Q2 2026 Capital Southwest Corp Earnings Call
Speaker #1: Thank you for joining today's Capitol 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 .
Speaker #1: And Amy Baker Executive vice president , counting . I'll now turn the call over to Amy Baker .
Speaker #2: Thank you . I would like to remind everyone that in the course of this call , we will be making certain forward looking statements .
Speaker #2: 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 .
Speaker #2: For information concerning these risks and uncertainties , see Capital Southwest's 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 .
Speaker #2: 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.
Speaker #3: Thanks , Amy . And thank you , everyone for joining us for our second quarter fiscal Year 2020 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 .
Speaker #3: 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 of the end of the prior quarter .
Speaker #3: 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 20th 24 to $1.13 today .
Speaker #3: 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 .
Speaker #3: 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 to October 2026 , and our 71.9 million notes due August 2028 .
Speaker #3: 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 .
Speaker #3: 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 .
Speaker #3: 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 ten existing portfolio companies .
Speaker #3: Add on financings continue 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 .
Speaker #3: 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 .
Speaker #3: 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 .
Speaker #3: I will now hand the call over to Josh to review more specifics of our investment activity and the market environment . Thanks , Michael .
Speaker #3: This quarter .
Speaker #4: We deployed a total of $166 million of new committed capital , including $162 million in the first meeting . Senior secured debt and $3 million of equity across seven new portfolio companies .
Speaker #4: In addition , we closed add on financings for ten existing portfolio companies consisting of 79 million in first lien senior secured debt and 1 million in equity .
Speaker #4: Our 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 2020 .
Speaker #4: For 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 senior secured with a weighted average exposure per company of only 0.9% .
Speaker #4: 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 .
Speaker #4: The vast majority of our portfolio and 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 .
Speaker #4: In the lower middle market , we often have the opportunity to invest a minority basis in the equity of our portfolio companies . Pari passu with private equity firm .
Speaker #4: When we believe that equity piece 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 .
Speaker #4: 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 .
Speaker #4: 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 .
Speaker #4: 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 relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk-return profiles.
Speaker #4: 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 the deal , demonstrating our continued penetration in the market .
Speaker #4: 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 .
Speaker #4: Our portfolio currently consists of 126 portfolio companies , weighted 89.9% to first line senior secured debt , 0.9% to second line senior secured debt and 9.1% to equity contestants .
Speaker #4: 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 .
Speaker #4: 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 .
Speaker #4: 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 .
Speaker #4: 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 1% of investment assets , which gives us great comfort in the overall risk profile of our portfolio .
Speaker #4: 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 .
Speaker #4: Over the past 12 months , new platform originations have averaged junior 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 .
Speaker #4: 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 in opportunistic in all economic environments .
Speaker #4: I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.
Speaker #5: Thanks , Josh . Specific to our performance for the quarter , pretax net investment income was $34 million , or $0.61 per share , for the quarter .
Speaker #5: 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 pick income compared to the prior quarter .
Speaker #5: Importantly , pick 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 .
Speaker #5: During the quarter , we paid out a 58% $0.58 per share regular dividend and a six cent per share supplemental dividend for the December 2020 quarter .
Speaker #5: 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 2020 quarter .
Speaker #5: We continued our consistent track record of regular dividend coverage with 104% coverage for the 12 months ended September 30th , 2025 , and 110% cumulative coverage since the launch of our credit strategy .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested and in people and infrastructure .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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 .
Speaker #5: 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.
Speaker #5: 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 .
Speaker #5: 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.
Speaker #5: I will now hand the call back to Michael for some final comments.
Speaker #3: Thank you Chris . Josh and Amy and all the employees who help us tell the story each and every quarter . And thank you everyone for joining us today .
Speaker #3: This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.
Speaker #6: Thank you . At this time , we will conduct a question and answer session . As a reminder to ask a question , you will need to press star one one on your telephone and wait for your name to be announced .
Speaker #6: To withdraw your question , please press star one one again . Please stand by while we compile the Q&A roster . Our first question comes from the line of Brian McKenna of citizens .
Speaker #6: Your line is now open .
Speaker #7: 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.
Speaker #7: So what is the pipeline look like heading into year end ? And then is there 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 ?
Speaker #3: 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 .
Speaker #3: You know , I think we did 248 million this past quarter . And had seven platform companies and ten add ons . I think the add ons has been a steady , a steady drip , and that's been pretty consistent .
Speaker #3: I think we'll continue to see , you know , 8 to 12 transactions a quarter . From the new origination side . I think this coming quarter , the 1231 is probably going to look , you know , based on what we're seeing today , similar volume to what we saw in the 930 quarter .
Speaker #3: And then looking ahead , it just feels like the , you know , our principles MDS , we've made significant headway with sponsor activity .
Speaker #3: And we continue to see a lot of their quality deals . And so we don't really see any reason for the the growth to slow down .
Speaker #3: So I think where we used to originate 100 , 125 million a quarter , I think we're doing something closer to 150 to 200 million on a normal quarter .
Speaker #7: 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 ?
Speaker #7: You've also made some really changes , like moving to a monthly regular dividend . But is there anything else you can do that ultimately benefits shareholders ?
Speaker #3: Yeah . You know , we've mentioned on previous calls that , you know , we're looking to monetize our investment platform . To enhance our competitive position in the market , as well as potentially bringing , you fees and .
Speaker #3: Additional economics for what we do . So certainly that's we spent quite a bit of time on the road . We think that I think I said in the previous call that we have potential opportunities in front of us that could be closing in the near near our time .
Speaker #3: So that's something that we're looking at . We've since we in the last eight months , we've grown a portfolio of operations group .
Speaker #3: Internally . That's something that was I thought was an important part of the process to scalability . And we continue to look to add originators to the platform .
Speaker #3: So I think it's just building for growth because , you know , coupling , taking these two questions together , we've seen really remarkable growth on deal volume , which doesn't always portend to deals that are closed .
Speaker #3: But getting that funnel larger leads to better quality deals . So we're definitely there's a focus internally . We know our operating leverage is quite low in the market , but we are looking to continually add to our our staff so that we can be ready for the growth that comes .
Speaker #7: Got it . Thanks so much .
Speaker #8: You're welcome .
Speaker #6: Thank you . Our next question comes from the line of Doug Harter of UBS . Your line is now open .
Speaker #8: 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 .
Speaker #8: Any change in kind of their their growth or profitability and just kind of how you're thinking about the credit outlook over the coming quarters ?
Speaker #3: Yeah , I'll get my remarks . And I think , Josh , you should as well . But we just looked at it for over the last 12 months , you know , the growth in EBITDA and revenue of our existing portfolio company has been about 10% growth annually , which still very healthy .
Speaker #3: If you look back , maybe 18 months , 24 months ago , it might have been something closer to 15% . So it's slowed a bit .
Speaker #3: But when we're looking at our individual portfolio companies , they're they're performing extremely well . We're not really seeing anyone particular industry that has issues .
Speaker #3: 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 , you know , the white House and how it impacts potential industries on a go forward basis .
Speaker #3: Right . Things . Nothing has stayed the same . I feel like we're , you know , 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 .
Speaker #3: Josh , you have any .
Speaker #4: 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 .
Speaker #4: Or as expected . But we have created a very diversified by industry and granular by company portfolio . So feel pretty pretty comfortable with where we sit today .
Speaker #3: And the other thing I'd add is like 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 is stayed very conservative and consistent .
Speaker #3: I mean , we've looked at it , I think , over the last nine months . We've seen I think it was 36% loan to value .
Speaker #3: And 3.4 times leverage . So companies aren't stretching . They're just basically the portfolio . The borrowers are getting lower , lower spreads for for sort of the same amount of debt .
Speaker #3: So that's for us . That also , you know , in a market where there was certainly a feeding frenzy over the last 12 months , the fact that debt discipline maintained is a strong protect , strong going forward .
Speaker #8: Great . Appreciate it . Thank you . Sure .
Speaker #6: Thank you . Our next question comes from the line of Miki Schleien of Clear Street . Please go ahead .
Speaker #9: 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 Appel Roofing Monster , Script , Flex U.S.
Speaker #9: Telepacific and Everest. How do you describe the trends overall affecting those companies and their outlook?
Speaker #3: Well , let me 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 .
Speaker #3: So they're two and a half or three times , and they have covenant . You know , cushions of 30% . So when we have a default in our portfolio , these credits are defaulting somewhere between four and six times .
Speaker #3: 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're obviously having issues , but they have private equity sponsors that are supporting the deals in terms of individual .
Speaker #4: I kind of consistent with what I was just talking about . It's obviously diversified portfolio and we we obviously keep track on , you know , the industry breakouts of the of the underperforming assets .
Speaker #4: 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 is unexpected , into which ones we're going to see them .
Speaker #4: But we know in a , in a big a large , broad portfolio that we're going to see them . So we monitor that , you know them by industry , but we don't see we don't see sort of correlation .
Speaker #4: You know , correlations in our in our underperforming assets .
Speaker #9: 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 .
Speaker #9: But that could imply meaningful prepayment risk . What is your gauge of that risk and how much could that impact the portfolios yield .
Speaker #9: You know, obviously excluding the fees that you could collect on those prepayments.
Speaker #3: So I think this goes back to our discipline on granularity . You know , when we were 500 million fund of assets , we were originating 12 or 13 million per asset .
Speaker #3: Today we're , you know , $2 billion , and we're still originating around 15 , 16 per hold . So really , I don't I think that cuts , you from both prepayment risk as well as nonaccrual risk .
Speaker #3: The portfolio is granular enough that no one credit is going to have a material impact . And in fact , in the 630 quarter , we had , I can't remember what company it was , but we got repaid .
Speaker #3: I think it was the tune of $50 million came back and we still posted , you know , $0.61 this quarter . So we don't we don't live in fear of that .
Speaker #3: Our top five is not significantly larger than the rest of the portfolio. And that's by design. Yeah.
Speaker #9: Other thing that's helpful .
Speaker #5: Yeah . Mickey , if you look back in history , the other thing I would add is we've sort of had over the past 2 to 3 years , consistently 15 to 20% of the portfolio in that investment rating , one bucket for outperformance .
Speaker #5: And that has not correlated directly to sort of 20% of prepayments per year , are prepayments are more like 10 to 12% per year as a percentage of the portfolio .
Speaker #5: 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 .
Speaker #5: Yeah .
Speaker #9: No I understand . It's just that you also mentioned the tight spread environment , which , you know , I clearly agree with .
Speaker #9: And we're seeing that across not only your your the lower middle market , but as well in the middle market and the upper middle market .
Speaker #9: So I was trying to gauge if that was an consideration .
Speaker #3: Yeah . Well , given a breakdown by the way . So over the last six months , our spread is is actually stayed pretty constant and give you an indication for the for this quarter , we had seven new portfolio companies .
Speaker #3: The range of yield or spread was 550 at the lowest and 725 at the highest. The add-on activity was at 6.7%.
Speaker #3: So blended 6.5% . So I don't think it's meaningfully off of our our pace . The other part I would note is like , so , you know , one of our probably our top performing portfolio company , our largest hold has due to its equity appreciation .
Speaker #3: So if that exit the debt hold is small , the equity is non-yielding for the most part . Right . So you'll redeploy that capital into debt .
Speaker #3: So, that could actually be an uptick. And.
Speaker #9: Well , as yeah .
Speaker #3: Obviously an increase to our UTI bucket .
Speaker #9: 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 ?
Speaker #9: Or could you give us some insight into that ?
Speaker #3: Sure , sure . I actually would go back in time . If you look at the 330 one quarter , our spread was or total yield was 1168 , it went up to 1183 .
Speaker #3: In the 630 quarter , primarily because we had one large exit that I just mentioned that had 16 basis points of accelerated OID .
Speaker #3: So it was actually fit , juiced . So this quarter , it came back to the same 1168 . But then we did see eight eight basis points reduction due to Non-accruals and just five basis points based on compression .
Speaker #9: Okay . And lastly , for me , could you give us some guidance on stock based compensation and salary expense for the fourth calendar quarter ?
Speaker #9: The quarter we're in right now , given that there's some seasonality , that that would be helpful for us .
Speaker #5: So there won't be seasonality on the RSU expense . So that that should be consistent with the with the current quarter , you know , for for the cash compensation , you know , that is really going to be dependent on our performance during the quarter .
Speaker #5: I would 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 .
Speaker #5: So that's but it really dependent on where we how we perform for the quarter and how much bonus accrual we end up taking .
Speaker #9: Okay . That's helpful . That's it for me . This afternoon . Thanks for taking my questions .
Speaker #3: Thanks .
Speaker #4: Nikki .
Speaker #6: Thank you . Our next question comes from the line of Eric Zwick of Lucid Capital Markets . Your line is now open .
Speaker #10: Thanks . Good morning everyone . I wanted to follow up with a kind of a question on the credit outlook . You provided .
Speaker #10: And just curious , you mentioned that the the top of the funnel for originations has continues to expand . And , you know , there are maybe a couple pockets of the economy that are showing some weakness now .
Speaker #10: 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 , that maybe you weren't 12 months ago .
Speaker #3: Well , I'd start off by saying the area that and it's a very diverse is healthcare that there's just with with the big beautiful bill that came out before not quite understanding where Medicare and Medicaid reimbursement might come .
Speaker #3: That is something that historically we liked quite a bit . And now , you know , it's not that it's , you know , on a no fly list , but it , you know , requires a deep dive to understand how that's going to play out .
Speaker #3: I'm not sure there's any other like industries that we're , you know , just staying away from completely just .
Speaker #4: I mean , government funded , you know , government funded companies , sponsored companies , those are tough for us right now . But we're look , we're we're generalists , you know , that being said , when we when we look at dynamic industries like healthcare or , you know , government , we , we like to partner with private equity groups that have a lot of expertise .
Speaker #4: And we can piggyback off that expertise . And so , you know , when we do deals in more dynamic industries , typically we're doing them with with guys that were , that were that are investing in that space for years , given our generalist tilt .
Speaker #4: So , you know that . And then we also , you know , we also structure around those types of risks , you know , we may like you talked about being more discerning .
Speaker #4: We'll do that with in regards to , you know , you know , adding adding spread . And then also probably more importantly , reducing leverage and tightening up structure on deals to do deals in industries that we're we're a little bit more concerned about .
Speaker #3: You know , another thing to note is , is that with our , operating leverage has come down , obviously we've grown our portfolio and our our funnel .
Speaker #3: It's gotten larger . So we can be just generally speaking , more discerning . We've started we have the ability now with our cost of capital to to originate deals that are , you know , five 5575 , you know , and I always say to these guys like , you know , four years ago , you know , our deals needed to be 750 and above .
Speaker #3: And it was 650 . So today we can see sort of the whole gamut of investments in our space . And , you know , we can opt out of the ones that have hair on them and originate the ones that are , you know , when we're forced ranking deals that are in the same industry that we feel have the most competitive advantages .
Speaker #10: 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 ?
Speaker #10: Do you typically look for people that have multiple years of experience, or do you prefer to bring in people fresh out of college and train them yourself?
Speaker #10: Kind of to fit in with CAPITAL SOUTHWEST CORP beliefs ? Or how do you approach that ?
Speaker #3: So we've done it both ways . I would tell you right now we are sort of aim to do all of the above .
Speaker #3: We're certainly looking on , on , on the originator side to bring in another resource to , to carry one of the coasts that we that we don't cover quite as strongly as we'd like to .
Speaker #3: We're bringing in several people on the analyst side to start supporting the pyramid , and we're also looking for another , you know , operations VP .
Speaker #3: I kind of noticed earlier like that is that's department that we feel like , you know , adds a lot of value . And when we say that , we these the operations group works alongside our deal team .
Speaker #3: 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 .
Speaker #3: So I actually think it's sort of up and down the organization . I think , you know , what we're seeing today , we have enough staff to support it , but we're we're going , you know , it's going to require just a more scalable infrastructure .
Speaker #10: Thanks for taking my questions.
Speaker #3: You're welcome .
Speaker #6: Thank you. Our next question comes from the line of John Hick of Jefferies. Your line is now open.
Speaker #11: Yeah . Good morning . Thanks for taking my questions . The first one is you guys have on the margin made some , you know , you've added the the bond , you've used your ATM , you've got your sbic .
Speaker #11: So you got you got a diverse set of sourcing anything we should think about kind of as we go into 2020 . Well calendar year 2026 about the mix of your capital structure and about how that might , you know , be influenced by interest rate changes .
Speaker #5: So I don't think so . If you look at , you know , we obviously , as you mentioned , we did the 350 million on secured .
Speaker #5: We redeemed those prior two bonds . We're in a really good situation from a liquidity perspective . You know I think we'll continue to use the Sbic , you know , that will be a main source of sort of new capital for calendar year 2026 .
Speaker #5: And , you know , 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 from sort of where we sit today in our philosophy on the mix of , of unsecured debt , secured debt and sbic .
Speaker #11: Okay . And then follow up question , you guys mentioned at the beginning of the call that a lot of competition from both banks and Non-banks .
Speaker #11: I'm wondering, has that changed just in light of some of these, you know, idiosyncratic events in the bond market over the last few weeks?
Speaker #4: It's hard to tell in real time because we propose , you know , we propose on deals , you no consistently . But like , yeah , I mean , there's been a little bit of firming up in the market , but I don't think it's it's , you know , it's a little early to say it's widespread .
Speaker #11: Okay . All right guys thank you very much .
Speaker #6: Thank you. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.
Speaker #12: Hi , guys . I'm on if I can . You prepared remarks ? No , actually . If you looking to monetize the investment platform via asset management , it correct me if I'm wrong .
Speaker #12: 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 .
Speaker #12: So maybe I was reading too much into your wording , but if you could give us any more color , there , I mean , obviously that would be a , you know , an excellent , you know , low capital , at risk given you'd just be using the predominantly the staffing already have and the would there be any .
Speaker #12: Yeah. Sorry. Go ahead.
Speaker #3: No , no . Look I yeah look these processes tend to take a lot longer than you hope or you think going in .
Speaker #3: Yeah . Definitely answers like we you know we have a direction I think you know backing up . We've been seeking out partners to help grow .
Speaker #3: And I said monetize on our investment platform that we've built over the last ten years . And I think it's , you know , been on the road three years doing it .
Speaker #3: And I think we've finally started to hone on , on , on the right structure and found , you know , potentially a partner that is someone that's like minded .
Speaker #3: 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 .
Speaker #3: And it would be , you know , net helpful to this organization going forward .
Speaker #12: Got it , got it . Thank you . Then just another any this has been any changes in thought on . You mentioned equity co-invest where you've got a really good track record and unrealized appreciation and portfolio .
Speaker #12: I mean , at the margin of spreads come in a little bit within your your end market , you know , is there is there any appetite to maybe , you know , tweak the amount that goes into equity up a little bit ?
Speaker #12: I mean , if the spreads tighter and it's a good equity story , you know , does it make sense to allocate a little bit more to that side of the book to kind of , you know , 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 .
Speaker #3: Yeah . No , it's a it's a good question and it's something that we grapple with internally as our whole sizes get larger , but we're still playing in the same bailiwick .
Speaker #3: Our debt check will probably be larger percentage of the total invested capital with equity still being in the , you know , usually a half 1 million to 1 million and a half .
Speaker #3: We do have an interest in doing so . I think that the way you get that accomplished is potentially , you know , 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 .
Speaker #3: But a lot of those deals have a lot of hair . And so I think , you know , the old saying , we got to kiss a lot of frogs there .
Speaker #3: So I think , you know , we , we that is a when I talked about scalability that is an area we may add , you know , some more resources to be able to do so .
Speaker #3: It does fit nicely in our business strategy because we are , you know , our SBA . Right . Those are usually going to be the small to smaller businesses .
Speaker #3: 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 to 12 months .
Speaker #3: But I think over the next 24 to 36 months , that's something that we are geared toward , you know , working .
Speaker #12: Got it. Thank you.
Speaker #3: Sure .
Speaker #6: Thank you . Our next question comes from the line of Dylan Hynes of our Riley Securities . Your line is now open .
Speaker #13: 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 ?
Speaker #3: It's a tough question to answer . I mean , towards are over the last three quarters , as we noted , we haven't seen that degradation , the deals that we are seeing in our pipeline for , you know , this quarter and maybe we're working on for the subsequent quarter , probably similar yield profiles .
Speaker #3: 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 from the or spreads going forward .
Speaker #3: Some of the kind of the other activities we're working on . So yeah , I don't think I'm not expecting over , you know , from from a spread perspective on the base rate .
Speaker #3: Right . Obviously with Sofr that's coming down , that's out of our control . But , you know , we built a portfolio on an income statement .
Speaker #3: We think that's , you know , positioned well both with our regular dividend as well as our UTI bucket .
Speaker #13: Okay . Great . Thank you .
Speaker #6: 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 .
Speaker #3: Well we appreciate everybody joining us today . We look forward to speaking to you in three months . Have a good weekend .