportunities in front of us that could be closing in the nearer time. So that’s something that we’re looking at. Since we in the last eight months we’ve grown a portfolio operations group internally. That’s something that I thought was an important part of the process to scalability, and we continue to look to add originators to the platform.

So I think it’s just building for growth because taking these two questions together, we’ve seen really remarkable growth on deal volume, which doesn’t always portend to deals that are closed, but getting that funnel larger leads to better quality deals, so definitely, there’s a focus internally. Our operating leverage is quite low in the market, but we are looking to continually add to our staff so that we can be ready for the growth that comes.

Got it. Thanks so much.

You’re welcome.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of Doug Harter of UBS. Your line is now open.

Thanks. I’m hoping you could just talk a little bit more about credit quality and kind of what you’re seeing in the underlying portfolio companies, any change in kind of their growth or profitability, and just kind of how you’re thinking about the credit outlook over the coming quarters.

Michael Sarner, Chief Executive Officer, Capital Southwest: Yeah. I’ll give my remarks, and I think Josh should as well. But we just looked at it. So over the last 12 months, the growth in dividend revenue of our existing portfolio company has been about 10% growth annually, which is still very healthy. If you look back maybe 18 months, 24 months ago, it might have been something closer to 15%. So it’s slowed a bit. But when we are looking at our individual portfolio companies, they’re performing extremely well. We’re not really seeing any one particular industry that has issues. The one thing that’s gotten more difficult, I think, in the boardroom is just the changing environment in terms of what’s coming out of the White House and how it impacts potential industries on a go-forward basis, right? Nothing has stayed the same.

I feel like we’ve got our nose buried in the news more today than we ever have to make certain that we understand the impact on our portfolio, but also what’s investable going forward. Josh, do you have any?

Yeah. I mean, look, we have over 100 portfolio companies in the lower middle market. So obviously, not all of them are going to perform really well or as expected. But we have created a very diversified by industry and granular by company portfolio. So I feel pretty comfortable with where we sit today.

The other thing I’d add is when we look at the deals we’re doing, as competitive as the environment has been, which has led to spread compression, the loan-to-value and the leverage of these deals has stayed very conservative and consistent. I mean, let me look at it. I think over the last nine months. We’ve seen, I think it was 36% loan-to-value and 3.4 times leverage. So companies aren’t stretching. They’re just basically, the borrowers are getting lower spreads for sort of the same amount of debt. So for us, that also, in a market where there was certainly a feeding frenzy over the last 12 months, the fact that debt discipline maintained is a strong protector going forward.

Great. Appreciate it. Thank you.

Sure.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of Mickey Schlein of Clear Street. Please go ahead.

Yes. Good morning, everyone. In your internal ratings, you’re showing about 9% of the debt portfolio performing below expectations. It looks like those are names like Bradner, Apple Roofing, Monster Script, LL Flex, US Telepacific, and Everest. How do you describe the trends overall affecting those companies and their outlook?

Michael Sarner, Chief Executive Officer, Capital Southwest: Let me start. I want to say one thing. When we look at our watch list, and you compare us to the upper middle market, one thing to note is the leverage levels that we get in at are much lower than others, so they’re two and a half or three times, and they have covenant cushions of 30%, so when we have a default in our portfolio, these credits are defaulting somewhere between four and six times, so I say that to sort of frame that these companies aren’t in dire situations when they show up on our watch list. They are obviously having issues, but they have private equity sponsors that are supporting the deals. In terms of the individual.

I think that’s kind of consistent with what I was just talking about. It’s obviously a diversified portfolio, and we obviously keep track of the industry breakdowns of the underperforming assets, but we don’t see any real consistency or correlation. There’s a lot of idiosyncratic issues that have happened at some of these lower-middle-market companies, which candidly is unexpected into which ones we’re going to see them, but we know in a big, large, broad portfolio that we’re going to see them, so we monitor them by industry, but we don’t see sort of correlations in our underperforming assets.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Yeah. That’s what I was getting at, actually. And on the flip side, you have about 20% of the portfolio performing above expectations, which is great. But that could imply meaningful prepayment risk. What is your gauge of that risk? And how much could that impact the portfolio’s yield? Obviously, excluding the fees that you could collect on those prepayments.

Michael Sarner, Chief Executive Officer, Capital Southwest: So I think this goes back to our discipline on granularity. When we were a $500 million fund of assets, we were originating $12-$13 million per asset. Today, we’re $2 billion, and we’re still originating around $15-$16 per hold. So really, I think that cuts from both prepayment risk as well as non-accrual risk. The portfolio is granular enough that no one credit is going to have a material impact. And in fact, in the third quarter, we had, I can’t remember what company it was, but we got repaid to the tune of, what, $50 million. Came back. And we still posted $0.61 this quarter. So we don’t live in fear of that. Our top five is not significantly larger than the rest of the portfolio, and that’s by design. Yeah. The other thing that.

Josh Weinstein, Chief Investment Officer, Capital Southwest: That’s helpful.

Michael Sarner, Chief Executive Officer, Capital Southwest: Yeah. Mickey, if you look back in history, the other thing I would add is we’ve sort of had over the past two to three years consistently 15%-20% of the portfolio in that investment rating one bucket for outperformance. And that has not correlated directly to sort of 20% of prepayments per year. Our prepayments are more like 10%-12% per year as a percentage of the portfolio. So it’s an indication of performance, but it doesn’t necessarily indicate that all of those are going to prepay in the near term.

Josh Weinstein, Chief Investment Officer, Capital Southwest: No, I understand. It’s just that you also mentioned the tight spread environment, which I clearly agree with, and we’re seeing that across not only the lower middle market, but as well in the middle market and the upper middle market. So I was trying to gauge if that was a consideration.

Michael Sarner, Chief Executive Officer, Capital Southwest: Given a breakdown, by the way, so over the last six months, our spread has actually stayed pretty constant. Give you an indication for this quarter, we had seven new portfolio companies. The range of yield or spread was $5.50 at the lowest and $7.25 at the highest. The add-on activity was at 6.7%, so blended 6.5%. I don’t think it’s meaningfully off of our pace. The other part I would note is so one of our, probably our top-performing portfolio company, our largest hold, has due to its equity appreciation. If that exits, the debt hold is small. The equity is non-yielding for the most part, right? You’ll redeploy that capital into debt yield. That could actually be an uptick, as well as obviously an increase to our UTI bucket.

Josh Weinstein, Chief Investment Officer, Capital Southwest: I understand. And in terms of the change of the portfolio’s weighted average yield during the quarter, which fell about 30 basis points in a quarter where SOFR was stable, was that due to the spread environment that you’re talking about, or was it due to maybe going up market a little bit toward higher quality names with lower spreads? Or could you give us some insight into that?

Michael Sarner, Chief Executive Officer, Capital Southwest: Sure. Sure. I actually would go back in time. If you look at the 3/31 quarter, our spread was. Our total yield was $11.68. It went up to $11.83 in the 6/30 quarter, primarily because we had one large exit that I just mentioned that had 16 basis points of accelerated OID. So it was actually bit juiced. So this quarter, it came back to the same $11.68, but then we did see eight basis points reduction due to non-accruals and just five basis points based on compression.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Okay, and lastly, for me, could you give us some guidance on stock-based compensation and salary expense for the fourth calendar quarter, the quarter we’re in right now, given that there’s some seasonality? That would be helpful for us.

Michael Sarner, Chief Executive Officer, Capital Southwest: So there won’t be seasonality on the RSU expense. So that should be consistent with the current quarter. For the cash compensation. That is really going to be dependent on our performance during the quarter. I would say that it’s somewhere between flat with 930 and maybe slightly elevated based on some of the staffing initiatives that Michael laid out. So that’s really dependent on how we perform for the quarter and how much bonus accrual we end up taking.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Okay. That’s helpful. That’s it for me this afternoon. Thanks for taking my questions.

Michael Sarner, Chief Executive Officer, Capital Southwest: Thanks, Mickey.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of Eric Zwick of Lucid Capital Markets. Your line is now open.

Thanks. Good morning, everyone. Wanted to follow up with kind of a question on the credit outlook you provided. And just curious, you mentioned that the top of the funnel for originations has continued to expand. And there are maybe a couple of pockets of the economy that are showing some weakness now. So as you evaluate these new opportunities, are there any industries or segments that you’re maybe kind of looking at a little bit more with a more kind of discerning eye or staying away from that maybe weren’t 12 months ago?

Michael Sarner, Chief Executive Officer, Capital Southwest: I’d start off by saying the area that, and it’s very diverse, is healthcare, that there’s just, with the big, beautiful bill that came out before, not quite understanding where Medicare and Medicaid reimbursement might come. That is something that historically we liked quite a bit. And now. It’s not that it’s on a no-fly list, but it requires a deep dive to understand how that’s going to play out. I’m not sure there’s any other industries that we’re just staying away from completely, Josh.

I mean, government-funded companies, sponsored companies, those are tough for us right now, but look, I mean, we’re a generalist. That being said, when we look at dynamic industries like healthcare or government. We like to partner with private equity groups that have a lot of expertise, so we can piggyback off that expertise, and so when we do deals in more dynamic industries, typically, we’re doing them with guys that have been investing in that space for years, given our generalist tilt. So that and then we also structure around those types of risks. Like you talked about being more discerning, we’ll do that in regards to adding spread and then also, probably more importantly, reducing leverage and tightening up structure on deals to do deals in industries that we’re a little bit more concerned about.

Yeah. Another thing to note related is that with our operating leverage has come down, obviously, we’ve grown our portfolio. And our funnel has gotten larger. So we can be, just generally speaking, more discerning. We have the ability now with our cost of capital to originate deals that are $550, $575. And I always say to these guys, like, four years ago, our deals needed to be $750 and above, and it was $650. So today, we can see sort of the whole gamut of investments in our space. And we can opt out of the ones that have hair on them. And originate the ones that are just, when we’re forced ranking deals that are in the same industry that we feel have the most competitive advantages.

Thanks. I appreciate the color. And just one more for me. Mike, when you’re talking about building for growth and continuing to add new originators, can you just kind of remind me about your kind of strategy for bringing in new originators? Do you typically look for people that have multiple years of experience, or do you prefer to bring people fresh in out of maybe college and train them yourself kind of to fit in with Capital Southwest culture? Or how do you approach that?

So we’ve done it both ways. I would tell you right now. We are sort of aimed to do all of the above. We’re certainly looking on the originator side to bring in another resource to cover one of the coasts that we don’t cover quite as strongly as we’d like to. We’re bringing in several people on the analyst side to start supporting the pipeline. And we’re also looking for another operations VP. I kind of noticed earlier that that’s a department that we feel like adds a lot of value. And when we say that, the operations group works alongside our deal team. So we get basically two eyes, two opinions when we come into the boardroom to make better decisions before we put good money after bad. So I actually think it’s sort of up and down the organization.

I think what we’re seeing today, we have enough staff to support it. But where we’re going, it’s going to require just a more scalable infrastructure.

Thanks for taking my questions.

No, you’re welcome.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of John Hick of Jefferies. Your line is now open.

Yeah. Good morning. Thanks for taking my questions. The first one is. You guys on the margin made some. You’ve added the bond. You’ve used your ATM. You’ve got your SBI. So you’ve got a diverse set of sourcing. Anything we should think about kind of as we go into 2020, well, just a calendar year 2026, about the mix of your capital structure and about how that might be influenced by interest rate changes?

Michael Sarner, Chief Executive Officer, Capital Southwest: So I don’t think so. If you look at. We obviously, as you mentioned, we did the $350 million unsecured. We redeemed those prior two bonds. We’re in a really good situation from a liquidity perspective. I think we’ll continue to use the SBIC. That will be a main source of sort of new capital for calendar year 2026. And continue to create flexibility under our secured credit facilities to make sure that we have adequate liquidity. But I don’t think that you’ll see a major shift from sort of where we sit today in our philosophy on the mix of unsecured debt, secured debt, and SBIC.

Okay. And then follow-up question. You guys mentioned at the beginning of the call that there’s been a lot of competition from both banks and non-banks. I’m wondering, has that changed just in light of some of these idiosyncratic events in the bond market over the last few weeks?

It’s hard to tell in real time because we propose on deals consistently. But yeah, I mean, there’s been a little bit of firming up in the market, but I don’t think it’s a little early to say it’s widespread.

Okay. All right, guys. Thank you very much.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Chris Rehberger, Chief Financial Officer, Capital Southwest: Hi, guys. If I can, my team prepared remarks. No, actually, I’m curious. Obviously looking to monetize the investment platform via asset management. Correct me if I’m wrong, it seems like you’re indicating there could be something on the table on that front within the next 12 months or something like that. So maybe I was reading too much into your wording, but if you could give us any more color there. And I mean, obviously, that would be an excellent low capital risk, given you’d just be using the staffing you already have. And would there be any? Yeah, sorry, go ahead.

Michael Sarner, Chief Executive Officer, Capital Southwest: Yeah. No, no, okay. Yeah. These processes tend to take a lot longer than you hope or you think going in. Yeah, definitely. Answers like we have a direction. And I think, backing up, we’ve been seeking out partners to help grow and, as I said, monetize our investment platform that we’ve built over the last 10 years. And I think it’s been on the road three years doing it. And I think we finally started to hone in on the right structure and found potentially a partner that is someone that’s like-minded. I don’t have anything to announce right now, but we’re hopeful as we keep pushing along that that’ll be something that we can make an announcement, and it would be net helpful to this organization going forward.

Chris Rehberger, Chief Financial Officer, Capital Southwest: Got it. Got it. Thank you. Then just another. Has there been any changes in thought on. You mentioned already equity co-invest where you’ve got a really good track record and unrealized appreciation in the portfolio. I mean, at the margin, the spreads come in a little bit. Within your end market. Is there any appetite to maybe tweak the amount that goes into equity up a little bit? I mean, if the spread’s tighter and it’s a good equity story. Does it make sense to allocate a little bit more to that side of the book. To kind of improve the total return or IRR over the life of an asset if you’re giving up a little bit on a spread for a high-quality business?

Michael Sarner, Chief Executive Officer, Capital Southwest: Yeah. No, it’s a good question. And it’s something that we grapple with internally. As our hold sizes get larger, but we’re still playing in the same bailiwick, our debt check will probably be a larger percentage of the total investment capital with the equity still being in the usually $500,000-$1.5 million. We do have an interest in doing so. I think that the way you get that accomplished is potentially seeing more non-sponsored deals, which we do see a pipeline of non-sponsored deals, which require usually it’s a smaller debt check and a larger equity check. But a lot of those deals have a lot of hair. And so I think the old saying, we got to kiss a lot of frogs there.

So I think that is a, when I talked about scalability, that is an area we may add some more resources to be able to do so. It does fit nicely in our business strategy because we are our SBA, right? Those are usually going to be the smaller, smaller businesses. And so the answer is yes, we’re around 9% equity today. I would like to see it grow. I don’t think that’s going to happen in the next 6-12 months. But I think over the next 24-36 months, that’s something that we are geared towards working towards.

Chris Rehberger, Chief Financial Officer, Capital Southwest: Got it. Thank you.

Michael Sarner, Chief Executive Officer, Capital Southwest: Sure.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. Our next question comes from the line of Dylan Hines of RRLE Securities. Your line is now open.

Hey, thanks for taking the call. I was just wondering, so while rate cuts are slowing, if your commitments growth maintains moving forward. Do you expect the yield dilution to be roughly the same quarter over quarter as it was from last quarter to this quarter?

Michael Sarner, Chief Executive Officer, Capital Southwest: It’s a tough question to answer. I mean, over the last three quarters, as we noted, we haven’t seen that degradation. The deals that we are seeing in our pipeline for this quarter and maybe we’re working on for the subsequent quarter, probably similar yield profiles. So I don’t see the yields coming down. I think also some of the activity we’re working on might allow us to continue to either hold or improve our spreads going forward, some of the kind of the other activities we’re working on. So yeah, I don’t think I’m not expecting over the from a spread perspective. On the base rate, right, obviously with SOFR, that’s coming down. That’s out of our control. But we built a portfolio and an income statement we think that’s positioned well, both with our regular dividend as well as our UTI bucket.

Okay, great. Thank you.

Josh Weinstein, Chief Investment Officer, Capital Southwest: Thank you. I’m showing no further questions at this time. I would now like to turn it back to Michael Sarner for closing remarks.

Michael Sarner, Chief Executive Officer, Capital Southwest: We appreciate everybody joining us today. We look forward to speaking to you in three months. Have a good weekend.

Josh Weinstein, Chief Investment Officer, Capital Southwest: All right. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

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