Executive Summary
- Capital Southwest delivered solid Q3 2025 operating results with pre-tax net investment income (NII) of $0.64 per share, which fully covered the regular quarterly dividend of $0.58 and the supplemental $0.05, with the March quarter dividend mix set at $0.58 regular and a higher supplemental of $0.06 (total $0.64). This underscores management’s commitment to stable, sustainable distributions even as the macro backdrop evolves.
- The portfolio program remained highly active and well-balanced: $317.5 million of capital invested/committed across nine new platform companies and 20 existing portfolio companies, with follow-ons representing approximately 41% of total commitments. Weighted average loan-to-value (LTV) on new deals ranged from 35% to 50%, yielding substantial equity cushions and leverage near 3.5x debt to EBITDA. Equity co-investments totaled 77 positions, fair value $159 million (9% of portfolio), marked at 143% of cost ($0.96 per share of embedded appreciation).
- Balance sheet liquidity and funding flexibility remained robust. The on-balance-sheet credit portfolio reached $1.5 billion (up 31% YoY), with 98% of the portfolio first-lien secured and weighted average exposure per company at 0.9%. Cash and undrawn commitments totaled ~$412 million, equating to roughly 2.1x unfunded commitments. The company also executed a $230 million 5.125% convertible note issuance (due 2029) to redeem the $140 million January 2026 bonds and repay debt facilities, alongside equity ATM activity that raised ~$54 million gross in the quarter.
- NAV per share held steady at $16.59; the near-term outlook reflects continued high-originations potential, ongoing equity exits, and regulatory leverage management. Management reiterated a disciplined approach to leverage, balance-sheet liquidity, and dividend sustainability, while pursuing transformative steps (SBIC license progress) to broaden capital sources. Overall, CSWC remains well-positioned to advance its credit and equity co-investment strategy in a competitive lower-middle-market (LMM) environment.
Key Performance Indicators
QoQ: -28.26% | YoY:-43.83%
QoQ: -42.40% | YoY:-34.01%
QoQ: -28.28% | YoY:-30.73%
QoQ: -29.17% | YoY:-40.35%
Key Insights
Revenue: $41.33m; YoY -14.9%, QoQ +7.6%
Gross Profit: $26.61m; YoY -43.8%, QoQ -28.3%
Operating Income: $19.64m; YoY -34.0%, QoQ -42.4%
Net Income: $16.27m; YoY -30.7%, QoQ -28.3%
EPS: $0.34; YoY -40.4%, QoQ -29.2%
Pre-tax NII per share: $0.64; Dividend coverage: 12-month trailing 115% (NII coverage), 111% cumulative since credit-strategy launch
Regular dividend: $0.58; Supplemental dividend: $0.06 for March quarter; Total declared: $0.64 per share
NAV per share: $16.59 (flat QoQ)
Weighted avera...
Financial Highlights
Revenue: $41.33m; YoY -14.9%, QoQ +7.6%
Gross Profit: $26.61m; YoY -43.8%, QoQ -28.3%
Operating Income: $19.64m; YoY -34.0%, QoQ -42.4%
Net Income: $16.27m; YoY -30.7%, QoQ -28.3%
EPS: $0.34; YoY -40.4%, QoQ -29.2%
Pre-tax NII per share: $0.64; Dividend coverage: 12-month trailing 115% (NII coverage), 111% cumulative since credit-strategy launch
Regular dividend: $0.58; Supplemental dividend: $0.06 for March quarter; Total declared: $0.64 per share
NAV per share: $16.59 (flat QoQ)
Weighted average yield on portfolio: 12.1%; Weighted average leverage (security basis): 3.6x EBITDA; 95% of portfolio rated in top two categories (1 or 2)
Non-accruals: 2.7% of portfolio at fair value
Cash flow: CFO -$161.68m; Free cash flow (FCF) -$161.16m; Net cash from financing: +$155.35m; Net change in cash: -$11.22m; Cash at period end: $36.01m
Balance sheet: Total assets $1.79b; Total debt $393.47m; Net debt $357.45m; Cash $36.01m; Short-term debt $222.74m; Long-term debt $170.72m; Total stockholders’ equity $830.44m; Debt to equity ~0.47; Debt to capitalization ~0.32
Liquidity: Approximately $412m in cash and undrawn leverage commitments; Unfunded commitments $193m; Regulatory leverage ~0.9x; Unsecured covenant-free bonds ~48% of capital structure
Valuation/Multiples: P/S ~25.5x; P/B ~1.27x; Dividend yield ~2.99%
Key portfolio stats: 125 companies; 89.1% first lien, 9.3% equity co-investments; 12.1% weighted average yield; 3.6x weighted average leverage; Non-accruals at 2.7%; Equity co-investment value at $159m (~$0.96 per share embedded appreciation)
Income Statement
| Metric |
Value |
YoY Change |
QoQ Change |
| Revenue |
41.33M |
-14.90% |
7.58% |
| Gross Profit |
26.61M |
-43.83% |
-28.26% |
| Operating Income |
19.64M |
-34.01% |
-42.40% |
| Net Income |
16.27M |
-30.73% |
-28.28% |
| EPS |
0.34 |
-40.35% |
-29.17% |
Key Financial Ratios
operatingProfitMargin
47.5%
operatingCashFlowPerShare
$-3.35
freeCashFlowPerShare
$-3.34
dividendPayoutRatio
193.8%
Management Commentary
- Strategy and capital structure discipline: Management emphasizes dividend sustainability and balance-sheet liquidity. Quote: “Balance sheet liquidity at Capital Southwest remains robust, which Michael will provide additional commentary on in a moment.†(Bowen Diehl) and “Since the launch of our credit strategy, we have increased our quarterly regular dividend 29x and have never cut the regular dividend, all while maintaining strong coverage.†(Bowen Diehl)
- Portfolio activity and market dynamics: Strong deal flow in the lower middle market with sizable add-on activity and a broad sponsor network. Quote: “Deal flow in the lower middle market was very strong this quarter and the competitive environment around quality deals continued at the feverish pace we have seen for the past few quarters.†(Bowen Diehl)
- Financing and capital deployment: Convertible note issuance, SBIC program progress, and equity ATM funding underpin liquidity and growth options. Quote: “We issued $230 million in aggregate principal of convertible notes… Net proceeds used to redeem… no make-whole payment.†(Michael Sarner)
- Outlook and guidance: Management signals higher near-term originations and potential realized gains from equity sales. Quote: “We expect to see meaningful realized gains for Capital Southwest in the March 2025 quarter†and “we expect our baseline originations in the near-term to be higher than the previous.†(Bowen Diehl / Josh Weinstein)
- Tariffs and macro risk: Management discusses tariff exposure (~10% of portfolio) and the defensible position of first-lien debt amid evolving trade policies. Quote: “around 10% of our portfolio could see some impact… first lien senior secured lenders… position will mute the impact.†(Josh Weinstein)
Since the launch of our credit strategy, we have increased our quarterly regular dividend 29x and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income.
— Bowen Diehl
Based on today's five-year treasury rate, the rate on the convertible note is approximately 200 basis points cheaper than the current market for a traditional unsecured bond, resulting in significant interest expense savings which flow directly to pre-tax NII.
— Michael Sarner
Forward Guidance
- Near-term originations: Management and investment teams expect Q4 2025 originations to be in the range of $150–$200 million, higher than the typical seasonal Q4 level, supported by sponsor relationships and add-on activity.
- Equity realizations and UTI uplift: Two equity investments are in sale processes with expected closing in the next two weeks; realized gains could add roughly $0.10–$0.15 per share to UTI by end of March 2025. If realized gains materialize, UTI could rise toward $0.78–$0.83 per share, potentially enabling larger supplemental distributions if warranted by earnings trajectory.
- SBIC II ramp and cost of capital: Final SBIC II approval imminent; expected debt funding costs likely in the 4–5% range versus traditional unsecured debt, which remains accretive to NII and yields favorable funding economics.
- Leverage and liquidity discipline: Target regulatory leverage remains in the 0.8–0.95 range with ongoing ATM equity and secured/unsecured debt access to preserve liquidity cushions. Monitoring macro drivers (rates, tariffs) and portfolio performance will determine any incremental leverage adjustments.
- Monitoring the portfolio and catalysts: The company will continue to monitor non-accruals and restructuring outcomes; upgrades remain above downgrades, supporting NAV stability. Investors should watch equity exits, UTI balance evolution, and the timing of SBIC license funding as key drivers of earnings and distribution flexibility.