Press release·11/08/2024 01:15:37

OVERVIEW OF GLADSTONE INVESTMENT CORPORATION’S FINANCIAL PERFORMANCE

Gladstone Investment Corporation is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940. The company’s investment objectives are to achieve and grow current income by investing in debt securities of established private businesses, and to provide its stockholders with long-term capital appreciation by investing in equity securities of those businesses.

Gladstone Investment focuses on investing in lower middle market private businesses in the U.S. that meet certain criteria, such as sustainable free cash flow, experienced management teams, and reasonable capitalization. The company invests by itself or jointly with other funds and/or the management of the portfolio company.

Investment Activity and Portfolio Performance

From its initial public offering in 2005 through September 30, 2024, Gladstone Investment has invested approximately $1.8 billion in 58 companies, excluding investments in syndicated loans. The company has exited investments in 32 portfolio companies, generating $332.5 million in net realized gains and $42.0 million in other income upon exit.

During the six months ended September 30, 2024, the company exited two portfolio companies. Key transactions included:

• In May 2024, the remaining shares in Funko Acquisition Holdings, LLC were sold, resulting in a realized gain of $2,000.
• In July 2024, an additional $18.5 million was invested through secured first lien debt in Nocturne Luxury Villas, Inc. to fund an add-on acquisition.
• In September 2024, the investment in Nth Degree Investment Group, LLC was exited, resulting in success fee income of $0.1 million, a realized gain of $42.3 million on the preferred equity, and the repayment of a $25.0 million debt investment.

As of September 30, 2024, Gladstone Investment’s investment portfolio was comprised of 77.4% in debt investments and 22.6% in equity investments, at cost. The majority of the debt securities have a success fee component, which enhances the yield. However, success fees are only recognized as income upon receipt, so the company has $50.2 million in unrecognized, contractual success fees as of September 30, 2024.

Capital Raising and Liquidity

Gladstone Investment has been able to meet its capital needs through extensions and increases to its revolving credit facility, as well as by accessing the capital markets through public offerings of unsecured notes and common and preferred stock.

In May 2024, the company entered into new “at-the-market” equity distribution agreements, allowing it to issue and sell up to $75.0 million of common stock. During the three and six months ended September 30, 2024, the company did not sell any shares under these programs.

The company’s ability to issue equity is constrained when its common stock trades below net asset value (NAV) per share, as the Investment Company Act generally prohibits the issuance and sale of common stock at a price below NAV without stockholder approval. As of September 30, 2024, Gladstone Investment’s common stock was trading at a 15.7% premium to its NAV of $12.49 per share.

Gladstone Investment also has a $200.0 million revolving credit facility, with a potential total commitment of $300.0 million. As of September 30, 2024, the company had $8.9 million in borrowings outstanding on the facility and $191.1 million in available borrowing capacity.

Regulatory Compliance

The company’s ability to seek external debt financing is subject to the asset coverage requirements of the Investment Company Act, which require Gladstone Investment to maintain asset coverage of at least 150% on its senior securities representing indebtedness. As of September 30, 2024, the company’s asset coverage ratio on senior securities representing indebtedness was 229.3%.

Distributions and Dividends

Gladstone Investment is required to distribute at least 90% of its investment company taxable income to qualify as a regulated investment company (RIC) and avoid corporate-level federal income tax. The company’s Board of Directors has declared monthly cash distributions to common stockholders of $0.08 per share for each of the six months from April through September 2024, as well as a supplemental distribution of $0.70 per share paid in October 2024.

Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023

Total investment income increased 11.3% to $22.6 million, primarily due to a $1.6 million increase in dividend and success fee income and a $0.7 million increase in interest income. The weighted-average principal balance of the interest-bearing investment portfolio increased to $572.8 million, compared to $543.8 million in the prior year period.

Total expenses, net of credits from the Adviser, decreased 30.6% to $15.3 million, primarily due to a $9.3 million decrease in incentive fees, partially offset by a $0.5 million increase in other expenses.

Net investment income was $7.3 million, compared to a net investment loss of $1.7 million in the prior year period. Net realized gains were $42.3 million, compared to $0.3 million in the prior year period, primarily due to the realized gain from the exit of Nth Degree Investment Group. Net unrealized depreciation was $34.1 million, compared to $48.8 million of unrealized appreciation in the prior year period.

Overall, net assets resulting from operations decreased 67.3% to $15.5 million, compared to $47.4 million in the prior year period.

Comparison of the Six Months Ended September 30, 2024 to the Six Months Ended September 30, 2023

Total investment income increased 10.3% to $44.7 million, primarily due to a $3.0 million increase in interest income and a $1.2 million increase in dividend and success fee income.

Total expenses, net of credits from the Adviser, decreased 26.1% to $25.0 million, primarily due to a $15.3 million decrease in incentive fees, partially offset by a $1.8 million increase in interest expense and a $1.5 million increase in other expenses.

Net investment income was $19.7 million, compared to $6.7 million in the prior year period. Net realized gains were $42.3 million, compared to $1.4 million in the prior year period, primarily due to the realized gain from the exit of Nth Degree Investment Group. Net unrealized depreciation was $53.1 million, compared to $48.0 million of unrealized appreciation in the prior year period.

Overall, net assets resulting from operations decreased 84.0% to $9.0 million, compared to $56.1 million in the prior year period.

Liquidity and Capital Resources

Gladstone Investment’s net cash provided by operating activities for the six months ended September 30, 2024 was $75.5 million, compared to net cash used in operating activities of $96.6 million in the prior year period. This change was primarily due to a decrease in purchases of investments and an increase in net proceeds from the sale and recapitalization of investments and principal repayments.

Net cash used in financing activities for the six months ended September 30, 2024 was $76.0 million, which consisted primarily of $58.1 million of net repayments under the credit facility, $17.6 million in distributions to common stockholders, and $0.3 million of deferred financing and offering costs.

The company has $200.0 million in total commitments under its revolving credit facility, with a potential total commitment of $300.0 million. As of September 30, 2024, the company had $8.9 million in borrowings outstanding and $191.1 million in available borrowing capacity under the facility.

Gladstone Investment has also issued three series of unsecured notes: the 5.00% Notes due 2026, the 4.875% Notes due 2028, and the 8.00% Notes due 2028. As of September 30, 2024, the total principal amount outstanding on these notes was $337.2 million.

Outlook and Conclusion

Gladstone Investment continues to focus on its strategy of providing a combination of debt and equity financing to support management and independent sponsor-led buyouts of lower middle market companies in the U.S. The company has been able to successfully raise capital and maintain compliance with regulatory requirements, allowing it to continue investing in and supporting its portfolio companies.

The company’s financial performance over the past six months has been mixed, with increases in investment income offset by decreases in net realized and unrealized gains. However, Gladstone Investment remains well-positioned to continue executing on its investment strategy and generating returns for its shareholders.

Overall, Gladstone Investment’s financial report demonstrates the company’s ability to navigate the challenges of the current market environment and maintain its focus on its core investment objectives. The company’s diversified portfolio, access to capital, and disciplined approach to risk management position it well for the future.