Capital Southwest (CSWC) Q2 Earnings call transcript Oct 29, 2025

Capital Southwest Corporation held its second quarter fiscal year 2025 earnings call, providing investors and stakeholders with an update on the company's financial performance and strategic initiatives. The call, led by Bowen Diehl, Chief Executive Officer, and Michael Sarner, Chief Financial Officer, among others, offered insights into the company's portfolio growth, investment strategies, and market positioning.

Strong Portfolio Performance and Dividends

Capital Southwest reported a pretax net investment income of $0.64 per share, fully covering its regular dividend of $0.58 per share and supplemental dividend of $0.06 per share for the quarter. The company's portfolio earnings remained robust, with an estimated undistributed taxable income of $0.64 per share. For the upcoming December quarter, a regular dividend of $0.58 per share and a supplemental dividend of $0.05 per share have been declared.

Market Position and Investment Activity

The lower middle market continues to be a competitive landscape for deal flow, with Capital Southwest's team maintaining its position as a premier lender. Deal closings have been lumpy from quarter-to-quarter, but the company's current backlog of deals indicates strong net portfolio growth in the December quarter. The deals underwriting currently have loan-to-value levels ranging from 35% to 50%, ensuring a significant equity capital cushion below debt investments.

Financial Performance and Liquidity

Capital Southwest's financial performance remains strong, with a robust balance sheet and liquidity, allowing the company to invest in new platform companies and provide financing for existing portfolio companies. The company's track record of producing steady dividend growth, strong dividend coverage, and solid value creation over the past decade underscores its commitment to shareholder returns.

Investment Strategy and Market Outlook

Capital Southwest's investment strategy in the lower middle market, primarily in first lien senior secured loans, continues to yield attractive returns. The company's equity co-investment portfolio, representing 9% of the total portfolio at fair value, provides shareholders with participation in the equity upside of growing businesses. The company's equity portfolio, marked at 132% of cost, reflects the potential for asset value appreciation and equity distributions to Capital Southwest over time.

Challenges and Opportunities

The company faces challenges such as increased competition from banks and nonbank lenders, but it is well-positioned with a conservative approach to leverage and balance sheet liquidity. The company's track record of navigating through various economic cycles and its strong balance sheet liquidity provide a solid foundation for future growth.

Conclusion

Capital Southwest Corporation's second quarter fiscal year 2025 earnings call highlighted the company's robust portfolio performance, strong financial position, and strategic investment initiatives. The company's focus on maintaining a conservative approach to leverage and balance sheet liquidity, while continuing to generate strong shareholder returns, positions it well for future growth. With a diverse portfolio and a strategic investment approach, Capital Southwest is well-positioned to navigate the competitive landscape and capitalize on opportunities in the lower middle market.