Gladstone Investment Corporation Q4 2023 Earnings Call

Speaker 1: Eight.

Speaker 2: require Operator Assistant to an conference, please press star zero on your telephone keypad. As a reminder, this conference will be in recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer, please begin, sir.

Speaker 3: Oh, thank you, Latonya. And good morning to you all. This is David Gladstone, chairman of the Gladstone Investment Corporation. This is the fourth quarter fiscal year ending 2023. The year ending is March 31st, 2023. And earnings and conference call.

Speaker 3: For stock holders, an analyst of Glanced on Investment listed on NASDAQ and of the symbol GAIN or the common stock. And then we have two registered notes. One is gain in and the other one is gain Z so you can buy different securities in this fund.

Speaker 3: Thank you all for calling in. We always happy to provide an update to our shareholders and to the analysts that follow us and Give you a view of current business environment as well as what we're trying to do with this fund But let's start now with Michael LaCoussey. He's our general counsel and secretary and Michael. Go ahead

Speaker 4: Thanks, David. Good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors, and though they're based on our current plans, which we believe to be reasonable.

Speaker 4: Many factors may cause their actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our forms 10Q, 10K, and other documents that we file with the SEC, and you can find them all in the Investors page of our website.

Speaker 4: Gladstoneinvestment.com or the SEC's website that's scc.gov. Now we undertake no obligation to publicly update or revise any forward looking statements with there as a result of new information future events or otherwise except as required by law. Please also note that past performance or market information is not a guarantee of future results.

Speaker 4: We ask that you visit our website, once again, Gladstoneinvestment.com. Sign up for our email notification service. You can also find us on Twitter. The handle there is at Gladstonecomps. Also on Facebook, keyword there is the Gladstone Companies. Today's call is an overview of our results through 3-31-23.

Speaker 4: We ask that you review our press release in form 10k, both issued yesterday for more detailed information. With that, I'll turn it back to David Dolan, president of Gladstone Investment. Thanks, Mike. Appreciate it. Good morning, everyone. Listening in. We are very pleased that we had another very good quarter and, as importantly,

Speaker 5: a very good and excellent year in results for the fiscal year 23.

Speaker 5: For that year end, which ends as reported, 3.31.23, we generated adjusted NII of a dollar 10 for share, which is actually up from a dollar per share in the prior year. We also actually added some shares to the base as well. We also increased the total fare value of our portfolio to $754 million.

Speaker 5: from 714 million at the prior year end. This growth is a net of a couple of things. One, we increased assets through, obviously, new investments, which was for both BIOS, as well as incremental financings and recapitizations, and some add-ons, which helped create value to our existing portfolio companies, and then it was reduced actually by two exits. So the net effect was

Speaker 5: increase of roughly 40 million dollars to the to the net value. We did experience though a small aggregate net decline in valuations across the portfolio mainly due to declining industry valuation multiples and even though we experienced an increased EBITDA at many of our portfolio companies.

Speaker 5: For fiscal 23, we did invest a total of 133.7 million, which is actually up from about 92.7 in fiscal year 22, of which 60 million was in one new buyout investment, an additional 73.7 million was invested in various other existing portfolio companies.

Speaker 5: with 45.5 million being invested as part of the recapitization of two existing portfolio companies. Now these recaps were not only opportunities for additional investment and retaining two very good companies in a portfolio, they also allowed us to recognize an aggregate of 15.6 million of realized gains.

Speaker 5: at 9.3 million and dividend and success fee income. So recapitalization opportunities may present themselves from time to time and we will pursue them if we believe they are beneficial to shareholder value. We also sold two portfolio companies which resulted in aggregate realized capital gains on equity of about 4.7 million.

Speaker 5: per share. We paid an aggregate of 48 cents per share in supplemental distributions and that included a 24 cent per share supplemental distribution was paid in the most recent quarter March 2023. And subsequent to this quarter end we declared another supplemental distribution of 12 cents per share.

Speaker 5: which will be paid in June of 2023 and therefore be a function of the fiscal year for 2024.

Speaker 5: We currently anticipate being able to fund future supplemental distributions as we do recognize realized capital gains on the equity portion of future exits and potentially from other recapitizations, although we cannot guarantee the timing of capital gains on exits or obviously supplemental distributions.

Speaker 5: And as a point of reference, it's important to note that since inception in 2005 for this fund and through this fiscal year end, 3-31-23, we have invested in 56 buyout portfolio companies for an aggregate of approximately $1.6 billion, exited 29 of these companies when generating approximately $260 million in net realized gains.

Speaker 5: and over 40 million other income on these exits. So it's important to note that these results do reinforce the model in the success of our bio-focus strategy for this fund, which is generating both income for the monthly distributions to shareholders, as well as these capital gains on equity for the supplemental distributions.

Speaker 5: So looking forward, even though there seems to be some decline in the multiples being used to determine the values of buyouts, the market is still very competitive. Deal flow appears though to be picking up as sellers who had been holding back over the past six months are testing the market and we hear it from the M&A and the sell-side bankers that we deal with.

Speaker 5: that the backlog of new opportunities in fact has been building somewhat. However, there continue to be significant liquidity in buyout funds, which is our competition, so we remain selective while we aggressively seek new acquisitions, and we are patient in our diligence and review process.

Speaker 5: We are in the due diligence phase on a couple of new biode opportunities right now, so we'll see how that plays out over the next few quarters and hopefully we'll be adding to our portfolio in the new bio phase.

Speaker 5: So, in summing up the quarter in the fiscal year and looking forward, we believe the state of our portfolio is very good. We have a strong liquid balance sheet, an active level of biodeactivity, and a continued prospect of good earnings and distributions over the next year. So with that, I'll turn it over to Rachel Easton to give you some more detail on our financials. Rachel? Thank you, Dave, and good morning, everyone.

Speaker 6: Looking at our operating performance, we finished fiscal year 2023 strong, generating total investment income of $81.5 million, up from $72.6 million in the prior fiscal year, and adjusted net investment income of $36.7 million, or $1.10 per share, up from $33.3 million, or $1.00 per share in the prior fiscal year.

Speaker 6: Focusing now just on the fourth quarter of fiscal year 23, we generated total investment income of 19.9 million. This was down compared to 21.6 million in the prior quarter. The decrease was primarily due to a decrease in dividend and success fee income, the timing of which can be variable throughout the fiscal year. However, we also benefited from a 1.2 million increase in interest income during the quarter.

Speaker 6: This was driven by an increase in overall yields on our debt investments, which was directly correlated to increased LIBOR.

Speaker 6: Net expenses decreased as of March 31, 2023, to $10.2 million from $13 million in the prior quarter, which was primarily due to a decrease in accrued capital gains-based incentives due to the net impact of realized and unrealized gains and losses as required under US GAAP. The net investment income for the quarter ended March 31, 2023, was $9.6 million.

Speaker 6: for the quarter and as previously mentioned, adjusted net investment income for the fiscal year was up at $1.10 per share from $1 per share in the prior year. We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains based in centipedes, is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter at March 31, 2023,

Speaker 6: when possible. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements to our success. We have long-term capital in place and at March 31, 2023 had over $144 million available on our $180 million credit facility. Additionally, during the quarter we raised approximately $2 million in net proceeds under our –

Speaker 6: of the pre-shared decreased to $13.9 per share compared to $13.43 per share at the end of the prior quarter. The decrease was primarily driven by 16.1 million of distributions paid to common shareholders, as well as 5.1 million of net unrealized appreciation on investment. These amounts were partially upset by 9.6 million of net investment income generated during the quarter.

Speaker 6: In April , we declared an additional 12 cent per share supplemental distribution to be paid in June 2023.

Speaker 6: Using the monthly distribution run rate of 96 cents per share per year and 48 cents per share in supplemental distributions paid during the fiscal year of 2023, our aggregate fiscal year distributions would total $1.44 per common share or a yield of about 10.7% using yesterday's closing price of $13.45. Discover my part of today's call. Back to you, David. Okay. Thank you. Yeah, fairs.

Speaker 3: it now no longer have those pretty annual reports we used to produce.

Speaker 3: The team has reported solid results for the quarter and the fiscal year, including the buyout investments and the exit activity associated with realized gains. We believe the team is in great position to continue these successes through the fiscal year ending March 31, 2024.

Speaker 3: Gladstone investment is an attractive investment for investors seeking continuous monthly distributions and from time to time supplemental distributions from potential capital gains and other income. Team hopes to continue to show strong returns for your investment in our final outlets.

Speaker 3: Stop, we'll have some questions from the analyst and any shareholders who want to ask us questions. Latoya, would you come on and tell them how to do that?

Speaker 2: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants use the speaker equipment.

Speaker 2: It may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we post our first question.

Speaker 7: Our first question comes from Kyle Joseph with Jeffries. Please proceed. Hey, good morning, guys. Thanks for taking my questions. Just two quick ones for me. First, in terms of portfolio companies, are you guys doing anything on the leverage front on existing portfolio companies in terms of managing leverage given...

Speaker 7: a pretty volatile environment. And I know you guys have control of that given your strategy, which is obviously a positive. And then on new transactions, any sort of changes in structure.

Speaker 5: Thank you. I'll go more on it and thanks for the questions. Regarding the first question and the point you made is correct. You know, if you will have influence, if you will, control over the portfolio companies. We have, we have taken a review because obviously our investments in the debt securities of those companies, as you know, also.

Speaker 5: just regarding leverage there. In terms of new deals going forward, I'd say nothing, again, really structurally, what we are finding, which I kind of alluded to a little bit, is those that we are interested in looking at and where we're doing work, we do diligence and so on, that the valuations, indeed, have somewhat come down a bit. And so we're still able to maintain

Speaker 5: to look at what the fixed charge coverage ratio is when we model out these transactions and when we structure the deals and always want to try to have a fixed charge coverage that's going to be in excess usually about 1.2 times and as long as we can hold that then the relative mix of debt and equity kind of falls out of that.

Speaker 7: long answer your question, but fundamentally right now, no real change. You got it helpful. And you touched on where I was going with my second, but just, you know, in the wake of a regional bank.

Speaker 7: I just want to get a sense for valuations in the middle market and whether you've seen multiples compress at all and how that impacts your outlook for your fiscal 24 capital deployment opportunities.

Speaker 5: Right. So we, as I again sort of mentioned, you know, at least through this quarter for our valuations, we did see pickup in some of our companies in any DAH and we did see some declines in the multiples that are used for the valuation. So as a result of that, you know, the kind of mix we had a few that were sort of neutral, not much of an increase in some of that action.

Speaker 6: portfolio that weren't completely outweighed by the increase EBITDA. We saw a handful of our portfolio companies.

Speaker 5: Yeah, and I think if, you know, looking forward, obviously, as I always like to say, we try to be really, you know, deliberate in our look forward. And we are, as I mentioned, the good news is I think we are starting to see some interesting new investment opportunities and they're kind of coming back to us a little bit in terms of valuation. So, I think the bigIGHTN is

Speaker 5: you know, we'll just have to see. And in terms of the only other thing that may be what underlying your question is from a competitive perspective, where some of these other private equity firms would be going out to get leverage, say from whether it be banks or other third parties, our sense is that the leverage availability obviously is tighter.

Speaker 5: So as a result of that, some of these firms are actually having to, if they're going to do a deal, have to put more equity in relatively speaking. And that seems to be helping, if you will, in terms of the valuations that we're bidding against. So, you know, yes, it's a little tighter and again, you know, for us, you know, we have as much as we can, we have a lot of equity in terms of the valuations that we're bidding against.

Speaker 2: Do we have any other questions? The next question comes from Bryce Rowe with B Riley. Please proceed.

Speaker 8: Hi, good morning. Wanted to maybe start on some of the prepared comments there Dave around.

M&A chatter picking up here recently, maybe just kind of help us think about what's causing that or are you seeing sellers maybe just more comfortable with the environment, with the level of interest rates and the direction of interest rates, or like you said, are you just seeing some...

seeing the buyers kind of come back in terms of valuation and getting comfortable with kind of where valuations are today. Yeah, I think when you look, say, going into the sort of end of last year, early part of this year, and clearly uncertainty and, you know, both private equity firms that might have been looking to sell companies.

and as this rest of the year plays out, what we are seeing is some of the companies are still coming to market now and deciding to say, okay, look, we think valuations are now settling down a bit, and as a result of that, they're willing to come back into the market. And actually when I was writing the.

ironically that the remarks as you said I was then on a phone with one of the M&A bankers we deal with on the cell side and said look here's an idea what I think I'm gonna say is that would just make sense and he said absolutely so I think generally the idea that the backlog I think that they being the M&A bankers are seeing

to some extent seems to be picking up. Now again, how that's going to play out, you know, again with some of the credit issues that, you know, looking forward, it's hard to tell, but as of right now, I'd say we're probably looking at more...

legitimate opportunities and we were certainly probably three months ago.

good line of sight in terms of some potential exits here in the next fiscal year.

So, they're not necessarily indicative of future exits. It is just that our portfolio companies, sometimes from time to time, will prepay those exit fees or success fees to us.

Thank you very much for taking the questions. Thanks, Brian .

Other questions? Latoya? Once again to ask a question at this time, please press star one on your telephone keypad. There are no further questions in queue. I would like to turn this call back over to Mr. David Glass. No foreclosing comments. All right. Thank you very much for those two questions. They were very nice. We wish there were many more, but I guess we'll just have to wait until next quarter to get a whole slew of questions about what's going on in the world. Not that we have the answers, but we like doing the answering of our feelings. But that's the end of this call. We thank you all. That's the end, Latoya. Thank you. This does conclude today's...

And J.