Q2 2026 Gladstone Capital Corp Earnings Call

May 7, 2026

Operator: Greetings. Welcome to the Gladstone Capital Corporation Q2 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please just press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Eric Hellman, General Counsel. Thank you. You may begin.

Speaker #2: If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Eric Hellman, General Counsel.

Speaker #2: Thank you. You may begin. Good morning and thank you for that nice introduction. This is the earnings conference call for GLADSTONE CAPITAL for the quarter ended March 31st, 2026.

Eric Hellman: Good morning, thank you for that nice introduction. This is the Earnings Conference Call for Gladstone Capital for the quarter ended 31 March 2026. Thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company. Now we'll have Catherine Gerkis, our Director of Investor Relations and ESG, provide a brief disclosure regarding certain regulatory matters regarding this call.

Eric Hellmold: Good morning, thank you for that nice introduction. This is the Earnings Conference Call for Gladstone Capital for the quarter ended 31 March 2026. Thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company. Now we'll have Catherine Gerkis, our Director of Investor Relations and ESG, provide a brief disclosure regarding certain regulatory matters regarding this call.

Speaker #2: Thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company.

Speaker #2: Now we'll have Catherine Gerkis, our Director of Investor Relations and ESG, provide a brief disclosure regarding certain regulatory matters regarding this call. Thank you, Eric, and good morning.

Catherine Gerkis: Thank you, Eric. Good morning. Today's call may include forward-looking statements which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investor's page of our website, gladstonecapital.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our investor relations department. Now I will turn the call over to Gladstone Capital's CEO and President, Robert Marcotte.

Speaker #2: Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance and actual results may differ materially from those expressed or implied in these statements, due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investors' page of our website, GLADSTONECAPITAL.COM.

Speaker #2: We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release.

Speaker #2: For more detailed information, you can also sign up for our email notification service and find information on how to contact our investor relations department.

Speaker #2: Now I will turn the call over to GLADSTONE CAPITAL's CEO and President, Bob Marcotte. Thank you, Catherine. Good morning, all. I'll cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company.

Robert Marcotte: Thank you, Catherine. Good morning, all. I'll cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results. Fundings last quarter totaled $44 million and included 3 new private equity-sponsored investments totaling $34 million and $10 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to what we experienced in 2025 and came in at $46 million, so assets were largely unchanged for the quarter. Interest income for the period declined slightly to $23.2 million, with a 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield was 11.8% for the period. Other income for the period came in at $2.8 million, which was up $2.2 million on prepayment fees and dividends.

Robert Marcotte: Thank you, Catherine. Good morning, all. I'll cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results. Fundings last quarter totaled $44 million and included three new private equity-sponsored investments totaling $34 million and $10 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to what we experienced in 2025 and came in at $46 million, so assets were largely unchanged for the quarter. Interest income for the period declined slightly to $23.2 million, with a 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield was 11.8% for the period. Other income for the period came in at $2.8 million, which was up $2.2 million on prepayment fees and dividends.

Speaker #2: Beginning with our last quarter's results, funding's last quarter totaled $44 million and included three new private equity-sponsored investments, totaling $34 million, and $10 million of additional advances to existing portfolio companies.

Speaker #2: Exits and prepayments declined relative to what we experienced in 2025 and came in at $46 million, so assets were largely unchanged for the quarter.

Speaker #2: Interest income for the period declined slightly to $23.2 million, with a 30 basis point decline in the average SOFR rates compared to last quarter.

Speaker #2: As our weighted average debt yield was 11.8% for the period, other income for the period came in at $2.8 million, which was up 2.2 million from the on prepayment fees and dividends.

Robert Marcotte: Interest and financing costs declined with lower SOFR rates and reduced unused commitment fees. Net management fees rose $875,000 with the lower origination fee credits. However, net investment income rose $574,000 to $11.8 million for the period. Net portfolio appreciation came in at $4.2 million, largely driven by the unrealized appreciation of three of the larger companies in our portfolio which continued to scale. With respect to the portfolio, the portfolio growth for the period did not have a material impact on investment mix or spread profile as first lien debt and total debt investments came in at 70% and 90% of the portfolio cost, respectively.

Speaker #2: Interest in financing costs declined, with lower SOFR rates and reduced unused commitment fees. Net management fees rose $875,000, with the lower origination fee credits.

Speaker #2: However, net investment income rose $574,000 to $11.8 million for the period. Net portfolio appreciation came in at $4.2 million, largely driven by the unrealized appreciation of three of the larger companies in our portfolio, which continued to scale.

Speaker #2: With respect to the portfolio, the portfolio growth for the period did not have a material impact on our investment mix or spread profile. As first-lean debt and total debt investments came in at 70% and 90% of the portfolio cost, respectively, our healthcare-related industry concentration declined and is expected to fall further in the short term, with the pending exits as we do not and we do not have any existing software-related exposures.

Robert Marcotte: Our healthcare-related industry concentration declined and is expected to fall further in the short term with the pending exits as we do not have any existing software-related exposures. As of the end of the quarter, our 3 non-earning debt investments were unchanged with a cost basis of $28.8 million or $13 million or 1.6% of debt investments at fair value. In addition, our PIK income for the quarter declined to $1.7 million or 7.4% of interest income. Since the end of the quarter, we funded 2 new in portfolio companies representing a total of $44 million of senior secured debt.

Speaker #2: As of the end of the quarter, our three non-earning debt investments were unchanged, with the cost basis of $28.8 million or $13 million or $1.6% of debt investments at fair value.

Speaker #2: In addition, our PIC income for the quarter declined to $1.7 million or $7.4% of interest income. Since the end of the quarter, we've funded two new portfolio companies representing a total of $44 million of senior secure debt.

Speaker #2: And while earning assets have increased since the end of last quarter, we are expecting a couple of exits in the near term, and our actively managing a healthy pipeline of investment opportunities which should more than cover any repayments and support our continued modest asset growth.

Robert Marcotte: While earning assets have increased since the end of last quarter, we are expecting 2 exits in the near term and are actively managing a healthy pipeline of investment opportunities, which should more than cover any repayments and support our continued modest asset growth. The strength of our investment outlook represents a combination of the resilience of the growth opportunities within the lower middle market and add-on financing opportunities within our existing portfolio. In particular, we're seeing strong demand for precision manufacturing businesses, where customers are looking to move sourcing back to the US or scale in support of building defense-related backlogs. We ended the quarter with a conservative leverage position and net debt at a modest 92% of NAV and expect to continue to leverage our floating rate bank facility to support our floating rate assets, thereby mitigating any impact of short-term rate decline.

Speaker #2: The strength of our investment outlook represents a combination of the resilience of the growth opportunities within the lower middle market and add-on financing opportunities within our existing portfolio.

Speaker #2: In particular, we're seeing strong demand for precision manufacturing businesses where customers are looking to move sourcing back to the US or scale in support of building defense-related backlogs.

Speaker #2: We ended the quarter with a conservative leverage position and net debt at a modest 92% of NAV and expect to continue to leverage our floating rate bank facility to support our floating rate assets thereby mitigating impact of short-term rate decline.

Speaker #2: Our current line of credit facility totals $365 million, and as of the end of the quarter, borrowing availability is more than $150 million, which is ample to support our near-term investment activities.

Robert Marcotte: Our current line of credit facility totals $365 million. As of the end of the quarter, borrowing availability is more than $150 million, which is ample to support our near-term investment activities. Now I'll turn the call over to Nicole Schaltenbrand, Gladstone Capital's CFO, to provide some details on the fund's financial results for the quarter. Nicole?

Speaker #2: And now I'll turn the call over to Nicole Schaltenbrand, GLADSTONE CAPITAL CFO, to provide some details on the fund's financial results for the quarter.

Speaker #2: Nicole?

Speaker #3: Thanks, Bob. Good morning, all. During the March quarter, total interest income declined $700,000 or $2.9% to $23.2 million. As the average earning assets rose 21.7 million or $2.8%, while the weighted average yield on our interest-bearing portfolio declined 40 basis points to $11.8% for the period.

Nicole Schaltenbrand: Thanks, Bob. Good morning, all. During the March quarter, total interest income declined $700,000 or 2.9% to $23.2 million as the average earning assets rose $21.7 million or 2.8%, while the weighted average yield on our interest-bearing portfolio declined 40 basis points to 11.8% for the period. Total investment income was $26 million as dividends and fee income rose $2.2 million from the prior quarter. Total expenses rose $900,000 or 6.8%, driven primarily by $900,000 of higher net management fees due to higher average assets and lower closing fee credits versus the prior quarter. Net investment income for the quarter rose $11.8 million or $0.52 per share or 116% of cash distributions per common share.

Speaker #3: Total investment income was $26 million as dividends and fee income rose 2.2 million from the prior quarter. Total expenses rose $900,000 or $6.8%. Driven primarily by $900,000 of higher net management fees, due to higher average assets and lower closing fee credits versus the prior quarter.

Speaker #3: Net investment income for the quarter rose $11.8 million or $52 per share, or $116% of cash distributions per common share. The net increase in net assets resulting from operations was $15.5 million, or $68 per share for the quarter-ended March 31st.

Nicole Schaltenbrand: The net increase in net assets resulting from operations was $15.5 million or $0.68 per share for the quarter ended 31 March, as impacted by the valuation appreciation mentioned by Bob. Moving over to the balance sheet. As of 31 March, total assets rose to $925 million, consisting of $907 million in investments at fair value and $18 million in cash and other assets. Liabilities declined $3 million quarter-over-quarter to $442 million as of 31 March, with a decrease in LOC borrowings. The remaining balance of our liabilities consists primarily of $149.5 million of 5 and seven eighths convertible debt due 2030, $50 million of 3 and three quarter notes due May 2027, and $35 million of 6 and a quarter perpetual preferred stock.

Speaker #3: As impacted by the valuation appreciation mentioned by Bob. Moving over to the balance sheet, as of March 31st, total assets rose to $925 million, consisting of $907,00,000 in investments at fair value and $18,000,000 in cash and other assets.

Speaker #3: Liabilities declined $3,000,000 quarter over quarter to $442,000,000 as of March 31st, with the decrease in LOC borrowings. The remaining balance of our liabilities consists primarily of $149.5 million of 5 and 7/8 convertible debt due 2030, $50,000,000 of 3 and 3/4 notes due May 2027, and $35,000,000 of 6 and 1/4 perpetual preferred stock.

Speaker #3: As of March 31st, net assets rose $5.3 million to $483,000,000, and NAV per share rose from $2113,000 to $2136,000. A gross leverage as of March 31st rose to 91.8% of net assets.

Nicole Schaltenbrand: As of 31 March, net assets rose $5.3 million to $483 million, and NAV per share rose from $21.13 to $21.36. Our gross leverage as of 31 March rose to 91.8% of net assets. Monthly distributions for May and June will be $0.15 per common share, which is an annual run rate of $1.80 per share. The board will meet in July to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock and with the common stock price at about $19.21 per share yesterday, the distribution run rate is now producing a yield of about 9.4%. Now I'll turn it back to Bob to conclude.

Speaker #3: Monthly distributions for May and June will be $0.15 per common share, which is an annual run rate of $1.80 per share. The board will meet into July to determine the monthly distributions to common stockholders for the following quarter.

Speaker #3: At the current distribution rate for our common stock and with the common stock price at about $19.21 per share yesterday, the distribution run rate is now producing a yield of about 9.4%.

Speaker #3: And now I'll turn it back to Bob to conclude.

Speaker #1: Thank you, Nicole. In sum, it was another solid quarter for GLADSTONE CAPITAL. The team continued to deliver strong earnings performance, bolstered by prepayment fees and portfolio distributions, which more than covered the current shareholder dividends.

Robert Marcotte: Thank you, Nicole. In sum, it was another solid quarter for Gladstone Capital. The team continued to deliver strong earnings performance bolstered by prepayment fees and portfolio distributions, which more than cover the current shareholder dividends. The team is doing a good job managing the portfolio, sourcing attractive private equity backed lower middle-market investment opportunities. The company is also in a very strong balance sheet position with ample borrowing capacity to prudently grow our investment portfolio and deliver the earnings to support our shareholder dividends. Now will the operator tell our callers how to submit their questions.

Speaker #1: The team is doing a good job managing the portfolio sourcing attractive private equity-backed lower middle market investment opportunities. The company is also in a very strong balance sheet position with ample borrowing capacity to prudently grow our investment portfolio and deliver the earnings to support our shareholder dividends.

Speaker #1: And now we will operate our tell our callers how to submit their questions.

Speaker #3: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Please proceed with your question.

Speaker #3: A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue.

Speaker #3: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the *keys. One moment, please, while we pull for questions.

Speaker #3: Our first question comes from the line of Eric Zwick with Lucid Capital Markets. Please proceed with your question.

Erik Zwick: Thanks. Good morning, everyone. Wanted to start with a question, just thinking a little bit about the future path of the portfolio yield. If the Fed funds futures curve is right, you know, there shouldn't be, you know, market's not expecting any changes, so base rates should be more stable. Wondering, you know, if you could talk a little bit about the spreads that you saw for your April activity as well as what's in the, you know, the pipeline and how those compare to the, you know, the weighted average spread for the existing portfolio.

Speaker #4: Thanks. Good morning, everyone. I wanted to start with a question just thinking a little bit about the future path of the portfolio yield if the Fed funds futures curve is right.

Speaker #4: There shouldn't be the market's not expecting any changes, so base rate should be more stable. But wondering if you could talk a little bit about the spreads that you saw for your April activity as well as what's in the pipeline and how those compare to the weighted average spread for the existing portfolio.

Speaker #1: Thank you, Eric. Good question. The activity on the quarter we really didn't see any compression in spreads. What we were closing essentially is on par with our prior quarters.

Robert Marcotte: Thank you, Eric. Good question. The activity on the quarter, we really didn't see any compression in spreads. What we were closing essentially is on par with our prior quarters. We really don't see any degradation. That's really coming from a couple of things. One, it's a disciplined approach and an added value approach in the lower middle market. We've never seen quite the same competition as upmarket transactions. Obviously, in the last quarter, there's also been a bit of a sell-off with spreads backing up, upmarket from us. We've seen less competitive pressure from larger transactions, which are probably backed up 50 to 75 basis points. We really don't see at the moment much in the way of degradation on the outlook.

Speaker #1: So, we really don't see any degradation, and that's really coming from a couple of things. One, it's a disciplined approach and an added value approach in the lower middle market.

Speaker #1: We've never seen quite the same competition as up market transactions. Obviously, in the last quarter, there's also been a bit of a sell-off with spreads backing up up market from us.

Speaker #1: And so we've seen less competitive pressure from larger transactions, which are probably backed up 50 to 75 basis points. So we really don't see at the moment much in the way of degradation on the outlook.

Speaker #1: So with closing spreads in the range of roughly 7% on average last quarter, I wouldn't expect much to impact there. We do have some impact as companies get larger.

Robert Marcotte: You know, with closing spreads in the range of roughly 7% on average last quarter, I wouldn't expect much to impact there. We do have some impact as companies get larger. There is some trade-off, but for the most part, it's pretty stable. The other thing is, I do expect that we will be funding add-ons to existing portfolio companies in the next quarter, which tend to be consistent with the existing spreads on those transactions. I think you're correct that in the near term, the pressure on margins are gonna be fairly limited. When we originally reset the dividend, we were anticipating a curve where we might have 2 or 3 rate reductions over the course of 2026.

Speaker #1: There is some trade-off. But for the most part, it's pretty stable. The other thing is I do expect that we will be funding add-ons to existing portfolio companies in the next quarter.

Speaker #1: Which tend to be consistent with the existing spreads on those transactions. So I think you're correct that in the near term, the pressure on margins are going to be fairly limited.

Speaker #1: When we originally reset the dividend, we were anticipating a curve where we might have two or three rate reductions over the course of 2026.

Speaker #1: Obviously, that's not happening. And the combination of lower up market pressure is part of that process, which was one of the reasons why we feel pretty confident in where we stand today with respect to dividend coverage.

Robert Marcotte: Obviously, that's not happening, and the combination of lower upmarket pressure is part of that process, which is one of the reasons why we feel pretty confident in where we stand today with respect to dividend coverage.

Speaker #4: That's great and good to hear. Thank you. Looking at just the dividend income in the most recent quarter, it was up quarter over quarter.

Erik Zwick: That's great and good to hear. Thank you. Looking at just the dividend income, in the most recent quarter, it was up quarter-over-quarter. I'm curious if that was driven by kind of one large dividend or if there were multiple companies that contributed to it, and whether you view those more as kind of one time or if they'll be recurring.

Speaker #4: I'm curious if that was driven by kind of one large dividend or if there were multiple companies that contributed to it and whether you view those more as kind of one-time or if they'll be recurring.

Robert Marcotte: There are really two components of the income. One was the prepayment fee which we broadcast at the end of last call, last quarter. The second one was a fairly large dividend, a single transaction of a company that had been scaling and we owned a slug of the business. I would expect that there may be some other additional distributions coming, but they do tend to be one-time events. I think we do have some companies that are de-leveraging, that are performing well, and if the private equity sponsor feels so compelled and there aren't good acquisition opportunities, distributions is something that they will look to do. We should expect that we'll see more of those in the future, but I would continue to characterize them as one-time events.

Speaker #1: There are really two components of the income. One was the prepayment fee, which we broadcast at the end of last call, last quarter. The second one was a fairly large dividend, a single transaction.

Speaker #1: Of a company that had been scaling and we owned a slug of the business. I would expect that there may be some other additional distributions coming, but they do tend to be one-time events.

Speaker #1: So I think we do have some companies that are deleveraging that are performing well. And if the private equity sponsor feels so compelled and there aren't good acquisition opportunities, distributions is something that they will look to do.

Speaker #1: And we should expect that we'll see more of those in the future. But I would not I would continue to characterize them as one-time events.

Speaker #1: But we are monitoring that and expect some of that to be realized over the course of 2026.

Robert Marcotte: We are monitoring that and expect some of that to be realized over the course of 2026.

Speaker #4: Thanks. And last one for me. I know you addressed this a little bit last quarter, but just your thoughts on kind of repurchasing shares at this point, whether you view that as a good use of capital certainly that the stock has come back a little bit from the lows a couple of months ago.

Erik Zwick: Thanks. Last one for me. I know you addressed this a little bit last quarter, but just your thoughts on kind of repurchasing shares at this point, whether you view that as a good use of capital. Certainly that, you know, the stock has come back a little bit from the lows a couple months ago. you know, with the trading at a 10% discount to NAV today, curious how you view that opportunity.

Speaker #4: But with it trading at a 10% discount to NAV today, curious how you view that opportunity.

Speaker #1: Eric, we are seeing tremendous opportunities to continue to execute our plan and strategy. And based upon where that returns are being generated, scale is important.

Robert Marcotte: Eric, we are seeing tremendous opportunities to continue to execute our plan and strategy. Based upon where that returns are being generated, scale is important. I don't think you'll likely see us buying shares in. I think we are gonna be looking to scale the capital base to capitalize on our market position in the lower middle market. The long-term returns on our portfolio have been pretty good. We think it's best interest of the shareholders to continue to scale that opportunity. This is frankly a good time. The turmoil, the uncertainty, and the issues in the marketplace provide a nice window for us to continue to execute against our long-term strategy. We've been doing this for 25 years. I think the idea is we can continue to grow it and produce good returns for our shareholders.

Speaker #1: So I don't think you'll likely see us buying shares in. I think we are going to be looking to scale the capital base to capitalize on our market position in the lower middle market.

Speaker #1: The long-term returns on our portfolio have been pretty good. We think it's best interest of the shareholders to continue to scale that opportunity. And this is frankly a good time.

Speaker #1: The turmoil, the uncertainty, and the issues in the marketplace provide a nice window for us to continue to execute against our long-term strategy. We've been doing this for 25 years.

Speaker #1: I think the idea is we can continue to grow it and produce good returns for our shareholders.

Speaker #4: I appreciate the commentary today. Thank you.

Erik Zwick: Appreciate the commentary today. Thank you.

Speaker #1: Thank you.

Robert Marcotte: Thank you.

Speaker #3: Thank you. Our next question comes from the line of Christopher Nolan with Lattenberg Bellman. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Christopher Nolan: Bob, congratulations on the promotion, and please pass our best wishes to David Gladstone.

Speaker #5: Bob, congratulations on the promotion. And please pass our best wishes to David Gladstone.

Christopher Nolan: Bob, congratulations on the promotion, and please pass our best wishes to David Gladstone.

Speaker #1: Will do.

Robert Marcotte: Will do.

Speaker #5: On the non-accruals, it stepped up a little bit. And you're as a quality is good. Can you share with us some observations you're seeing in the market?

Christopher Nolan: On the non-accruals, it stepped up a little bit and, you know, your asset quality is good. Can you share with us some observations you're seeing in the market? I mean, is higher fuel prices just generally creating increased stress in lower middle market, middle markets? Is it less sponsor support? I'm seeing increased non-accruals across multiple BDCs incrementally. Nothing huge yet, but I'd like to get a little broader perspective, if possible.

Speaker #5: I mean, is higher fuel prices just generally creating increased stress in lower middle markets, middle markets? Is it less sponsor support? Because I'm seeing increased non-accruals across multiple BDCs, incrementally, nothing huge yet.

Speaker #5: But I'd like to get a little broader perspective if possible.

Speaker #1: Sure. The only reason that our non-accruals went up in fair value is because one of them in particular is performing very well. And so we're optimistic that it will be turned to a cash paying and go off non-accrual.

Robert Marcotte: Sure. The only reason that our non-accruals went up in fair value is because one of them in particular is performing very well. We're optimistic that it will be turned to a cash paying and go off non-accrual. It's been a while for that XL situation to turn around, but we're feeling very good about it given where it's executed. It's not bad that it went up. It's actually good in a weird way. In terms of your specific question around energy, we don't tend to have a lot of energy-related businesses or energy-impacted businesses. I will say that we do have businesses that, you know, might provide services, and there are energy costs in delivering their products.

Speaker #1: It's been a while for that Excel situation to turn around. But we're feeling very good about it given where it's executed. So it's not bad that it went up.

Speaker #1: It's actually good in a weird way. In terms of your specific question around energy, we don't tend to have a lot of energy-related businesses or energy-impacted businesses.

Speaker #1: I will say that we do have businesses that might provide services. And there are energy costs in delivering their products. And certainly, the delivery companies, the FedEx's of the world, we're very quick in adjusting their rates.

Robert Marcotte: You know, certainly the delivery companies, the FedExes of the world, were very quick in adjusting their rates. Passing through surcharges has been something that I think we've encouraged and our portfolio companies have been pretty adamant on, and that's really been kind of a neutral event. It's not necessarily negatively affected their business since it's a well-understood cost of doing business. In terms of other energy-related matters, I would say we're seeing a little bit of slowing or uncertainty. As we've said in the past, we do have one or two investments that are related to the auto market. Energy and auto is a little bit up in the air right now.

Speaker #1: And so passing through surcharges has been something that I think we've encouraged in our portfolio companies have been pretty adamant on. And that's really been kind of a neutral event.

Speaker #1: It's not necessarily negatively affected their business since it's a well-understood cost of doing business. In terms of other energy-related matters, I would say we're seeing a little bit of slowing or uncertainty as we've said in the past.

Speaker #1: We do have one or two investments that are related to the auto market. And energy and auto is a little bit up in the air right now.

Robert Marcotte: Certainly, whether it's electric vehicles or whether it's, you know, transitioning model years or general auto sales, they're soft. We are closely monitoring some of those. We feel the business is on the right programs, but the volume in that market is relatively soft. Beyond that, you know, obviously one of the benefits is we have zero software. Some of, I think, what you're seeing is just momentum and decision-making in the software side of things. You know, I don't think anybody's making any fast moves to grow the revenue or to expand, you know, their software investments at the moment. I think we're all pretty impressed at the relatively low cost and incredibly efficient AI-related tools that we're all toying with.

Speaker #1: Certainly, whether it's electric vehicles or whether it's transitioning model years or general auto sales, they're soft. So we are closely monitoring some of those.

Speaker #1: We feel the business is on the right programs. But the volume in that market is relatively soft. Beyond that, obviously, one of the benefits is we have zero software.

Speaker #1: So some of, I think, what you're seeing is just momentum and decision-making in the software side of things. I don't think anybody's making any fast moves to grow the revenue or to expand their software investments at the moment.

Speaker #1: I think we're all pretty impressed at the relatively low cost and incredibly efficient AI-related tools that we're all toying with. So I think that's affecting significant number of others.

Robert Marcotte: I think that's affecting a significant number of others, and we really don't have that exposure. You know, right now, I would generally say I don't see a ton of slowing. We don't see much in the way of direct impact of energy. I would almost argue it's the other way around because we do have some precision manufacturing businesses. They are seeing huge inbound order requests, and frankly, we're being asked to fund capital expenditures to grow those businesses. We're kind of feeling like it's a decent opportunity for us if we're close to our businesses to take share and scale some of our opportunities.

Speaker #1: And we really don't have that exposure. So right now, I would generally say we don't see a ton of slowing. We don't see much in the way of direct impact of energy.

Speaker #1: I would almost argue it's the other way around because we do have some precision manufacturing businesses that are seeing huge inbound order requests. And frankly, we're being asked to fund capital expenditures to grow those businesses.

Speaker #1: So we're kind of feeling like it's a decent opportunity for us if we're close to our businesses to take share and scale some of our opportunities.

Christopher Nolan: Just as a follow-up, in general, are you seeing private equity sponsors being a little bit more hesitant in general, or any equity providers, or is it just sort of pretty stable?

Speaker #5: And just as a follow-up, in general, are you seeing private equity sponsors being a little bit more hesitant in general? Or any equity providers?

Speaker #5: Or is it just sort of pretty stable?

Robert Marcotte: I definitely think that the private equity sponsors are being very diligent. Deals are not closing at the same pace. I think there's a lot of, you know, making sure the numbers are real and there's no ambiguities. You know, I think there's a fair bit of being cautious. You know, most of the businesses that we see, it's really about the long-term growth, not the financial structure, not the financial timing. You know, most of the lower middle-market businesses on average are trading, you know, plus or minus 7x on EBITDA. That is a business that you can buy and grow and absorb some, you know, variability and headwinds and still make good money.

Speaker #1: I definitely think that the private equity sponsors are being very diligent. Deals are not closing at the same pace. I think there's a lot of making sure the numbers are real and there's no ambiguities.

Speaker #1: I think there's a fair bit of being cautious. But most of the businesses that we see it's really about the long-term growth, not the financial structure, not the financial timing.

Speaker #1: Most of the lower middle market businesses on average are trading plus or minus 7X on EBITDA. That is a business that you can buy and grow.

Speaker #1: And absorb some variability and headwinds and still make good money. If you're trading a large-scale business at 9 and a half, 10, 12 times, you don't have the cushion to be able to absorb that.

Robert Marcotte: If you're trading a large scale business at, you know, 9.5x, 10x, 12x, you don't have the cushion to be able to absorb that. I suspect you're seeing much more caution upmarket because the window of growth and equity appreciation is far narrower, and the exit multiple that you can get to is gonna be harder to achieve. The idea of trading at that lower multiple in a lower middle market. You've already got 2x to 2.5x of potential appreciation just from scaling the business. That drove one of, you know, a couple of our marks on the quarter.

Speaker #1: So I suspect you're seeing much more caution up market because the window of growth and equity appreciation is far narrower and the exit multiple that you can get to is going to be harder to achieve for us.

Speaker #1: The idea of trading at that lower multiple and a lower middle market, you've already got 2 to 2 and a half turns of potential appreciation just from scaling the business.

Speaker #1: And that drove one of a couple of our marks on the quarter. When we go into a business and trades at a lower multiple, the next thing you know, it's 25 or 30 million dollars of EBITDA.

Robert Marcotte: When we go into a business and trades at a lower multiple, and next thing you know, it's $25 or $30 million of EBITDA, and the multiple for those businesses is 2 to 3 turns higher. That's a natural appreciation that we as well as the private equity sponsors are able to achieve. I guess it's just a much more forgiving entry point that is part of the process as long as the numbers are solid. Sorry to take so much on it, but that's a fundamental value to lower middle market.

Speaker #1: And the multiple for those businesses is 2 to 3 turns higher that's a natural appreciation that we as well as the private equity sponsors are able to achieve.

Speaker #1: So I guess it's just a much more forgiving entry point that is part of the process as long as the numbers are solid. Sorry to take so much on it.

Speaker #1: But that's a fundamental value to lower middle market.

Christopher Nolan: Okay. Thank you.

Speaker #5: Okay. Thank you.

Operator: Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Speaker #6: Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Robert Dodd: Hi. Hi, everybody. Yeah, congratulations, Bob. Just kind of sticking with that point. I mean, the color on strong demand from pre-precision manufacturing. I mean, it sounds from you saying that's primarily for add-ons to those already in your portfolio. If we step back, I mean, to your point, you know, the upper market, valuations are tighter. Spreads seem to be showing maybe not just for precision manufacturing, maybe widening, certainly widening in software, but you don't have any of that. But to your point, are you starting to see any spread expansion in your end of the market?

Speaker #7: Hi, everybody. Yeah. Congratulations, Bob. Just kind of sticking with that point, I mean, the color on strong demand from precision manufacturing, I mean, it sounds for me saying that's primarily for add-ons to those already in your portfolio.

Speaker #7: And then if we step back, I mean, to your point, the upper market, valuations are tighter, spreads seem to be showing maybe not just precision manufacturing, maybe widening, certainly widening in software, but you don't have any of that.

Speaker #7: But to your point, are you starting to see any spread expansion in your end of the market? I mean, I would think something like precision manufacturing, where the demand dynamics, like you say, on short events, etc., are so good, might be increasingly crowded from a competitive perspective.

Robert Dodd: I mean, I would think, you know, something like precision manufacturing, where the demand dynamics, like you say, on short events, et cetera, are so good, might be increasingly crowded from a competitive perspective for new deals, right? Obviously, the ones you already have. I mean, do you think those markets that you're in are gonna be more resistant to spread expansion, even if it moves in the upper market? Any thought on how the pricing for those kind of businesses you do might evolve, even if the upper market moves on a pricing front?

Speaker #7: For new deals, right? Obviously, the ones you already have. I mean, so do you think those markets that you're in are going to be more resistant to spread expansion even if it moves in the upper market?

Speaker #7: Or any thought on how the pricing for those kind of the kind of businesses you do might evolve even if the upper market moves on a pricing front?

Robert Marcotte: I would not expect, I would not expect spread to be widening in our market just for broad strokes. You know, the upper markets were dipping down sub 5 over LIBOR, and that ROE at the leverage point was starting to get tight. The fact that the funding costs have backed up has probably, you know, pushed those spreads up to, you know, 5.5 or 5.75 or something like that. We've always been, you know, let's say mid 6s and, you know, I don't think that I would expect that to expand much. You know, it's more of a relative play.

Speaker #1: I would not expect I would not expect spread to be widening in our market just for broad strokes. The upper markets were dipping down sub-5 over LIBOR.

Speaker #1: And that ROE at the leverage point was starting to get tight. The fact that the funding cost have backed up is probably pushed those spreads up to 5 and a half or 5 and three-quarters, something like that.

Speaker #1: We've always been let's say mid-6s. And I don't think that I would expect that to expand. Much. It's more of a relative play at 150 basis points spread.

Robert Marcotte: At 150 basis points spread to an upper-market deal, a sponsor's gonna say, You're way too expensive, you know, I'd rather continue to shop it. At a 50 to 75 basis point spread, they're not gonna say, It's not worth my time, given the size of the transaction. I think we will see less competitive spread pressure because the sponsors understand smaller deals are going to be more expensive, and they're on a relative basis. I think the other point that I would make is, you know, once these large platforms are as large as they are, it's very hard to go back down-market, right?

Speaker #1: To an upper market deal, the sponsor's going to say, "You're way too expensive. I'd rather continue to shop it." At a 50 to 75 basis point spread, they're not going to say it's not worth my time, given the size of the transaction.

Speaker #1: So, I think we will see less competitive spread pressure because the sponsors understand smaller deals are going to be more expensive, and on a relative basis.

Speaker #1: I think the other point that I would make is once these large platforms are as large as they are, it's very hard to go back down market, right?

Robert Marcotte: You know, once you're big as you are, and there's not a ton of capital coming into the lower middle market. I mean, look where the BDC, you know, equities are trending. Look at who the brand names are that are raising the new funds. The only people that are actually accessing the capital markets or accessing funding sources that might compete with us would be the SBICs, and they are by definition, somewhat constrained in their overall size. And, you know, government SBA financing is not exactly cheap these days either. We find ourselves particularly well positioned to compete with those folks, and we obviously have a scale advantage over them.

Speaker #1: Once you're as big as you are, and there's not a ton of capital coming into the lower middle market. I mean, look at where the BDC equities are trending.

Speaker #1: Look at who the brand names are that are raising the new funds. The only people that are actually accessing the capital markets are accessing funding sources that might compete with us would be the SBICs and they are by definition somewhat constrained in their overall size.

Speaker #1: And government SBA financing is not exactly cheap these days either. So we find ourselves particularly well positioned to compete with those folks and we obviously have a scale advantage over them.

Robert Marcotte: I don't think it goes down, but I think the pressure is less and the opportunities are going to be as, you know, continue to be relatively positive for us to see, you know, modest asset growth within our desired balance sheet leverage, constraints.

Speaker #1: So I don't think it goes down. But I think the pressure is less and the opportunities are going to be as continue to be relatively positive for us to see modest asset growth within our desired balance sheet leverage constraints.

Robert Dodd: Got it. Thank you, Bob. Really appreciate that color.

Speaker #5: Got it. Got it. Thank you, Bob. I really appreciate that color.

Operator: Thank you. Our next question comes from the line of Sean-Paul Adams with B. Riley. Please proceed with your question.

Speaker #6: Thank you. Our next question comes from the line of Sean Paul Adams with B. Reilly. Please proceed with your question.

Sean-Paul Adams: Hey, good morning.

Robert Marcotte: Good morning.

Sean-Paul Adams: It looks like the quarter was quite solid. Non-accruals, you know, kind of went up in fair value, but it looks like they could be on the decline. Those legacy 3 positions might go down to 2. You guys experienced NAV accretion in a quarter where there's just been a wave of NAV losses. The zero SOFR exposure, you know, usually means materially less impact to this, you know, widespread market repricing. You talked a little bit about spreads and, you know, besides potentially, you know, that auto exposure, is there just any concern about, you know, just future declines in net origination volume, you know, potentially from any other partners trying to come downstream and, you know, operate in this lower middle market segment?

Speaker #8: Hey, good morning. It looks like the quarter was quite solid. Not a cruel kind of went up in fair value, but it looks like they could be on the decline.

Speaker #8: So those legacy three positions might go down to two. You guys experienced NAV accretion in a quarter where there’s just been a wave of NAV losses.

Speaker #8: And the zero software exposure, usually means materially less impact to this widespread market repricing. You talked a little bit about spreads. And besides potentially that auto exposure, is there just any concern about just future declines in net origination volume?

Speaker #8: Potentially from any other partners trying to come downstream and operate in this lower middle market segment?

Robert Marcotte: It, Sean-Paul, it's hard. You know, I think I would make two observations. One, we spend a lot of time focusing on the underlying businesses. You know, what's the long-term growth story? What's the market position? We don't look at these as financial transactions. We look at these as businesses. What is the organic growth of this company, and what's the ability of the sponsor and our ability to support and be a partner in growth of the business? It's a very different view in looking at the business than a financial transaction that somebody is looking to, you know, invest their capital, and it's a spread and a leverage decision that they make when they buy that paper.

Speaker #1: It's, Sean Paul, it's hard. I think I would make two observations. One, we spend a lot of time focusing on the underlying businesses. What's the long-term growth story?

Speaker #1: What's the market position? We don't look at these as financial transactions. We look at these as businesses. What is the organic growth of this company?

Speaker #1: And what's the ability of the sponsor and our ability to support and be a partner in growth of the business? It's a very different view in looking at the business than a financial transaction that somebody is looking to invest their capital and it's a spread and a leveraged decision that they make when they buy that paper.

Robert Marcotte: That's a different mindset, and we've always had that business orientation and focus, and that's where we align ourselves with the underlying sponsor. I think that's relatively unique, and the larger transactions, the larger funds, it's about putting money out and scaling and taking advantage of the opportunity, not necessarily as focused on the underlying business. You, you add the fact that, you know, it's a lot more efficient to raise capital in billion-dollar increments. I mean, what's the, what's the math? Last year in 2025, more than 90% of the private capital raised were in funds bigger than $1 billion. A billion-dollar fund is not gonna come down market to compete with us. It doesn't, it doesn't make economic sense. They can't put out the money fast enough to be able to achieve their investment opportunities.

Speaker #1: That's a different mindset and we've always had that business orientation and focus. And that's where we align ourselves with the underlying sponsor. I think that's relatively unique and the larger transactions, the larger funds, it's about putting money out and scaling and taking advantage of the opportunity not necessarily as focused on the underlying business.

Speaker #1: So you add the fact that it's a lot more efficient to raise capital in billion-dollar increments I mean, what's the math? Last year in 2025, more than 90% of the private capital raised were in funds bigger than a billion dollars.

Speaker #1: A billion-dollar fund is not going to come down market to compete with us. It doesn't make economic sense. They can't put out the money fast enough to be able to achieve their investment opportunities.

Robert Marcotte: We may see, you know, there are plenty of guys out there that are in our ZIP Code. It's four or five folks. We're also talking about a market that's broad and deep. If we're looking at, you know, 500 deals a year, and all we need to do is 20, you know, that's a good flow of opportunities that we can cherry-pick to make our investments. I don't think the big guys think that way. They think about they need to get a certain percentage share. They need to get a certain investment. They need to make a certain, you know, investment scale, and they're gonna continue to stay up market.

Speaker #1: We may see we have there are plenty of guys out there that are in our zip code. It's 4 or 5 folks. But we're also talking about a market that's broad and deep.

Speaker #1: And if we're looking at 500 deals a year and all we need to do is 20, that's a good flow of opportunities that we can cherry-pick to make our investments.

Speaker #1: I don't think the big guys think that way. They think about they need to get a certain percentage share. They need to get a certain investment.

Speaker #1: They need to make a certain investment scale. And they're going to continue to stay up market. I think it's going to be very difficult for them to come down market and think and focus on the lower middle market the way we are.

Robert Marcotte: I think it's gonna be very difficult for them to come down market and think and focus on the lower middle market the way we are.

Sean-Paul Adams: Got it. Appreciate the call. Thank you.

Speaker #8: Got it. I appreciate the color. Thank you.

David Gladstone: Thank you.

Robert Marcotte: Thank you all. I appreciate the time. You wanna wrap it?

Speaker #6: Thank you.

Speaker #1: Thank you all. I appreciate the time. You want to wrap it?

David Gladstone: We gotta take a minute. This is David Gladstone. I finally made it to work. Accident in our area, so it kind of clogged up everything. There's no accident at this company. It's very straightforward. We've watched all the private lending companies go over to the high technology area, and God bless them. I hope they make it. We're just gonna continue to do what we've done for the last 20 years, and that is look at solid small businesses and mid-sized businesses and finance them where they need it. Since there are no other questions, we'll see you next quarter. That's the end of this call.

Speaker #9: Oh, we got to take a minute. This is David Gladstone, I finally made it to work. An accident in our area, so it's kind of clogged up everything.

Speaker #9: There's no accident at this company. It's very straightforward. We've watched all the private lending companies go over to the high-technology area and God bless them.

Speaker #9: I hope they make it. We're just going to continue to do what we've done for the last 20 years and that is look at solid, small businesses and mid-sized businesses and finance them where they need it.

Speaker #9: So since there are no other questions, we'll see you next quarter. That's the end of this call.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.

Speaker #6: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.