Gladstone’s NAV Surges on EBITDA Gains, Not Multiple Hikes

Date of Call: Feb 4, 2026

Business Commentary:

Portfolio Growth and Diversification:

• Gladstone Investment reported adjusted NII of $0.21 per share, with total assets reaching about $1.2 billion, up $92 million from the prior quarter.
• The increase in assets resulted from one new buyout investment and significant appreciation in the investment portfolio.
• The company currently has 29 operating companies and continues to grow its portfolio through acquisitions at attractive valuations.

Impact of Interest Rates and Spread Compression:

• Gladstone's weighted average yield decreased modestly from 13.2% to 12.9%, aligning with a 32 basis point decrease in SOFR.
• To mitigate the effect of declining SOFR, the company includes interest rate floors in its debt investments, typically set between 13% to 13.5%.
• Over half of the debt portfolio is currently at these interest rate floors, providing protection against future rate declines.

Unrealized Gains and NAV Appreciation:

• The company's net asset value (NAV) increased to $14.95 per share, driven by $1.77 per share of net unrealized appreciation and $0.09 per share of net realized gains.
• The unrealized appreciation was primarily due to increased performance and higher valuation multiples across the portfolio.
• Portfolio company valuations increased significantly, with some companies like Schylling, Old World, and SFEG showing large increases in value.

Liquidity and Balance Sheet Management:

• Gladstone maintains a strong liquidity position, with a total commitment level of $300 million under its credit facility and approximately $171 million in remaining availability.
• The company redeemed its 8% notes and issued new 6.875% notes, reducing its interest burden by approximately 110 basis points.
• The company emphasizes proactive balance sheet management to support portfolio growth and manage fluctuating interest rates.

Nonaccrual Investments and Asset Quality:

• Gladstone has 3 portfolio companies on nonaccrual status, representing 3.8% of the total portfolio at cost and 1.5% at fair value.
• The company is working with these companies to support efforts to return to accrual status or pursue exits.
• The outlook for these nonaccrual investments is positive, with potential for improvement or exit in the future.

Sentiment Analysis:

Overall Tone: Positive

• Management stated the portfolio is in good shape with a strong and liquid balance sheet, a healthy pipeline for new acquisitions, and the prospect of continued good earnings and distributions. They emphasized being well-positioned to navigate challenges and highlighted competitive advantages in the M&A market.

Q&A:

• Question from Mickey Schleien (Clear Street LLC): Dave, a good portion of the appreciation in NAV this quarter came from 3 investments, Schylling, Old World, SFEG. Can you discuss the operational or valuation changes that drove that appreciation for each of those companies?
  Response: The increases were fundamentally due to EBITDA increases, not multiple changes.

• Question from Mickey Schleien (Clear Street LLC): It's interesting. I don't know if it's pronounced Schylling or Schylling, but Schylling and Old World are obviously consumer-oriented companies, and we're reading so much about the K-shaped economy. So what's sort of different about those 2 companies that's allowing them to grow their EBITDA even with the headwinds in the consumer sector?
  Response: Attributed to unique, high-demand products, good management, and ability to navigate tariff impacts.

• Question from Mickey Schleien (Clear Street LLC): Dave, you also recently invested in Rowan Energy. Can you walk us through how you underwrote that deal particularly how you assess the cyclicality in the energy equipment fracking sand filtration sector? And what assumptions you made about where Rowan stands in its business cycle?
  Response: Rely on knowledge from existing energy investments; feel the company is in a position with remaining upside and reasonable valuations.

• Question from Mickey Schleien (Clear Street LLC): I appreciate that. Dave or maybe Taylor, if I look at the table in the press release regarding floor rates, I want to make sure I understand it. Is it correct to say that about half the portfolio has about 80 basis points of downside in average yields?
  Response: Clarified that reaching the floor would require significant SOFR decreases (~210 bps), and the portfolio's overall rate decline is not one-to-one with SOFR due to floors.

• Question from Mickey Schleien (Clear Street LLC): Given sort of the typical portfolio companies that you are attracted to, is it reasonable to say that there's sort of limited risk from AI in the portfolio? And how are you looking at that in terms of the pipeline?
  Response: Most companies use AI for efficiency and design, not as a direct tech competitor; no AI-focused tech companies in the portfolio.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): As a follow-up to the unrealized gains, were those mostly related to equity gains in the portfolio?
  Response: Yes, the unrealized gains were predominantly equity-driven.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): And then in the comments section, you guys said there's good liquidity in the M&A market. I've heard from other managements where credit is widely available to all these middle market companies, but equity is less so. Do you have a different take on that? And if equity is less prevalent, do that give you a competitive advantage?
  Response: Competitive but sees a slight edge in being able to provide both debt and equity, speaking for the whole capital stack.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): Given the decline in base rates over the last year or so, will that have any positive effect in the discount rate used in your fair value calculations for your portfolio companies going forward?
  Response: Most investments use TEV (EBITDA multiple) valuation, not DCF, so rate changes don't directly affect the bulk of valuations.

• Question from Justin Marca (Lucid Capital Markets, LLC, Research Division): This is Justin on for Erik today. Just wondering if you could speak on the current state of underwriting conditions and specifically, if you're seeing any pressure on terms or structure given the tighter spread environment?
  Response: No significant pressure; model remains disciplined with ~70% debt, 30% equity, targeting 2x cash on cash on equity.

• Question from Justin Marca (Lucid Capital Markets, LLC, Research Division): Yes. And Dave, in your prepared remarks, you described the pipeline is very healthy. Can you talk about how it's looking compared to maybe a year ago? And are there any specific sectors where you're seeing better deals than others?
  Response: Pipeline is about the same as a year ago; consumer sector is slower due to tariffs, while business services and aerospace/defense show reasonably good activity.

• Question from Justin Marca (Lucid Capital Markets, LLC, Research Division): Sorry, I just got one more. It was good to see that your nonaccrual was stable quarter-over-quarter. Just wondering if you could talk about your current outlook for asset quality and if there's any near-term opportunities to resolve any of the remaining names that are on nonaccrual.
  Response: Outlook is positive; companies are generating positive EBITDA, and actions are being taken that could lead to resolution or exit.

Contradiction Point 1

Pipeline Activity and Deal Focus

Contradiction on whether pipeline activity is as strong as before or if there's a shift in target company size.

How does the current pipeline compare to a year ago, and which sectors are showing stronger deal activity? - Justin Marca (Lucid Capital Markets, LLC, Research Division)

2026Q3: The pipeline is as healthy as a year ago, with activity across most sectors. - Dave Dullum(President)

Can you share details about the due diligence and discussions for pending commitments, including their scale and target industries? - Unknown Analyst (B. Riley Securities)

2026Q2: The company is in the final stages of diligence on several deals and has multiple indications of interest (IOIs) and letters of intent (LOIs) in process. The level of activity is as high as it has been, suggesting a good pipeline for adding to the portfolio. - Dave Dullum(President)

Contradiction Point 2

Competitive Landscape for Deal Execution

Contradiction on whether competition is primarily from other BDCs or from private equity funds.

Does the M&A market's liquidity, where credit is widely available but equity is less so for middle-market companies, give you a competitive advantage, and do you have a different perspective on this dynamic? - Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division)

2026Q3: While traditional PE firms may access cheaper debt, Gladstone's ability to provide both debt and equity is a competitive advantage. - Dave Dullum(President)

Are larger BDCs pursuing smaller deals among your borrowers? - Justin Marca (Lucid Capital Markets, LLC, Research Division)

2026Q2: Competition is broad but from private equity funds, not necessarily other BDCs moving down market. Taylor Ritchie: Competitors are typically private equity funds focused on the middle market, not other BDCs, as their deal targets differ. - Dave Dullum(President), Taylor Ritchie(CFO & Treasurer)

Contradiction Point 3

Underwriting and Deal Execution Strategy

Contradiction on the firm's target capital structure for investments.

Can you discuss the current underwriting conditions and any pressure on terms or structure due to tighter spreads? - Justin Marca (Lucid Capital Markets, LLC, Research Division)

2026Q3: The firm targets a roughly 70% debt / 30% equity structure for each investment. - Dave Dullum(President)

What is your leverage comfort level given current dry powder and potential deal flow? - Kyle Joseph (Jefferies)

2024Q3: The strategy is to maintain flexibility to support new deal flow without breaking the 150% coverage test. - Dave Dullum(President) and Rachael Easton(CFO)

Contradiction Point 4

Market Outlook on Credit Availability and Deal Activity

Contradiction on the competitive environment and availability of cheap debt for portfolio companies.

Given the current M&A market liquidity, do you believe the reduced prevalence of equity offers a competitive advantage? - Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division)

2026Q3: While traditional PE firms may access cheaper debt, Gladstone's ability to provide both debt and equity is a competitive advantage. - Dave Dullum(President)

Are you concerned about refinancing risk for your better-performing investments due to more liquid credit markets and potential cheaper debt? - Mickey Schleien (Ladenburg Capital)

2024Q3: While spreads are tightening, the flood gates have not opened for cheap capital, so no significant refinancing threats are observed at this time. - Dave Dullum(President)

Contradiction Point 5

Portfolio Performance and Valuation Drivers

Contradiction on whether consumer sector companies are experiencing EBITDA declines due to tariffs versus performing well despite headwinds.

What factors differentiate Schylling and Old World from other consumer-oriented companies, enabling EBITDA growth despite consumer sector headwinds? - Mickey Schleien (Clear Street LLC)

2026Q3: These companies are performing well due to unique products, strong management, and effective cost management that has allowed them to maintain demand despite broader consumer sector headwinds and tariff increases. - Dave Dullum(President)

Are there signs of weakening performance in your portfolio companies due to the economic slowdown? - Mickey Max Schleien (Ladenburg Thalmann & Co. Inc.)

2026Q1: On the consumer side, some companies have seen increased activity, but tariff costs are affecting margins, leading to a modest EBITDA decline and valuation adjustments for some companies. - David A. R. Dullum(President)