Hello, everyone, and thank you all for joining us during the Lytham Partners 2024 Investor Select Conference. My name is Roger Weiss, Vice President of Lytham Partners. During this fireside chat webcast, we welcome Gladstone Investment, NASDAQ's ticker symbol G-A-I-N for joining us. And coming or representing the company are David Dullum, President, and Rachael Easton, Chief Financial Officer. Also joining us today is Bryce Rowe, Senior Research Analyst with B. Riley Securities, whom we've asked to moderate today's fireside chat. A 20+ year veteran financial services analyst, Bryce has followed both banks and BDCs over his career and currently covers a wide array of business development companies at Riley, including Gladstone. Before I turn it over to Bryce, I want to remind everyone that management is available for one-on-one meetings throughout the conference.
If you've not already signed up and would like to schedule a one-on-one, please send me an email at Weiss@lythampartners.com or visit lythampartners.com/select2024. From there, you can click on the investor registration and make your one-on-one selection. Also, please note that Bryce and I webcasted an analyst roundtable on the BDC group earlier today. A replay link is available on the conference homepage. Again, that is at lythampartners.com/select2024, and then click Presentations on the top left corner. With that said, Bryce, the floor is yours.
Great. Thanks, Roger. Dave and Rachael, good to see you here on the webcast. And we'll get into it with some questions. Maybe start, Dave, with just a brief history of Gladstone Investment and, you know, the BDC's part within the broader Gladstone platform.
Okay. Thanks, Bryce. So, Gladstone Investment is one of four publicly traded entities, all actually trading on Nasdaq, that sit under a management umbrella, which is a privately owned management company called Gladstone Management Corporation. We have about 80 people in total in that organization, everyone associated with Gladstone Investment, and the other funds are all employed by Gladstone Management. Now, what's important about that for Gladstone Investment is that of those roughly 80 people, about almost a half, 40 folks, are associated with administrative function, which obviously means things like compliance, our finance function, which we do have a dedicated finance group within that, one of which is represented here today, Rachael Easton, our CFO. But it means that each entity has really good, strong administrative and back office, if you will, support.
As far as the actual entity itself, Gladstone Investment Corporation, we have our dedicated, I'll call them the deal-oriented folks, and so these are the people that are literally the ones that day-to-day are skilled and experienced in going out and sourcing, finding the business opportunities, doing all the diligence and all the work, and then subsequently managing the company on a pro forma basis, so the portfolio management aspect and so on. So it's a complete, well-run organization with the kind of talent necessary to achieve what we're trying to achieve.
Now, specifically, Gladstone Investment Corporation, which actually was created in 2005, and when the money was raised for Gladstone Investment Corporation, the objective was for it to be somewhat equity-oriented, which is a bit different than the majority of publicly traded BDCs, and I'll talk a bit more about that in a minute. The other fund that we have that is a BDC that is within the management company purview, is Gladstone Capital Corporation, and that actually was the first fund that we started with, and that money was raised actually in 2001. So today, Gladstone Capital Corporation, very active, they are a fairly traditional, credit-oriented BDC, which means they lend money primarily to private equity funds who are looking to do a buyout and are looking for the leverage.
Big differentiator between Gladstone Capital and Gladstone Investment Corporation is that Gladstone Investment, as I mentioned, is equity-oriented. And what that really means is that we, Gladstone Investment, are going out and looking for companies that we can acquire in a very, like a traditional private equity fund, but a very important aspect is that we, being Gladstone Investment, are providing both the debt and the equity to allow that transaction to take place, and we'll talk about that a little bit later as to how that and why that's important to someone as a shareholder. So a little bit of a differentiation there within the Gladstone family, and the other part of that would be, Gladstone Investment really considers that we compete with other private equity funds, not really with publicly traded BDCs that are primarily, as I mentioned, credit-oriented type funds.
That's a great synopsis, Dave, and you're spot on in terms of, you know, GAIN being differentiated from the bulk of the BDC space. So maybe let's talk a little bit about, you know, the investment focus. You hit on that a bit in your remarks just a few minutes ago. I want to also understand kind of the size of the companies in which you invest, the competitive landscape, and then what's the general mix of your debt investments or your loans versus your equity investments?
Certainly. Thanks. So I'll quickly say today, actually, we have 25 companies in our portfolio that we have significant ownership positions in, and our assets today are somewhere just around $900 million. And that is, again, we've grown from the very, very beginning in 2005. The type companies that make up that mix is generally companies that we have acquired over the years that range anywhere from about $5 million of EBITDA up to about $15 million of EBITDA. The sweet spot for us is around $10 million, because at $10 million of EBITDA, we are in a position, our fund, essentially in values that we would be looking at having to pay for these companies, where we actually, as I mentioned earlier, do all of the debt and all of the equity, which is really important to our model.
So the general structure is that anytime we acquire a business, about 30% of the money we invest is in equity of that company, and the balance, about 70%, is in the debt aspect of that company. And again, I will talk a bit more about that in a little bit about why that's important. But generally, our investment focus in business beyond that size are in companies, generally in the manufacturing space. We do a fair amount in business services, and we also do what I call specialty consumer-type products. So these are not generally retail operations, but these are companies that make products that, you know, are going to the consumer.
A good example would be, which most folks would know, Brunswick Bowling, as an example, is a company that we own that business, and they're the company that makes the bowling balls, the alleys, et cetera. So and that's a really good-sized business. So that's a typical type of business that we would like to own.
Dave, do you compete against other BDCs as you're trying to source these investments, or not? I'm just kind of curious how you stack up against, you know, for example, your sister BDC, GLAD, in terms of sourcing transactions.
Yeah, good question. So we would generally not really compete with GLAD from a sourcing standpoint, because generally, again, what they're doing is they're looking to the private equity funds as their leads to be involved in those transactions. However, we might be potentially competing with the private equity fund that might be looking at buying a business that we are looking at as well, which is generally going to be sourced through the investment banks, the traditional M&A, merger and acquisition-type shops that are around the country, and we have a very active sourcing program. So we cover the country with our deal folks, and we're out there all the time calling on, again, investment banks.
Generally, in the terminology, we are usually getting involved in these processes, where, you know, investment bank is representing a seller, whether it be another private equity firm who's selling a company in its portfolio, or a lot of times it's where there's an actual change of management teams or, you know, change of control in a particular company, and we come in, and we would invest in and get involved in that process. Now, the way we compete with other private equity funds and those types of processes are a couple of ways. First of all, the fact that we are an evergreen fund, being publicly traded, versus a traditional private equity fund, that is, you know, once they've raised one fund and they get that fully invested, they then have to go and raise the next fund.
We do not have to do that. We're able to access, obviously, capital, both common equity, debt securities, our own debt securities that trade publicly, and also bank line of credit. So we have a continual access to public markets that help to fund our activity as we go forward. So one advantage then is that we are evergreen, and we don't have to worry about sort of end of life for a portfolio company. And a lot of times that can be a real advantage because the management teams that we're investing with when we buy a business may want to stay with that business for many, many years, and we're not having to really force an exit or a transaction at the wrong time, if you will.
Yep.
Another advantage is that because we provide the debt and the equity to make the acquisition, as I mentioned, once we've decided, and we like the business, and we've got agreement with the selling group on a value, we do not have to then go to another third party, such as a traditional lender, and try to get them involved in the transaction. We're the ones, we being Gladstone Investment, are taking that decision. So it really has some, some real benefits versus our competition, again, being a traditional private equity fund.
Got it. That's helpful, and it's interesting. Roger and I, in the analyst roundtable, talked about the permanent capital nature of BDCs versus private equity funds being an advantage and a reason why BDCs will go public, is to capture that evergreen nature. One other thing we talked about in that analyst roundtable was, you know, NAV per share growth or net asset value per share growth being one of the primary fundamental metrics that I look at when I review BDCs. And, you know, this might come as a surprise to a lot of investors, but GAIN has the strongest track record of NAV per share growth over the last 10 years.
And better than, you know, better than names like a Main Street or an Ares that are more top of mind to investors. So can you talk about your investment approach that's really supported that level of NAV per share growth?
Yeah, sure, Bryce.
Dave, would you like to? Yeah, absolutely.
Yeah, absolutely. So the primary driver, I think, of GAIN's NAV growth, especially over that last 10-year period, really has been consistent and diligent portfolio growth. And we've really experienced that two ways. You know, first is gonna be both through meaningful new buyout investments, as well as add-on investments that we've made to existing portfolio companies. And then that second piece will just be value creation that we've experienced across the portfolio. So to that first point, as we look at our buyout strategy, you know, we have focused on investing in portfolio companies with proven competitive advantages and strong management teams. And as we've grown the portfolio, you know, we've also grown the size of our target investments.
So we're now looking, as Dave mentioned, to invest up to, you know, $75 million in potential new deals. And then we may look to create value in our investments through add-on acquisitions of these portfolio companies. So, you know, we consider this to be just a really positive event where we're able to increase our investment in a company where we know the management teams and the business, and where we believe we can continue to build incremental value. And it's gonna be that value creation where, you know, we see a real benefit, I think, from a NAV per share level as we hold that sort of 25%-30% piece of our investment portfolio in equity, and we're gonna be able to experience, you know, fair value fluctuations and ultimately generate returns at exit.
So as we look at our current portfolio, which also, I believe Dave mentioned, we're now at over $900 million in fair value as of this past quarter, you know, I think we have really seen that long-term benefit of the buyout-focused model, and how it directly correlates to that rise in NAV per share.
Got it. Yeah, that's helpful. And, you know, I think other BDCs that have, you know, that have done well from a NAV per share growth perspective also will take some equity positions in their investments, maybe not quite to the 30% level like you all do, but it's really been a strong driver of, you know, BDC performance over time is the ability to realize gains over time, first as unrealized appreciation, and then upon exit, you realize those gains.
It's a great strategy, and certainly, I appreciate it. So, you know, you've got this model where you take kind of a majority economic interest in your portfolio companies. It's different than most BDCs that are really just investing in debt alongside a private equity sponsor. And because of that, I would assume that GAIN has pretty good visibility into the health of its portfolio companies. Can you talk about y ou know, is that, first of all, true? And then number two, can you talk about the health of the portfolio today? How does it look and, you know, given what many would argue is at least an uncertain macro backdrop?
Sure. And I think, well, first to your question, is it true? The answer is yes. And a big part of that is, again, our model, as I touched on briefly in the beginning. It's important to maybe reemphasize it here, is that when we do debt and equity, we are very cognizant of the benefit to our shareholders in that the debt portion is important, right? Because that part is what's generating income, the interest we're generating on that part of the portfolio, roughly, as Rachael said, about 70% of our assets. And that we flow through, and I think Bryce, as you know, on a monthly basis to our shareholders in the form of a dividend. However, we also really think about these companies as a private equity-type person, and we're looking at where is the equity upside?
Not sacrificing the income part, but really where it stands on its own as well. So as we think about a new company that we're looking at, and when we try to model out what the upside might be or the relative risks that are associated with that, we really are thinking about having the ability to generate a significant capital gain as well on the equity portion of the investment, which further then comes along as we now do it nowadays, and have done it quite consistently, and hope to continue it, is with these supplemental distributions that are coming from capital gain.
So with that, it means therefore that we really have to think about these businesses, not just with a lender's hat on, but we have to think of in a holistic basis as this is a business. It's an operating business. We need to not only get ourselves geared in terms of the talent we bring in, the way in which we approach it and work with the business, really on the portfolio management side, to really help the business grow. And as Rachel said earlier, by being able to do add-on acquisitions and help create value that way. So that's a big part of our thesis. Because of all of that, we obviously have, you know, we always are gonna have a seat on the board of our companies.
We have the, the usual monthly and then quarterly, financial calls and, you know, and so on. We work with our companies on strategy. We also, unfortunately, from time to time, have to make changes in the management teams. So we're very proactive with the way in which we function and operate with our companies. Now, we as the sort of deal folks in Gladstone Investment, while, while any one of us is working on all of those aspects, we're not clearly going to run the businesses, but we get very involved in understanding what it's gonna take to run them. And if we bring in folks from the outside to help, we go do that. We're not just standing by.
One of the things that we've actually found that's helped us in that regard is we've started, I think it's around 13 years ago, what we call our CEO conference, and this is where we bring together all of the portfolio company CEOs, CFOs, and actually now it's expanded a fair amount, where we come together for, like, three days. And what we do there is have a really a networking environment where the folks from all of our portfolio companies have an opportunity to learn from and talk with the other management teams of the other portfolio companies that are quite different, perhaps, when you think about a manufacturing versus, let's say, a very creative sort of consumer-oriented type business. There's interaction there, so we really help facilitate that, and we found it to be really, really helpful.
We learn a lot as well because we understand more about what's going on with other companies. We bring in experts from outside to talk about different, aspects of running a business, and so on. As a result of all of that, we really do have, to your point, have a somewhat great degree of visibility into our portfolio companies. We can not only obviously have to react if things aren't going well, hopefully, frankly, we're getting ahead of the game, on certain aspects and can be, again, proactive in making that happen. With all of that said, and thinking about the macro side of things right now, again, you know, who knows where this, this year is going in 2024? Certainly, interest rates, you know, appear to be trying to moderate down, but no, no certainty with that.
But right now, I'd say all of our portfolio companies are in pretty good shape. You know, we focus a lot on their ability to pay us our interest. I think we're in good shape there. And frankly, subject to some crazy, you know, downturn of some kind, which I'm not sure we see, I think our portfolio is, again, as I say, pretty healthy and excited about where we are today.
That's great color, Dave, you know, I'm only aware of one other BDC that can put together a, you know, a CEO or CFO day like you just spoke of. So certainly impressive and an advantage to you all in terms of, you know, being that close to your portfolio companies. You know, let's shift to maybe portfolio mix, equity versus debt, and then, you know, want to make the comment that, you know, you can have i f you have a heavier equity piece of your portfolio, that can sometimes kind of translate into choppier quarterly earnings, you know, as you get dividends from equity investments, or you get success fees, when you have some level of an exit.
Can you talk about, you know, maybe how that mix, you know, impacts the dividend, you know, whether it be base versus supplemental, and then talk about maybe how you think about those, the payout of supplementals?
Sure. Maybe I can take the first part of that, and then Rachael could.
Sounds perfect.
Add in on it. I think the first part you touched a little bit on was the sort of mix between debt and equity, and.
Yeah
Sort of ties back to a comment I, I think I made a little bit earlier, because we are doing the debt and the equity in every deal, and they always will be linked. In other words, you rarely would find, unless something unusual happened, where we sold off, for some reason, an equity piece in one of our companies and just kept the debt. But you'll never generally see an equity investment in a company where there is not likewise a debt investment in that particular company on our balance sheet. And as I mentioned earlier, that's, that's on purpose. We, we do that, and the way we think about it when we're buying a business is, again, that 70-30 mix you've heard is, again, pretty much the formula that works for us.
And it works because what we think about is we want the total dollars to generate a cash-on-cash return that is certainly providing that, that sort of consistency of cash distribution, and therefore going to our shareholders in the form of dividends. So that mix kind of works for us and if we hold to that, with the idea then being that the equity piece is what's going to ultimately grow and provide this incremental mix. So it's a very thoughtful approach to, again, the blend, and that does lead to, as you say, where does our income come from to supplement the dividends, and so on? And maybe, Rachael, you might address that one.
Yeah, absolutely. I can jump in there. So I think, Bryce, the phrasing you used was choppier earnings, and, you know, I think that's right when you consider the portion of our portfolio that's invested in equity securities, but it's also gonna be the non-recurring other income streams that we have as well. So kind of taking a look at our regular monthly distribution strategy first, that's gonna be supported by the investment income that's generated from our portfolio. And that income's comprised of two distinct buckets. We have interest income we earn on those debt securities, and then we also have other income, which can be comprised of dividends on our preferred equity investments or success fees.
So this is gonna be different from how we consider our supplemental distributions, as those are generally supported by significant realized capital gains that we've historically earned on the exit of the equity portion of these investments. So I guess sticking with the regular monthly distribution piece of this that's earned through the investment income, this other income bucket can be a bit volatile when we look at it kind of quarter-over-quarter, you know, sometimes even year-over-year. But we do factor in that volatility as we consider our distribution strategy annually. So just high level to kind of cover what's in that other income bucket. So as I mentioned, we do have dividend income, so that's gonna be, you know, dividends on preferred equity investments in our portfolio.
Typically, it's a stated rate, typically 8%, that we may take time to time, but it will be dependent on the ability of the portfolio company to support paying a dividend, and so that's why it might not be as consistent as our regular monthly interest income. And then the second component is our success fees, which most of our debt investments generally have success fees that are contractually due upon a change in control. So that's typically as a result from an exit or a sale. But we don't only earn these fees when an exit occurs. Sometimes it is common practice for some of our portfolio companies to choose to prepay these fees from time to time, and not just upon exit, so that can create variability across periods as well.
But, you know, ultimately, despite this volatility, you know, I think Gladstone Investment's goal is to pay out stable dividends with steady growth. Our regular monthly distribution growth is gonna be directly correlated to the growth in that level of investment income, both in the consistent interest income and these more variable income streams. But just to take a look back, since inception, through this current quarter end at 12/31, GAIN has paid 222 consecutive monthly distributions to shareholders. And taking a look at the last several years, since fiscal year 2011, and we like to use that as sort of a stake in the ground of when we believe GAIN's buyout focus strategy was really established.
But we've seen a regular distribution annual run rate increase of 100% since then. So that was from $0.48 per share annually in FY 2011 to $0.96 per share annually that we have today.
Impressive growth, for sure. When investors probably look at whether it be Yahoo or Bloomberg, they would likely see a lower stated dividend yield just because of the base dividend, and it's not gonna incorporate supplementals in there. How do you guys think about maybe or how would an investor think about judging the potential for future supplementals? What would they look at, you know, within the portfolio or balance sheet income statement to try to understand, you know, what that might look like?
Yeah, absolutely. So as I mentioned, our supplemental distribution strategy, you know, it's gonna be linked to the capital gains we generate on exits of our equity portion of our investments. So this is not something, you know, we can guarantee that we'll have future declaration of supplemental distributions, but it's most definitely our goal to continue this practice, and we're really committed to working towards that goal. So, one thing to note is, last quarter, we had a very large supplemental distribution that we paid out to shareholders, an aggregate of $1 per share across November and December, which we were very proud of. And this was in addition to an additional aggregate of $0.48 per share in supplementals we had paid already during the calendar year 2023.
So the GAIN model, it includes that target investment mix of 25%-30% equity, and, you know, that has the potential for these high returns through the realized capital gain appreciation on exit. If we look at our historical returns since inception, we have an average cash-on-cash return of nearly 4x , and that's really what's, you know, fueling these supplemental distributions. So our ability to pay them out is gonna be supported by those gains. So, you know, investors can monitor our exits as they progress, and any associated realized gains that we disclose publicly, as well as kind of recent historical levels of supplementals to kind of judge for that future supplemental potential.
Got it. And I would assume you can also kind of look at the scheduled investments and see where you might have some unrealized appreciation that could eventually convert into a realized gain that would help fund a supplemental.
Yes, exactly. And, you know, I think, it, it's gonna be, you know, directly tied to our exit strategy, and, and it is constantly evolving. So you can look at the schedule of investments and kind of see how that portfolio is maturing, and yes, kind of the, the unrealized appreciation that might exist on some of those longer-held investments.
Got it. Got it. All right, maybe one last topic, as we're getting to the end of our time here. So Roger and I talked about balance sheet leverage in that analyst roundtable and kind of, you know, made the point that maybe lower balance sheet leverage creates a lower risk profile. GAIN actually has, you know, very low balance sheet leverage, lower than most BDCs. Can you talk about, you know, maybe why that is? I think Dave, you know, referred to, you know, the various sources of debt capital that GAIN uses, but can you talk about, you know, how you source that debt capital, and then are you raising equity to, you know, at the same time to help manage the balance sheet?
Yeah, absolutely. I completely agree with what you just said. You know, I think we believe that lower leverage really produces a better risk profile. We believe the market appreciates that, and kind of overall, I'd say Gladstone Investment, you know, we're probably more conservative in practice than most. And we do look to kind of aim to keep a very conservative leverage profile. You know, one thing we are very mindful of is the 150% asset coverage test that BDCs are required to maintain. So that's, you know, an asset coverage to debt of 1.5- 1. Right now we're in kind of the low 200%, which, you know, plenty, plenty of room there compared to the 150%.
So, you know, as we look at our various capital, you know, sources, you know, we are focused on, I think, primarily, a few things. So first of all, we have long-term fixed-rate financing, and we look to meet our funding needs that way, and supplement that with usage of our credit facility. So we have three publicly traded notes, GAINN, GAINZ, and GAINL, on Nasdaq, which in the aggregate represent about $340 million of outstanding debt. That was about 83% of our total debt outstanding as of our last reporting.
Those public notes don't mature until 2026 and 2028, so they've really allowed us to lock in for the last handful of years long-term capital at very attractive interest rates, 4.875%, 5%, and we also have some at 8%. Additionally, we have our credit facility, and that provides us with flexibility of accessing debt capital when needed. And then in addition to our ability to access the debt markets, GAIN also has a common stock ATM program in place. It was last established in August 2022, and that allows us to tap into the equity market when prices are at a premium to NAV. You know, we really consider this to be a great way to supplement all our borrowings with accretive equity capital. And so we just consider this a really valuable tool in our capital-raising toolbox.
So while we aren't necessarily selling, you know, maybe large amounts at a time, we do look at these equity sales as, you know, really helpful in keeping the 150% coverage requirement in check, and also and allowing us to kind of keep that conservative coverage ratio in check as well. So as we look at, you know, our deal pipeline and as we're targeting these new deals up to $75 million in total investment size, you know, we wanna keep that leverage cushion ample in order to allow us to absorb any additional debt financing that we may need to fund the pipeline, and then we have the ATM tool in place where we can supplement that with additional capital as needed.
The other piece to add to that, maybe very quickly, is the fact that-
Sure.
We do have the, obviously, the equity pieces, which we, as we pointed out earlier, exit from time to time.
When we do exit, then we generate these significant capital gains. We actually utilize some of that capital. We obviously make these supplemental distributions to shareholders, but also gives us the ability to pay down on our revolving line of credit. So really, as Rachael said, when we look out and in doing our projections, you know, estimating what transactions we may be doing, new investments we've been making, we're always cognizant of that, maintaining that debt-to-equity ratio. And if we think, you know, for a reason, we think, "Geez, because we're doing more l ook like we're making more investments, we're gonna need more capital," we really think through, do we wanna go and do another equity raise or, you know, how we supplement that, plus factor in potential exits that we think may happen. So we really try to balance it.
I would say, I don't want to say we'd have a stated policy, but I think we'd be really always at the point where we would never wanna probably get much lower than perhaps 170, you know, this 150% ratio you heard, but maybe 170. Always try to keep it and always having access to the public markets to do equity or certainly some kind of debt security.
That's great. I think this was helpful, this discussion we just had, and appreciate your time. And I'll turn it over to Roger for closing remarks or kind of exit remarks.
Very good. David and Rachel, Bryce, we really appreciate your taking the time to join us. I learned a lot about Gladstone, and I'm sure our viewers will find it both an educational and enlightening as well. As we wrap up, two quick reminders: to anyone out there who's not already signed up for the one-on-one, again, please send me an email at weiss@lythampartners.com, or again, visit lythampartners.com/select2024 and click the Enter Conference Site button. And don't forget about the BDC Analyst Roundtable that Bryce and I participated in earlier today. Webcast links are available at the conference homepage at, again, lythampartners.com/select2024, and click on Presentations in the top left corner. I hope you all can join us. And Bryce, David, and Rachel, thank you again. We hope you enjoy the conference.
Thanks, Roger.
Thanks, Roger. Thanks, Bryce.
Thanks.
Bryce, thank you very much for being here.
Absolutely.