Gladstone Investment (GAIN) Q4 2023 Earnings Call Transcript


Greetings and welcome to the Gladstone Investment Corporation Fourth Quarter and Year End Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please begin sir.

David Gladstone

Thank you, Latanya. And good morning to you all. This is David Gladstone, Chairman of the Gladstone Investment Corporation.

This is the fourth quarter fiscal year ending 2023, the year ending is March 31, 2023. And earnings and conference call for stockholders and analysts of Gladstone Investment listed on NASDAQ under the symbol GAIN or the common stock. And then we have two registered notes. One is GAINN and the other one is GAINZ so you can buy different securities in this fund.

Thank you all for calling in. We’re always happy to provide an update to our shareholders and to the analysts that follow us and give you a view of current business environment as well as what we’re trying to do with this fund.

But let’s start now with Michael LiCalsi. He’s our General Counsel and Secretary. And Michael, go ahead.

Michael LiCalsi

Thanks, David. Good morning, everybody. Today’s call may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors and they are based on our current plans, which we believe to be reasonable.

Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our Forms 10-Q, 10-K and other documents we filed with the SEC. You can find them on the Investors page of our website or the SEC’s website that’s And we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Please also note that past performance or market information is not a guarantee of future results. We ask that you visit our website once again,, sign-up for our e-mail notification service. You can also find us on Twitter, the handle there is @GladstoneComps, also on Facebook, keyword there is, The Gladstone Companies. And today’s call is an overview of our results through 3/31/23. So we ask that you review our press release and Form 10-K both issued yesterday for more detailed information.

Now with that, I will turn it back to Dave Dullum, President of Gladstone Investment. Dave?

Dave Dullum

Thanks, Mike. Appreciate it and good morning to everyone, listening in.

We are very pleased that we had another very good quarter and as importantly a very good and excellent year end results for the fiscal year ’23. For that year end, which ends as reported 3/31/23, we generated adjusted NII of $1.10 per share, which is actually up from $1 per share in the prior year and we also actually added some shares to the base as well.

We also increased the total fair value of our portfolio to $754 million from $714 million at the prior year end. This growth is a net of a couple of things. One, we increased assets through obviously new investments, which was for both buyouts as well as incremental financings and recapitalizations and some add-ons, which helps create value to our existing portfolio companies, and then it was reduced actually by two exits. So the net effect was an increase of roughly $40 million to the net value.

We did experience though a small aggregate net decline in valuations across the portfolio, mainly due to declining industry valuation multiples and even though we experienced an increased EBITDA at many of our portfolio companies. For fiscal ’23, we did invest a total of $133.7 million which is actually up from about $92.7 million in fiscal year ’22, of which $60 million was in one new buyout investment an additional $73.7 million was invested in various other existing portfolio companies with $45.5 million being invested as part of the recapitalization of two existing portfolio companies.

Now these recaps were not only opportunities for additional investment and retaining to very good companies in the portfolio, they also allowed us to recognize an aggregate of $15.6 million of realized gains and $9.3 million in dividend and success fee income. So recapitalization opportunities may present themselves from time to time and we will pursue them if we believe they are beneficial to shareholder value.

We also sold two portfolio companies which resulted in aggregate realized capital gains on equity of about $4.7 million and success fee income of $4.1 million. Also during the year, we were able to increase our monthly dividend, approximately 6.7% to $0.08 per share, which was up from $0.075 per share per month for an annual run rate of $0.96 per share. We paid an aggregate of $0.48 per share in supplemental distributions and that included a $0.24 per share supplemental distribution was paid in the most recent quarter, March 2023.

And subsequent to this quarter end, we declared another supplemental distribution of $0.12 per share, which will be paid in June of 2023 and therefore be a function of the fiscal year for 2024. We currently anticipate being able to fund future supplemental distributions as we do recognize realized capital gains on the equity portion of future exits and potentially from other recapitalizations, although we cannot guarantee the timing of capital gains on exits or obviously supplement reductions.

And as a point of reference, it’s important to note that since inception in 2005 for this fund and through this fiscal year-end 3/31/2023. We have invested in 56 buyout portfolio companies for an aggregate of approximately $1.6 billion, exited 29 of these companies when generating approximately $260 million in net realized gains and over $40 million now that income on these exits.

So it’s important to note that these results do reinforce the model and the success of our buyout focused strategy for this fund which is generating both income for the monthly distributions to shareholders, as well as these capital gains on equity for the supplemental distributions.

So looking forward and even though there seems to be some decline in the multiples being used to determine the values of buyouts, the market is still very competitive. Deal flow appears though to be picking up as sellers who have been holding back over the past six months are testing the market and we hear it from the M&A and the sell side bankers that we deal with that the backlog of new opportunities in fact has been building somewhat.

However, there continue to be significant liquidity in buyout funds, which is our competition, so we remain selective while we aggressively seek new acquisitions and we are patient in our diligence and review process. We are in the due-diligence phase on a couple of new buyout opportunities right now. So we’ll see how that plays out over the next few quarters and hopefully we’ll be adding to our portfolio in the new buyout phase.

So in summing up the quarter and the fiscal year and looking forward, we believe the state of our portfolio is very good. We have a strong liquid balance sheet, an active level of buyout activity and a continued prospect of good earnings and distributions over the next year.

So with that, I’ll turn it over to Rachael Easton to give you some more detail on our financials. Rachael?

Rachael Easton

Thank you, Dave, and good morning everyone.

Looking at our operating performance, we finished fiscal year 2023 strong, generating total investment income of $81.5 million up from $72.6 million in the prior fiscal year and adjusted net investment income of $36.7 million or $1.10 per share, up from $33.3 million or $1 per share in the prior fiscal year.

Focusing now just on the fourth quarter of fiscal year ’23, we generated total investment income of $19.9 million. This was down compared to $21.6 million in the prior quarter. The decrease was primarily due to a decrease in dividend and success fee income, the timing of which can be variable throughout the fiscal year. However, we also benefited from a $1.2 million increase in interest income during the quarter. This was driven by an increase in overall yields on our debt investments, which was directly correlated to increased LIBOR.

Net expenses decreased as of March 31, 2023 to $10.2 million from $13 million in the prior quarter, which was primarily due to a decrease in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP.

Net investment income for the quarter ended March 31, 2023 was $9.6 million or $0.29 per share, up from $8.6 million or $0.26 per share in the prior quarter. Adjusted net investment income for the quarter ended March 31, 2023 was $8.6 million or $0.26 per share, down from $10 million or $0.30 per share in the prior quarter.

While down for the quarter and as previously mentioned, adjusted net investment income for the fiscal year was up at $1.10 per share from $1 per share in the prior year. We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains based incentive fees, is a useful and representative indicator of our ongoing operations.

Consistent with the prior quarter, at March 31, 2023 we continue to have three portfolio companies that are on non-accrual status and we will continue working with those companies to get them back on accrual status when possible. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements to our success.

We have long-term capital in place, and at March 31, 2023, had over $144 million available on our $180 million credit facility. Additionally, during the quarter, we raised approximately $2 million in net proceeds under our common stock ATM program and we anticipate continuing to be active in the ATM program. Overall, our leverage is low with an asset coverage ratio at March 31, 2023 of 244.7%, providing plenty of cushion to the required 150% coverage.

Our NAV per share decreased to $13.09 per share compared to $13.43 per share at the end of the prior quarter. The decrease was primarily driven by $16.1 million of distributions paid to common shareholders as well as $5.1 million of net unrealized depreciation on investments. These amounts were partially offset by $9.6 million of net investment income generated during the quarter and $0.2 million of net realized gains on investments.

Consistent with prior quarters, distributable book earnings to shareholders remains strong, Previously in the year, we increased our monthly distribution to $0.08 per share for an annual run rate of $0.96 per share. And during this past quarter, in March 2023, we paid a $0.24 per share supplemental distribution.

In April, we declared an additional $0.12 per share supplemental distribution to be paid in June 2023. Using the monthly distribution run rate of $0.96 per share per year and $0.48 per share in supplemental distributions paid during the fiscal year of 2023, our aggregate fiscal year distributions would total $1.44 per common share or a yield of about 10.7% using yesterday’s closing price of $13.45.

This covers my part of today’s call. Back to you, David.

David Gladstone

Okay. Thank you. That was very nice Rachel, nice also from Dave and Michael LiCalsi, good information for our shareholders. This call and the 10-K filed with the SEC yesterday should bring everyone up to date and that 10-K is like the old days of having an annual report so we’ve changed, and that’s the only way we do it now no longer have those pretty annual reports we used to produce.

The team has reported solid results for the quarter and the fiscal year, including the buyout investments and the exit activity associated with realized gains. We believe the team is in a great position to continue these successes through the fiscal year ending March 31, 2024. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and from time to time, supplemental distributions from potential capital gains and other income. Team hopes to continue to show strong returns for your investment in our fund.

Now let’s stop, we’ll have some questions from the analysts and any shareholders who want to ask us questions. Latanya, would you come on and tell them how to do that?

Question-and-Answer Session


[Operator Instructions] Our first question comes from Kyle Joseph with Jefferies. Please proceed.

Kyle Joseph

Hi, good morning guys. Thanks for taking my questions. Just two quick ones from me first, in terms of portfolio companies, are you guys doing anything on the leverage front on existing portfolio companies in terms of managing leverage given a volatile environment. And then – and I know you guys have control of that given your strategy, which is obviously a positive and then on new transactions, any sort of changes in structure?

David Gladstone

Hi, Kyle good morning and thanks for the questions. Regarding the first question and the point you made is correct, we do, if you will, have influence, if you will, control over the portfolio companies we have. We have taken a review because obviously our investments in the debt securities of those companies, as you know, also floats, which is a good thing and now it’s floating of course with SOFR, which we’ve adjusted to.

So, we’ve taken a look at our portfolio companies just being sure that there’s no incremental stress as a result of that. And so far we feel pretty good about where we are. So short answer in that regard is no nothing that, we are needing to do or adjust regarding leverage there. And in terms of new deals going forward, I’d say nothing again really structurally.

What we are finding, which I kind of alluded to a little bit is those that we are interested in looking at and where we’re doing work, we do due diligence and so on that the valuations indeed have somewhat come down a bit. And so, we’re still able to maintain the relative ratio of the equity that we put in relative to the debt that we put in, which of course we try to stick with about a 70% debt 30% equity of the dollars that we put in.

And we’ve been able to stay I think pretty much within that look likewise going forward. Because again, we always strive to look at what the fixed charge coverage ratio is when we model out these transactions and when we structure the deals and always want to try to have a fixed charge coverage that’s going to be in excess usually about 1.2 times. And as long as we can hold that then the relative mix of debt and equity kind of falls out of that. So long answer to your question, but fundamentally right now no real change.

Kyle Joseph

Got it. Helpful. And you touched on where I was going with my second, but just in the wake of a regional bank, volatility. I just want to get a sense for valuation middle market and whether you’ve seen multiples compressed at all and how that impacts your outlook for your fiscal ’24 capital deployment opportunities.

David Gladstone

Right, so we – as I again sort of mentioned, at least through this quarter when – for our valuations, we did see pickup in some of our companies in EBITDA and we did see some declines in the multiples that are used for the valuation.

So as a result of that, the kind of mix we had a few that were sort of neutral not much of an increase and some of that actually took a little bit of a decline from valuation perspective, because mainly around the multiples. I may turn ask Rachel Easton to address that as well. She might have some thoughts along those lines going forward. Rachel?

Rachael Easton

Sure Dave. I think you’re right on there. So it’s those – kind of decreased multiples we did see across the portfolio that weren’t completely outweighed by the increased EBITDA. We saw a handful of our portfolio companies.

David Gladstone

Yes. And I think if looking forward obviously as I always like to say, we try to be really deliberate in our look forward and we are, as I mentioned, the good news is I think we are starting to see some interesting new investment opportunities and they’re kind of coming back to us a little bit in terms of valuation. So, we just have to see.

In terms of the only other thing that maybe what underlying your question is from a competitive perspective where some of these other private equity firms would be going out to get leverage say from whether it be banks or other third-parties. Our sense is that the leverage availability obviously is tighter.

So as a result of that, some of these firms are actually having – if they’re going to do a deal, have to put more equity in relatively speaking and that seems to be helping, if you will in terms of the valuations that we’re bidding against. So yes, it’s a little tighter and again for us, we have as Rachel mentioned, our line of credit with our banks and we have availability and we are able to still do our own debt and the equity when we buy a business.

Kyle Joseph

Great, thanks very much for answering my questions this morning.

David Gladstone

Thanks Kyle. Do we have any other questions, Latanya?


The next question comes from Bryce Rowe with B. Riley. Please proceed.

Bryce Rowe

Hi, good morning. Wanted to maybe start on some of the prepared comments there, Dave, around M&A chatter picking up here recently. Maybe just kind of help us think about What’s causing that or are you seeing sellers maybe just more comfortable with the environment, with the level of interest rates and the direction of interest rates – or like you said? Are you just seeing some – seeing the buyers kind of come back in terms of valuation and getting comfortable with kind of where valuations are today?

David Gladstone

Yes. I think when you look say going into the sort of end of last year, early part of this year and clearly uncertainty and both private equity firms that might have been looking to sell companies and sellers what we were seeing was a little bit of a, I’ll call it, not a pullback per se, but while there’s a flurry of activity, the quality generally speaking was frankly kind of medium, if you will.

And then subject now, of course, to kind of what’s going on the credit side obviously, And as this rest of the year plays out, what we are seeing is some of the companies are still coming to market now and deciding to say, okay look let’s – we think valuations are now settling down a bit. And as a result of that, they’re willing to come back into the market.

And actually when I was writing the – ironically the remarks, as you said, I was then on a phone with one of the M&A bankers we deal with on the sell side and said, look, here’s an idea what I think I’m going to say is that would just make sense and he said absolutely. So I think generally the idea that the backlog I think that they being the M&A bankers are seeing to some extent seems to be picking up.

Now again, how that’s going to play out again with some of the credit issues that looking forward, it’s hard to tell. But as of right now, I’d say we are probably looking at more legitimate opportunities and we were certainly probably three months ago.

Bryce Rowe

Okay. That’s helpful commentary. And then maybe a question on the income statement – looks like a fairly subdued quarter from an activity perspective within the portfolio. Can you speak to the nature of dividend, other success fee income that we saw on the income statement this quarter?

Rachael Easton

Sure, absolutely. I can take that one. The other income this quarter that we saw so, I was taking a step back, that line item is going to be a little bit volatile quarter-over-quarter and a little challenging to compare. So this quarter, what we really saw were prepayments of success fees from our portfolio companies. This is going to be compared to last quarter if you’re looking at it. We had a pretty large dividend recap amount from Old World.

Bryce Rowe

Okay. Okay. And those prepayments of success fees are those – you’ve got pretty good line of sight in terms of some potential, exits here in the next fiscal year?

Rachael Easton

So they’re not necessarily indicative of future exits. It is just that our portfolio companies sometimes from time-to-time will prepay those exits fees or success fees to us.

Bryce Rowe

Okay. Okay. Thank you very much for taking the questions.

David Gladstone

Thanks, Bryce.

Rachael Easton

Thank you.

David Gladstone

Are there questions, Latanya?


[Operator Instructions] There are no further questions in queue. I would like to turn the call back over to Mr. David Gladstone for closing comments.

David Gladstone

All right. Thank you very much for those two questions. They were very nice. We wish there were many more, but I guess we’ll just have to wait till next quarter. To get a whole slew of questions about what’s going on in the world, not that we have the answers, but we like doing the answering of our feelings. But that’s the end of this call. We thank you all – that’s the end, Latanya.


Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.