On Thursday, Capital Southwest (NASDAQ:CSWC) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Capital Southwest experienced a 17% growth in its investment portfolio, increasing from $1.8 billion to $2.1 billion, with $762 million in new committed investment originations.
The company reported a 14% rise in investment income, reaching $232 million, and maintained a stable NAV per share of $16.69.
The company achieved a 40% return on equity for fiscal year 2026, despite market disruptions.
Weighted average leverage was reported at 3.6 times, with non-accruals reduced to 1.1% at fair value.
Capital Southwest raised over $465 million in new debt capital commitments, including a $350 million bond issuance.
The joint venture with Trinity Capital, CapTrend Partners, now holds approximately $85 million in assets, with plans to increase scale.
The company maintained strong dividend distributions, with a total of $2.56 per share for the fiscal year.
The lower middle market remains stable despite broader market slowdowns, with Capital Southwest focusing on disciplined transaction pricing.
Future guidance suggests continued growth in equity co-investments with a focus on conservative underwriting.
Full Transcript
OPERATOR
Thanks for joining Today’s Capital Southwest fourth quarter fiscal year 2026 earnings call. Participating on today’s call are Michael Zarner, Chief Executive Officer Chris Reberger, 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 Baker (Executive Vice President, Accounting)
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 Zarner
Thanks Amy and thank you everyone for joining us for our fourth quarter fiscal year 2026 earnings call. We’re pleased to be with you today to discuss our fourth fiscal quarter and the 2026 fiscal year. Overall, 2026 was an outstanding year for Capital Southwest by any measure. During the year we grew our investment portfolio by approximately $300 million, or 17%, from 1.8 billion to 2.1 billion. Deal activity was robust with 762 million in new committed investment originations. Additionally, we grew investment income by 28 million or 14%, from 204 million to 232 million. And despite a backdrop of pronounced volatility, we preserved the value of our portfolio. NAV per share closed the year at $16.69, essentially unchanged from $16.70 in the prior year, underscoring the resilience of our platform and the durability of our underwriting. As a result of our consistent investment strategy and strong operating performance, we’ve delivered an industry leading 40% return on equity for our shareholders during fiscal year 2026. Despite relentless market disruptions this year, from a major geopolitical event to the private credit contagion to the conflict in Iran, we continue to execute with consistency. The market has recognized that stability and our stock performance reflects the value of our approach. The quality of our debt portfolio remains strong, reflected in a weighted average leverage of 3.6 times, weighted average interest coverage of 3.5 times and non accruals of 1.1% at fair value down from 1.7% in the prior year. During the quarter, we saw improved performance across our watch list, with seven companies demonstrating meaningful progress and two removed from the watch list following a return to plan. We attribute much of this improvement to our Portfolio Operations group which works closely with our deal teams on credits that require additional support. This team is driving tangible value at the portfolio level, which in turn contributes to stronger overall performance and enhanced long term shareholder value. Additionally, our equity portfolio continues to perform well with net unrealized appreciation of 37.8 million or $0.62 per share as of the end of fiscal year 2026. We anticipate that a portion of this appreciation will be harvested as realized gains in fiscal year 2027 and thus will be available in our UTI bucket to support future dividend distributions. With $1.07 per share of undistributed taxable income, we are entering the year from a position of strength. Over the last 12 months, we have harvested $36.9 million in realized gains from equity exits, driving UTI growth from $0.79 per share in March 2025 to today’s level. Our UTI balance highlights both the reliability of our realization engineering and our conservative approach to dividend distributions when base rates were elevated, resulting in a meaningful balance of taxable income which we intend to distribute to our shareholders over time. Looking ahead, we are confident in our ability to continue generating real life gains that will support and expand our UTI balance. That confidence is grounded in the strength of our investment strategy in the lower middle market. At origination, we typically see three distinct avenues for equity value creation. First, new investments often present low hanging fruit opportunities, operational or strategic adjustments the sponsor can implement immediately to drive meaningful EBITDA uplift. Second, following a change of control, the sponsor and management team activate a set of targeted growth initiatives designed to accelerate both revenue expansion and margin improvement. Third, in many cases, the team has already identified actionable M&A opportunities that can further scale the platform, broaden its capabilities and diversify the business. As EBITDA grows and the business becomes more resilient and diversified, we expect these initiatives to enhance enterprise value and ultimately result in realized gains on our equity investments. We were also extremely active during the year in diversifying our sources of capital. We raised over $465 million in new debt capital commitments in the form of $350 million 5.9% bond issuance, $90 million in approved leverage commitments for our second Small Business Investment Company fund, and an additional $25 million in new secured debt commitments on our corporate credit facility. Additionally, we raised over $160 million in gross equity proceeds on our AGM program during the year at a weighted average price of 1.3 times the prevailing NAD per share. Having continual access to the public equity market through the at-the-market program is a tremendous tool which we can use in all market environments. We have also made meaningful progress on CapTrend Partners, our joint venture with Trinity Capital. The Joint Venture now holds approximately 85 million in assets and we expect to continue originating low leverage, high quality investments with within this structure. Subsequent to quarter end, we closed a $150 million revolving credit facility, further expanding the Joint Venture’s capacity and competitiveness. This facility provides the liquidity to meaningfully increase the scale of our joint venture over time and advance rates that should produce a 13 to 14% return once fully ramped. From a relationship standpoint, we could not be more impressed with Kyle and the entire Trinity team and we look forward to exploring additional avenues where we can create value for both organization. Finally, this year we continued our long track record of producing steady dividend distributions, consistent dividend coverage and solid value creation. Despite a year in which SOFR shrunk by approximately 60 basis points, we increased our total dividends paid from $2.54 per share in fiscal year 2025 to $2.56 per share in fiscal year 2026. Dividend sustainability, strong credit performance and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates consistent performance as well as the absolute alignment of all our decisions with the interest of our fellow shareholders. Although broader middle market M&A headlines have highlighted a slowdown tied to technology uncertainty and AI related risks and inflation concerns stemming from the conflict in Iran, our vantage point in the lower middle market tells a very different story. Activity in this segment has historically been and continues to be remarkably steady. Founder driven. Catalysts such as retirement, succession, planning, estate considerations and the desire to de risk after years of value creation do not fluctuate with macro sentiment or quarterly volatility. As a result, the lower middle market consistently offers a more resilient and predictable transaction environment, a characteristic that remains significantly under appreciated from a Capital Southwest perspective. We have seen a meaningful increase in new deals reviewed, advanced and ultimately closed. However, our close rate, which has historically averaged roughly 2%, has moderated to 1.5%. This decline reflects our continued discipline in pricing and structuring transactions based on the risk we underwrite, not simply the terms required to win a deal. We attribute the increase in deal flow to the continued development of our deal leads the addition of two Managing directors and the joint venture which has enhanced our competitiveness on higher quality opportunities. Despite this increase in deal flow, we’ve also seen tightening in leverage levels and loan to value ratios, underscoring the importance of maintaining our disciplined approach as the market continues to reprice risk. In summary, we are extremely …
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