Capital Southwest Corporation (NASDAQ:CSWC) Q2 2026 Earnings Call Transcript

Capital Southwest Corporation (NASDAQ:CSWC) Q2 2026 Earnings Call Transcript November 4, 2025

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

Amy L. Baker: Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management’s expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest’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 after the date of this press release, except as required by law. I will now hand the call over to our President and Chief Executive Officer, Michael Sarner.

Michael Sarner: Thanks, Amy, and thank you, everyone, for joining us for our second quarter fiscal year 2026 earnings call. We’re pleased to be with you today to discuss our second fiscal quarter as well as share our observations on the current market environment. During the second fiscal quarter, we generated pretax 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. Over the last 12 months, we’ve harvested $44.8 million in realized gains from equity exits, which is the main driver of our growth in UTI per share from $0.64 in September 2024 to $1.13 today. Furthermore, our Board of Directors has declared a total of $0.58 in regular dividends for the quarter, payable monthly in each of October, November and December 2025, and has also declared a quarterly supplemental dividend of $0.06 per share, bringing total dividends declared for the December quarter to $0.64 per share.

On the capitalization front, we successfully raised $350 million in aggregate principal of 5.95% notes due 2030. Subsequent to quarter end, the proceeds from these notes were partially used to redeem in full our outstanding $150 million notes due October 2026 and our $71.9 million notes due August 2028. Importantly, the redemption of these notes did not require a make-whole premium to be paid in either case. We believe this new capital enhances the strength of our balance sheet and alleviates any concerns surrounding near-term bond maturities with our earliest unsecured maturity now in fiscal year 2030. Finally, we raised approximately $40 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22.81 per share or 137% of the prevailing NAV per share.

Deal flow in the lower middle market continued to be robust this quarter with $245 million in total new commitments to 7 new portfolio companies and 10 existing portfolio companies. 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. Over the last 12 months, add-ons as a percentage of total new commitments have been 39%. So this is clearly a strong source of origination volume in deals we know well and have experience with the management team and sponsor. Additionally, the weighted average spread on our new commitments this quarter was approximately 6.5%, which we view as strong in a tight spread environment.

I will now hand the call over to Josh to review more specifics of our investment activity and the market environment.

Josh Weinstein: Thanks, Michael. This quarter, we deployed a total of $166 million of new committed capital, including $162 million in first lien senior secured debt and $3 million of equity across 7 new portfolio companies. In addition, we closed add-on financings for 10 existing portfolio companies, consisting of $79 million in first lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.7 billion, representing year-over-year growth of 24% from $1.4 billion as of September 2024. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%.

We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, pari passu with the private equity firm when we believe the equity thesis is compelling.

As of the end of the quarter, our equity co-investment portfolio consisted of 83 investments with a total fair value of $172 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 126% of our cost, representing $35.8 million in embedded unrealized appreciation or $0.63 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential from strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest over time.

Consistent with previous quarters, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and nonbank lenders. While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to the macroeconomic uncertainty, the depth and strength of the relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk return profiles. As a point of reference, currently, there are 85 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months, we closed 17 new platforms with financial sponsors with which we had not previously closed the deal, demonstrating our continued penetration in the market.

Since the launch of our credit strategy, we have completed transactions with over 120 different private equity firms across the country, including over 20% with which we have completed multiple transactions. Our portfolio currently consists of 126 portfolio companies weighted 89.9% to first lien senior secured debt, 0.9% to second lien senior secured debt and 9.1% to equity co-investments. The credit portfolio had a weighted average yield of 11.5% and weighted average leverage through our security of 3.5x EBITDA. We continue to be pleased with the operating performance across our loan portfolio. All our loans upon origination are initially assigned an investment rating of 2 on a 5-point scale, with 1 being the highest rating and 5 being the lowest rating.

Overall, the portfolio remains healthy with approximately 91% of the portfolio at fair value rated in one of the top 2 categories, a 1 or 2. Cash flow coverage of debt service obligations has reached 3.6x, the strongest level in the past 3 years, reflecting an improvement from the 2.9x low observed during the peak of base rates. This enhanced coverage underscores the strength of our portfolio with our loans averaging approximately 43% of portfolio company enterprise value. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio. For the new platform deals we closed in the September quarter, the weighted average senior leverage level was 3.6x debt to EBITDA and the weighted average loan-to-value level was 36%, resulting in significant equity capital cushion below our debt.

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

Chris Rehberger: Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $34 million or $0.61 per share. For the quarter, total investment income increased to $56.9 million from $55.9 million in the prior quarter. The increase was driven primarily by a $1.3 million increase in fees and other income, which was offset by a decrease of approximately $500,000 in PIK income compared to the prior quarter. Importantly, PIK 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 nonaccrual represented 1% of our investment portfolio at fair value. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend.

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

LTM operating leverage ended the quarter at 1.6%, a slight decrease from the prior quarter. Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best-in-class BDC. The company’s NAV per share at the end of the quarter was $16.62 per share, an increase from $16.59 per share in the prior quarter. The primary driver of the NAV per share increase was the accretion from the ATM equity program during the quarter.

As Michael mentioned, during the quarter, we successfully raised $350 million in new 5.95% unsecured notes due September 23. Subsequent to quarter end, the proceeds from these notes were partially used to redeem in full our $71.9 million August 2028 notes and $150 million October 2026 notes with no make-whole payment required on either redemption. The cost of the $350 million notes at 5.95% fixed was approximately breakeven with the cost of the debt we subsequently paid off, inclusive of the secured credit facilities. We view this capital raise as a highly favorable outcome for both the company and its shareholders as it strengthens our balance sheet and positions us to thrive across a wide range of capital markets environments. We are pleased to report that our balance sheet liquidity is robust with approximately $719 million in cash and undrawn leverage commitments on our 2 credit facilities, which represents over 2x the $334 million of unfunded commitments we had across our portfolio as of the end of the quarter.

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

I will now hand the call back to Michael for some final comments.

Michael Sarner: 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. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brian McKenna of Citizens.

Brian Mckenna: So it’s clearly a strong quarter of origination activity. It does feel like industry-wide M&A has picked up pretty meaningfully even since the last earnings call. So what does the pipeline look like heading into year-end? And then is there a way to think about the size of the pipeline today relative to the last quarter or 2 or even a year ago?

Michael Sarner: Yes. Look, we definitely have seen, at least in these 4 walls, a significant uptick just in the size of the pipeline, top of the funnel. I think we did $248 million this past quarter and had 7 platform companies and 10 add-ons. I think the add-ons has been a steady drip, and that’s been pretty consistent. I think we’ll continue to see 8 to 12 transactions a quarter. From the new origination side, I think this coming quarter, the 12/31 is probably going to look based on what we’re seeing today, similar volume to what we saw in the 9/30 quarter. And then looking ahead, it just feels like the — our principals, MDs, we’ve made significant headway with sponsor activity, and we continue to see a lot of their quality deals. And so we don’t really see any reason for the growth to slow down. So I think where we used to originate $100 million to $125 million a quarter, I think we’re doing something closer to $150 million to $200 million on a normal quarter.

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

Michael Sarner: Yes. We’ve mentioned on previous calls that we’re looking to monetize our investment platform to enhance our competitive position in the market as well as potentially bring in fees and additional economics for what we do. So certainly, that — 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 time. So that’s something that we’re looking at. We since we — in the last 8 months, we’ve grown a portfolio operations group 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. So I think it’s just building for growth because coupling — taking these 2 questions together, we’ve seen really remarkable growth on deal volume, which doesn’t always portend to deals that are closed, but getting that funnel larger leads to better quality deals.

So we’re definitely — there’s a focus internally. Our operating leverage is quite low in the market, but we are looking to continually add to our staff so that we can be ready for the growth that comes.

Operator: Our next question comes from the line of Doug Harter of UBS.

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

Michael Sarner: Yes, I’ll give my remarks, and I think, Josh, you should as well. But I mean we just looked at it over the last 12 months, the growth in EBITDA and revenue of our existing portfolio company has been about 10% growth annually, which is still very healthy. If you look back maybe 18 months, 24 months ago, it might have been something closer to 15%. So it slowed a bit. But when we’re looking at our individual portfolio companies, there they’re performing extremely well. We’re not really seeing any one particular industry that has issues. The one thing that’s gotten more difficult, I think, in the boardroom is just the changing environment in terms of what’s coming out of the White House and how it impacts potential industries on a go-forward basis, right?

Things — nothing has stayed the same. I feel like we’ve got our nose buried in the news more today than we ever have to make certain that we understand the impact on our portfolio, but also what’s investable going forward. Josh, do you have anything?

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

Michael Sarner: 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 has stayed very conservative and consistent. I mean we look at it, I think, over the last 9 months, we’ve seen, I think it was 36% loan-to-value and 3.4x leverage. So companies aren’t stretching. They’re just basically the portfolio — the borrowers are getting lower spreads for sort of the same amount of debt. So that’s — for us, that also in a market where there was certainly a feeding frenzy over the last 12 months, the fact that, that discipline maintained is a strong — project strong going forward.

Operator: Our next question comes from the line of Mickey Schleien of Clear Street.

Mickey Schleien: In your internal ratings, you’re showing about 9% of the debt portfolio performing below expectations. It looks like those are names like Bradner, Apple Roofing, [ Monster Script ], LL Flex, U.S. Telepacific and Everest. How do you describe the trends overall affecting those companies and their outlook?

Michael Sarner: 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. So they’re 2.5 or 3x, and they have covenant cushions of 30%. So when we have a default in our portfolio, these credits are defaulting somewhere between 4 and 6x. So I’d say that to sort of frame that these companies aren’t in dire situations when they show up on our watch list. They are obviously having issues, but they have private equity sponsors that are supporting the deals. In terms of the individual.

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

Mickey Schleien: Yes, that’s what I was getting at actually. And on the flip side, you have about 20% of the portfolio performing above expectations, which is great, but that could imply meaningful prepayment risk. What is your gauge of that risk? And how much could that impact the portfolio’s yield, obviously, excluding the fees that you could collect on those prepayments?

Michael Sarner: So I think this goes back to our discipline on granularity. When we were $500 million fund of assets, we were originating $12 million or $13 million per asset. Today, we’re $2 billion, and we’re still originating around $15 million, $16 million per hold. So really, we — I don’t — I think that cuts from both prepayment risk as well as nonaccrual risk, the portfolio is granular enough that no one credit is going to have a material impact. And in fact, in the 6/3 quarter, we had — I can’t remember what company it was, but we got repaid, I think it was in the tune of what, $50 million came back. And we still posted $0.61 this quarter. So we don’t live in fear of that. Our top 5 is not significantly larger than the rest of the portfolio, and that’s by design.

Chris Rehberger: Yes, 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 1 bucket for outperformance. And that is not correlated directly to sort of 20% of prepayment per year. Our prepayment is more like 10% to 12% per year as a percentage of the portfolio. So it’s an indication of performance, but it doesn’t necessarily indicate that all of those are going to prepay in the near term.

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

Michael Sarner: Well, kind of given a breakdown, by the way. So over the last 6 months, our spread has actually stayed pretty constant. And give you an indication for this quarter, we had 7 new portfolio companies. The range of yield or spread was 5.50% at the lowest and 7.25% at the highest. The add-on activity was at 6.7%, so blended 6.5%. So I don’t think it’s meaningfully off of our pace. The other part I would notice that so one of our — probably our top performing portfolio company, our largest hold is due to its equity appreciation. 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 yields. So that could actually be an uptick as well as obviously an increase to our UTI bucket.

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

Michael Sarner: Sure, sure. I actually would go back in time. If you look at the 3/31 quarter, our spread was — our total yield was 11.68%. It went up to 11.83% in the 6/30 quarter, primarily because we had one large exit that I just mentioned that had 16 basis points of accelerated OID. So it was actually a bit juice. So this quarter, it came back to the same 11.68%, but then we did see 8 basis points reduction due to nonaccruals and just 5 basis points based on compression.

Mickey Schleien: Okay. And lastly for me, could you give us some guidance on stock-based compensation and salary expense for the fourth calendar quarter, the quarter we’re in right now, given that there’s some seasonality that would be helpful for us.

Chris Rehberger: So there won’t be seasonality on the RSU expense. So that should be consistent with the current quarter. For the cash compensation, that is really going to be dependent on our performance during the quarter. I would say that it’s somewhere between flat with 9/30 and maybe slightly elevated based on some of the staffing initiatives that Michael laid out. So that’s — but it’s really dependent on where we — how we perform for the quarter and how much bonus accrual we end up taking.

Operator: Our next question comes from the line of Erik Zwick of Lucid Capital Markets.

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

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

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

Michael Sarner: Another thing to notice is that with our operating leverage has come down, obviously, we’ve grown our portfolio and our funnel has gotten larger. So we can be just generally speaking, more discerning. We’ve started — we have the ability now with our cost of capital to originate deals that are $550 million, $575 million. And I always say to these guys, like 4 years ago, our deals needed to be $750 million and above, and it was $650 million. So today, we can see sort of the whole gamut of investments in our space. And we can opt out of the ones that have hair on and originate the ones that are just — when we’re forced ranking deals that are in the same industry that we feel have the most competitive advantages.

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

Michael Sarner: So we’ve done it both ways. I would tell you right now, we are sort of aimed to do all of the above. We’re certainly looking on the originator side to bring in another resource to cover one of the coasts that we don’t cover quite as strong as we’d like to. We’re bringing in several people on the analyst side to start supporting the pyramid. And we’re also looking for another Operations VP. I kind of noticed earlier, that’s a department that we feel like adds a lot of value. And when we say that, we — the operations group works alongside our deal team. So we get basically 2 opinions when we come into the boardroom to make better decisions before we put good money after bad. So I actually think it’s sort of up and down the organization. I think what we’re seeing today, we have enough staff to support it. But where we’re going, it’s going to require just a more scalable infrastructure.

Operator: Our next question comes from the line of John Hecht of Jefferies.

John Hecht: The first one is you guys have on the margin, made some — you’ve added the bond, you’ve used your ATM, you’ve got your SBIC. So you’ve 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 be influenced by interest rate changes?

Chris Rehberger: So I don’t think so. If you look at — we obviously, as we mentioned, we did the $350 million unsecured. We redeemed those prior 2 bonds. We’re in a really good situation from a liquidity perspective. I think we’ll continue to use the SBIC. That will be a main source of sort of new capital for calendar year 2026 and continue to create flexibility under our secured credit facilities to make sure that we have adequate liquidity. But I don’t think that you’ll see a major shift from sort of where we sit today in our philosophy on the mix of unsecured debt, secured debt and SBIC.

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

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

Operator: Our next question comes from the line of Robert Dodd of Raymond James.

Robert Dodd: In your prepared remarks, no, I think obviously looking to monetize the investment platform via asset management. Correct me if I’m wrong, it seems like you’re indicating there could be something on the table on that front within the next 12 months or something like that. So maybe I was reading too much into your wording, but if you could give us any more color there. And I mean, obviously, that would be an excellent low capital miss given you’d just be using the predominantly the staffing you already have — would there be any — yes, sorry, go ahead.

Michael Sarner: Look, yes, look, these processes tend to take a lot longer than you hope or you think going in. Yes, it definitely answers like we have a direction. I think backing up, we’ve been seeking out partners to help grow and I said monetize on our investment platform that we’ve built over the last 10 years. And I think been on the road 3 years doing it, and I think we finally sort of to hone on the right structure and found potentially a partner that is someone that’s like-minded. I don’t have anything to announce right now, but we’re hopeful as we keep pushing along that, that will be something that we can make an announcement, and it would be net helpful to this organization going forward.

Robert Dodd: Got it. Got it. Then just another — any — has there been any changes in thought on — you mentioned the equity co-invest where you’ve got a really good track record and unrealized appreciation in the portfolio. I mean, at the margin as spreads come in a little bit, within your end markets. Is there any appetite to maybe tweak the amount that goes into equity up a little bit? I mean if the spreads tighter and it’s a good equity story, does it make sense to allocate a little bit more to that side of the book to kind of improve the total return or IRR over the life of an asset if you’re giving up a little bit on a spread for a high-quality business?

Michael Sarner: Yes. It’s a good question, and it’s something that we grapple with internally. As our hold sizes get larger, but we’re still playing in the same bailiwick. Our debt check will probably be a larger percentage of the total invested capital with equity still being in the usually $0.5 million to $1.5 million. We do have an interest in doing so. I think that the way you get that accomplished is potentially seeing more non-sponsored deals, which we do see a pipeline of non-sponsored deals, which require usually it’s a smaller debt check and a larger equity check. But a lot of those deals have a lot of hair. And so I think the old saying we got to kiss a lot of frogs there. So I think we — that is — when I talked about scalability, that is an area we may add some more resources to be able to do so.

It does fit nicely in our business strategy because we are our SBA, right? Those are usually going to be the small to smaller businesses. And so the answer is yes, we’re around 9% equity today. I would like to see it grow. I don’t think that’s going to happen in the next 6 to 12 months. But I think over the next 24 to 36 months, that’s something that we are geared toward working towards.

Operator: Our next question comes from the line of [ Dylan Hynes ] of B. Riley Securities.

Unknown Analyst: I was just wondering, so while rate cuts are slowing, if your commitments growth maintains moving forward, do you expect the yield dilution to be roughly the same quarter-over-quarter as it was from last quarter to this quarter?

Michael Sarner: It’s a tough question to answer. I mean we are — over the last 3 quarters, as we noted, we haven’t seen that degradation. The deals that we are seeing in our pipeline for this quarter and maybe we’re working on for the subsequent quarter, probably similar yield profiles. So I don’t see the yields coming down. I think also some of the activity we’re working on might allow us to continue to either hold or improve our spreads going forward, some of the kind of the other activities we’re working on. So yes, I don’t think — I’m not expecting over the — from a spread perspective. On the base rate, right, obviously, with SOFR, that’s coming down. That’s out of our control. But we built a portfolio on an income statement, we think that’s positioned well, both with our regular dividend as well as our UTI bucket.

Operator: Thank you I’m showing no further questions at this time. I would now like to turn it back to Michael Sarner for closing remarks.

Michael Sarner: Well, we appreciate everybody joining us today. We look forward to speaking to you in 3 months. Have a good weekend.

Operator: All right. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.