Gladstone Capital Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS

INVESTMENTS

3 Months Ended

Dec. 31, 2023

Investments, Debt and Equity Securities [Abstract]

Fair Value

In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of December 31, 2023 and September 30, 2023, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs, and our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient.

We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended December 31, 2023 and 2022, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of December 31, 2023 and September 30, 2023, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of December 31, 2023:
Secured first lien debt	$	546,602		$	—	$	—		$	546,602
Secured second lien debt	126,571			—		—			126,571
Unsecured debt	23			—		—			23
Preferred equity	29,722			—		—			29,722
Common equity/equivalents	46,821		(A)	—		22		(B)	46,799
Total Investments as of December 31, 2023	$	749,739		$	—	$	22		$	749,717


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of September 30, 2023:
Secured first lien debt	$	510,701		$	—	$	—		$	510,701
Secured second lien debt	127,854			—		—			127,854
Unsecured debt	24			—		—			24
Preferred equity	26,855			—		—			26,855
Common equity/equivalents	39,150		(A)	—		22		(B)	39,128
Total Investments as of September 30, 2023	$	704,584		$	—	$	22		$	704,562

(A)Excludes our investment in Leeds with a fair value of $0.2 million and $0.2 million as of December 31, 2023 and September 30, 2023, respectively. Leeds was valued using NAV as a practical expedient.

(B)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.

The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of December 31, 2023 and September 30, 2023, by caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type:


	Total Recurring Fair Value Measurements Reported in
	Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3)
	December 31, 2023			September 30, 2023
Non-Control/Non-Affiliate Investments
Secured first lien debt	$	529,003		$	491,686
Secured second lien debt	119,146			120,429
Unsecured debt	23			24
Preferred equity	24,589			21,733
Common equity/equivalents	35,477		(A)	29,419		(B)
Total Non-Control/Non-Affiliate Investments	$	708,238		$	663,291
Affiliate Investments
Secured first lien debt	$	2,829		$	2,895
Preferred equity	5,133			5,122
Common equity/equivalents	2,754			2,404
Total Affiliate Investments	$	10,716		$	10,421
Control Investments
Secured first lien debt	$	14,770		$	16,120
Secured second lien debt	7,425			7,425
Common equity/equivalents	8,568			7,305
Total Control Investments	$	30,763		$	30,850
Total Investments at Fair Value Using Level 3 Inputs	$	749,717		$	704,562

(A)Excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively, as of December 31, 2023. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

(B)Excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively, as of September 30, 2023. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2023 and September 30, 2023. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements.

The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

Quantitative Information about Level 3 Fair Value Measurements

Range / Weighted Average as of

December 31,
2023

September 30,
2023

Valuation

Techniques/

Methodologies

Unobservable

Input

December 31,
2023

September 30,
2023

Secured first lien debt

491,137

461,638

Yield Analysis

Discount Rate

11.4% - 17.6%

/ 13.4%

11.8% - 29.9%

/ 14.8%

55,465

49,063

TEV

EBITDA multiple

4.5x – 6.4x

/ 6.4x

4.7x – 6.8x

/ 6.7x

EBITDA

$1,068 - $18,154

/ $17,860

$995 - $14,002

/ $13,624

Revenue multiple

0.3x – 0.8x

/ 0.6x

0.3x – 0.8x

/ 0.6x

Revenue

$9,675 - $33,040

/ $17,731

$14,934 - $16,283

/ $15,361

Secured second lien debt

109,194

110,820

Yield Analysis

Discount Rate

12.3% - 16.4%

/ 14.8%

12.5% - 15.6%

/ 14.5%

9,952

9,609

Market Quote

IBP

79.0% - 94.0%

/ 85.2%

67.8% - 94.0%

/ 82.2%

7,425

TEV

EBITDA multiple

5.3x – 5.3x

/ 5.3x

5.6x – 5.6x

/ 5.6x

EBITDA

$3,798 - $3,798

/ $3,798

$3,690 - $3,690

/ $3,690

Unsecured debt

TEV

Revenue multiple

1.0x – 1.0x

/ 1.0x

1.0x – 1.0x

/ 1.0x

Revenue

$4,752 - $4,752

/ $4,752

$5,044 - $5,044

/ $5,044

Preferred and common equity / equivalents(A)

76,521

65,983

TEV

EBITDA multiple

4.5x – 13.1x

/ 7.4x

4.7x – 13.0x

/ 6.9x

EBITDA

$1,068 -$127,874

/ $11,049

$995 -$112,841

/ $10,570

Revenue multiple

0.3x – 3.0x

/ 1.2x

0.3x– 3.0x

/ 1.2x

Revenue

$4,493 -$33,040

/ $16,517

$4,213 -$16,283

/ $14,959

Total Level 3 Investments, at Fair Value

749,717

704,562

(A)Fair value as of December 31, 2023 excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively. Fair value as of September 30, 2023 excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both December 31, 2023 and September 30, 2023.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields, discount rates, or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase, respectively, in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three months ended December 31, 2023 and 2022 for all investments for which we determine fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Three months ended December 31, 2023	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2023	$	510,701	$	127,854	$	24	$	26,855	$	39,128	$	704,562
Total gains (losses):
Net realized gain (loss)(A)	—		—		—		—		259		259
Net unrealized appreciation (depreciation)(B)	6,996		(744)		(1)		(6,133)		7,955		8,073
Reversal of prior period net depreciation (appreciation) on realization(B)	—		—		—		—		(283)		(283)
New investments, repayments and settlements: (C)
Issuances/originations	50,024		185		—		9,000		—		59,209
Settlements/repayments	(21,119)		(724)		—		—		—		(21,843)
Net proceeds from sales	—		—		—		—		(260)		(260)
Transfers	—		—		—		—		—		—
Fair Value as of December 31, 2023	$	546,602	$	126,571	$	23	$	29,722	$	46,799	$	749,717

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Three Months Ended December 31, 2022	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2022	$	463,858	$	115,928	$	55	$	27,046	$	36,273	$	643,160
Total gains (losses):
Net realized gain (loss)(A)	—		—		(95)		—		4,995		4,900
Net unrealized appreciation (depreciation)(B)	(455)		(544)		(10)		(906)		(784)		(2,699)
Reversal of prior period net depreciation (appreciation) on realization(B)	103		—		95		—		(4,995)		(4,797)
New investments, repayments and settlements: (C)
Issuances/originations	11,475		182		—		—		500		12,157
Settlements/repayments	(24,738)		(811)		—		—		—		(25,549)
Net proceeds from sales	—		—		—		—		(7,978)		(7,978)
Transfers	—		—		—		—		—		—
Fair Value as of December 31, 2022	$	450,243	$	114,755	$	45	$	26,140	$	28,011	$	619,194

(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(B)Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(C)Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Investment Activity

Proprietary Investments

As of December 31, 2023 and September 30, 2023, we held 47 proprietary investments with an aggregate fair value of $739.9 million and $695.1 million, or 98.7% and 98.6% of the total investment portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the three months ended December 31, 2023:

•In November 2023, we invested $11.0 million in Quality Environmental Midco, Inc. (“Quality”) through secured first lien debt and preferred equity. We also extended Quality a $2.0 million secured first lien line of credit commitment, which was unfunded as of December 31, 2023.

•In November 2023, we extended Cafe Zupas, an existing portfolio company, a new $10.5 million secured first lien delayed draw term loan commitment, which was unfunded at close. We funded $1.4 million on the delayed draw term loan in December 2023. In addition, our existing term loan was paid down by $7.3 million.

•In November 2023, our remaining investment in PIC 360, LLC was sold resulting in a net realized gain of $0.3 million.

•In December 2023, we invested an additional $14.3 million in ALS Education, LLC, an existing portfolio company, through secured first lien debt.

•In December 2023, we invested an additional $12.0 million in Leadpoint Business Services, LLC, an existing portfolio company, through secured first lien debt.

•In December 2023, we invested an additional $7.0 million in Salt & Straw, LLC, an existing portfolio company, through preferred equity. We also increased our delayed draw term loan commitment to Salt & Straw, LLC by $2.9 million.

Syndicated Investments

As of December 31, 2023 and September 30, 2023, we held four syndicated investments with an aggregate fair value of $10.1 million and $9.7 million, or 1.3% and 1.4% of the total investment portfolio at fair value, respectively.

Investment Concentrations

As of December 31, 2023, our investment portfolio consisted of investments in 51 portfolio companies located in 24 states in 12 different industries, with an aggregate fair value of $750.0 million. The five largest investments at fair value as of December 31, 2023 totaled $185.7 million, or 24.8% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2023 totaling $176.9 million, or 25.1% of our total investment portfolio. As of December 31, 2023 and September 30, 2023, our average investment by obligor was $14.9 million and $14.2 million at cost, respectively.

The following table outlines our investments by security type as of December 31, 2023 and September 30, 2023:


	December 31, 2023								September 30, 2023
	Cost				Fair Value				Cost				Fair Value
Secured first lien debt	$	558,281	73.5	%	$	546,602	72.9	%	$	529,376	73.3	%	$	510,701	72.5	%
Secured second lien debt	129,713		17.1		126,571		16.9		130,252		18.1		127,854		18.1
Unsecured debt	198		0.0		23		0.0		198		0.0		24		0.0
Total debt investments	688,192		90.6		673,196		89.8		659,826		91.4		638,579		90.6
Preferred equity	44,617		5.9		29,722		3.9		35,617		4.9		26,855		3.8
Common equity/equivalents	26,825		3.5		47,067		6.3		26,826		3.7		39,381		5.6
Total equity investments	71,442		9.4		76,789		10.2		62,443		8.6		66,236		9.4
Total Investments	$	759,634	100.0	%	$	749,985	100.0	%	$	722,269	100.0	%	$	704,815	100.0	%

Our investments at fair value consisted of the following industry classifications as of December 31, 2023 and September 30, 2023:


	December 31, 2023				September 30, 2023
Industry Classification	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
Diversified/Conglomerate Service	$	163,817	21.8	%	$	135,060	19.2	%
Healthcare, Education, and Childcare	159,410		21.3		146,438		20.8
Diversified/Conglomerate Manufacturing	158,612		21.1		158,061		22.4
Aerospace and Defense	105,806		14.1		97,836		13.9
Beverage, Food, and Tobacco	80,492		10.7		78,788		11.2
Automobile	27,793		3.7		27,571		3.9
Oil and Gas	23,662		3.2		27,830		3.9
Personal and Non-Durable Consumer Products	14,162		1.9		14,576		2.1
Machinery	6,216		0.9		6,411		0.9
Other, < 2.0%	10,015		1.3		12,244		1.7
Total Investments	$	749,985	100.0	%	$	704,815	100.0	%

Our investments at fair value were included in the following U.S. geographic regions as of December 31, 2023 and September 30, 2023:


	December 31, 2023				September 30, 2023
Location	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
South	$	289,458	38.6	%	$	273,181	38.8	%
West	242,651		32.4		224,235		31.8
Midwest	154,155		20.5		145,122		20.6
Northeast	63,721		8.5		62,277		8.8
Total Investments	$	749,985	100.0	%	$	704,815	100.0	%

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2023:


		Amount
For the remaining nine months ending September 30:	2024(A)	$	21,950
For the fiscal years ending September 30:	2025	42,960
	2026	140,846
	2027	253,699
	2028	185,178
	Thereafter	44,847
	Total contractual repayments	$	689,480
	Adjustments to cost basis of debt investments	(1,288)
	Investments in equity securities	71,442
	Investments held as of December 31, 2023 at cost:	$	759,634

(A)Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of December 31, 2023.

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of December 31, 2023 and September 30, 2023, we had gross receivables from portfolio companies of $0.9 million and $0.8 million, respectively. The allowance for uncollectible receivables was $14 thousand and $9 thousand as of December 31, 2023 and September 30, 2023, respectively.