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, 2024

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, 2024, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investments in Gladstone Alternative Income Fund (“Gladstone Alternative”) and Leeds Novamark Capital I, L.P. (“Leeds”), which were valued using NAV as a practical expedient. As of September 30, 2024, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in 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, 2024 and 2023, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of December 31, 2024 and September 30, 2024, 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, 2024:
Secured first lien debt	$	586,409		$	—	$	—	$	586,409
Secured second lien debt	127,234			—		—		127,234
Unsecured debt	359			—		—		359
Preferred equity	31,294			—		—		31,294
Common equity/equivalents	49,164		(A)	—		—		49,164
Total Investments as of December 31, 2024	$	794,460		$	—	$	—	$	794,460


				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, 2024:
Secured first lien debt	$	554,937		$	—	$	—	$	554,937
Secured second lien debt	113,716			—		—		113,716
Unsecured debt	32			—		—		32
Preferred equity	31,346			—		—		31,346
Common equity/equivalents	96,191		(A)	—		—		96,191
Total Investments as of September 30, 2024	$	796,222		$	—	$	—	$	796,222

(A)Excludes our investments in Gladstone Alternative and Leeds with fair values of $5.0 million and $37 thousand, respectively, as of December 31, 2024. Excludes our investment in Leeds with a fair value of $38 thousand as of September 30, 2024. Gladstone Alternative and Leeds were valued using NAV as a practical expedient.

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, 2024 and September 30, 2024, 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, 2024			September 30, 2024
Non-Control/Non-Affiliate Investments
Secured first lien debt	$	574,861		$	540,661
Secured second lien debt	118,767			105,169
Unsecured debt	359			32
Preferred equity	27,158			27,247
Common equity/equivalents	28,780		(A)	77,757		(B)
Total Non-Control/Non-Affiliate Investments	$	749,925		$	750,866
Affiliate Investments
Secured first lien debt	$	336		$	380
Preferred equity	4,136			4,099
Common equity/equivalents	2,933			2,959
Total Affiliate Investments	$	7,405		$	7,438
Control Investments
Secured first lien debt	$	11,212		$	13,896
Secured second lien debt	8,467			8,547
Common equity/equivalents	17,451			15,475
Total Control Investments	$	37,130		$	37,918
Total Investments at Fair Value Using Level 3 Inputs	$	794,460		$	796,222

(A)Excludes our investments in Gladstone Alternative and Leeds with fair values of $5.0 million and $37 thousand, respectively, as of December 31, 2024, which were valued using NAV as a practical expedient.

(B)Excludes our investment in Leeds with a fair value of $38 thousand as of September 30, 2024, which was valued using NAV as a practical expedient.

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, 2024 and September 30, 2024. 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,
2024

September 30,
2024

Valuation

Techniques/

Methodologies

Unobservable

Input

December 31,
2024

September 30,
2024

Secured first lien debt

514,928

464,090

Yield Analysis

Discount Rate

10.5% - 14.9%

/ 11.8%

10.8% - 17.3%

/ 12.6%

71,481

90,847

TEV

EBITDA multiple

4.3x – 5.7x

/ 5.2x

4.1x – 13.9x

/ 10.0x

EBITDA

$3,228 - $16,491

/ $7,049

$3,020 - $16,211

/ $10,309

Revenue multiple

0.2x – 0.7x

/ 0.6x

0.2x – 4.6x

/ 2.1x

Revenue

$6,141 - $20,173

/ $11,724

$6,336 - $21,118

/ $13,981

Secured second lien debt

115,397

101,928

Yield Analysis

Discount Rate

11.7% - 15.4%

/ 13.4%

12.2% - 16.0%

/ 14.1%

3,370

3,241

Market Quote

IBP

91.5% - 91.5%

/ 91.5%

88.0% - 88.0%

/ 88.0%

8,467

8,547

TEV

EBITDA multiple

5.4x – 5.4x

/ 5.4x

5.4x – 5.4x

/ 5.4x

EBITDA

$2,805 - $2,805

/ $2,805

$3,343 - $3,343

/ $3,343

Unsecured debt

326

—

Yield Analysis

Discount Rate

14.3% - 14.3%

/ 14.3%

—% - —%

/ —%

TEV

Revenue multiple

1.0x – 1.0x

/ 1.0x

1.0x – 1.0x

/ 1.0x

Revenue

$7,994 - $7,994

/ $7,994

$7,834 - $7,834

/ $7,834

Preferred and common equity / equivalents(A)

80,458

127,537

TEV

EBITDA multiple

4.4x – 13.5x

/ 7.5x

4.1x – 13.9x

/ 8.0x

EBITDA

$1,220 -$144,351

/ $9,747

$1,182 -$144,458

/ $10,847

Revenue multiple

0.2x – 4.3x

/ 1.9x

0.2x– 4.6x

/ 2.0x

Revenue

$5,502 -$20,173

/ $12,042

$4,672 -$21,118

/ $12,587

Total Level 3 Investments, at Fair Value

794,460

796,222

(A)Fair value as of December 31, 2024 excludes our investments in Gladstone Alternative and Leeds with fair values of $5.0 million and $37 thousand, respectively, as of December 31, 2024, which were valued using NAV as a practical expedient. Fair value as of September 30, 2024 excludes our investment in Leeds with a fair value of $38 thousand, which was valued using NAV as a practical expedient.

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, 2024 and 2023 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, 2024	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2024	$	554,937	$	113,716	$	32	$	31,346	$	96,191	$	796,222
Total gains (losses):
Net realized gain (loss)(A)	(4,074)		—		—		2,450		59,348		57,724
Net unrealized appreciation (depreciation)(B)	(3,534)		115		5		3,136		12,396		12,118
Reversal of prior period net depreciation (appreciation) on realization(B)	3,581		—		—		(2,450)		(55,140)		(54,009)
New investments, repayments and settlements: (C)
Issuances/originations	111,754		29,244		322		6,262		—		147,582
Settlements/repayments	(76,255)		(15,841)		—		—		—		(92,096)
Net proceeds from sales	—		—		—		(9,450)		(63,631)		(73,081)
Transfers	—		—		—		—		—		—
Fair Value as of December 31, 2024	$	586,409	$	127,234	$	359	$	31,294	$	49,164	$	794,460

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

(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, 2024 and September 30, 2024, we held 49 and 47 proprietary investments with an aggregate fair value of $796.0 million and $792.9 million, or 99.6% and 99.6% of the total investment portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the three months ended December 31, 2024:

•In October 2024, our $15.0 million debt investment in Perimeter Solutions Group paid off at par. We also received a $0.5 million prepayment penalty in conjunction with the payoff.

•In October 2024, our investment in Antenna Research Associates, Inc. was sold, which resulted in a net realized gain on our common equity of approximately $59.3 million and the repayment of our debt investment of $31.3 million at par.

•In November 2024, we invested an additional $28.9 million in Giving Home Healthcare, LLC, an existing portfolio company, through secured first lien debt.

•In November 2024, we invested $10.5 million in Wings ‘N More Restaurants, LLC (“Wings”) through secured first lien debt. We also extended Wings a $1.5 million secured first lien line of credit commitment and a $5.0 million secured first lien delayed draw term loan commitment, both of which were unfunded as of December 31, 2024.

•In November 2024, our $22.3 million debt investment in ENET Holdings, LLC paid off at par.

•In December 2024, we invested $42.8 million in Vet’s Choice Radiology, LLC through secured first lien debt.

•In December 2024, we invested $28.9 million in Pan-Am Dental, LLC through secured second lien debt and preferred equity.

•In December 2024, we invested $15.0 million in Freedom Dental Management, Inc. through secured first lien debt.

•In December 2024, we invested $5.0 million in Tube Bending Technology, LLC through secured second lien debt.

•In December 2024, we invested $5.0 million in Gladstone Alternative, one of our affiliated funds, through common equity.

•In December 2024, our investment in Salt and Straw, LLC, paid off which resulted in a realized gain of approximately $2.5 million on our preferred equity and the repayment of our debt investment of $10.9 million at par. We also received a $0.1 million prepayment penalty in conjunction with the payoff. We continue to hold warrants for common equity in Salt and Straw, LLC.

•In December 2024, we sold our debt investments in DKI Ventures, LLC, which resulted in a net realized loss on our debt of approximately $4.1 million.

Syndicated Investments

As of December 31, 2024 and September 30, 2024, we held two syndicated investments with an aggregate fair value of $3.5 million and $3.3 million, or 0.4% and 0.4% of the total investment portfolio at fair value, respectively.

Investment Concentrations

As of December 31, 2024, our investment portfolio consisted of investments in 51 portfolio companies located in 23 states in 14 different industries, with an aggregate fair value of $799.5 million. The five largest investments at fair value as of December 31, 2024 totaled $190.6 million, or 23.8% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2024 totaling $232.7 million, or 29.2% of our total investment portfolio. As of December 31, 2024 and September 30, 2024, our average investment by obligor was $16.0 million and $15.7 million at cost, respectively.

The following table outlines our investments by security type as of December 31, 2024 and September 30, 2024:


	December 31, 2024								September 30, 2024
	Cost				Fair Value				Cost				Fair Value
Secured first lien debt	$	612,161	75.0	%	$	586,409	73.4	%	$	580,736	75.3	%	$	554,937	69.7	%
Secured second lien debt	127,094		15.6		127,234		15.9		113,691		14.8		113,716		14.3
Unsecured debt	520		0.0		359		0.0		198		0.0		32		0.0
Total debt investments	739,775		90.6		714,002		89.3		694,625		90.1		668,685		84.0
Preferred equity	44,279		5.4		31,294		3.9		45,017		5.8		31,346		3.9
Common equity/equivalents	32,086		4.0		54,201		6.8		31,369		4.1		96,229		12.1
Total equity investments	76,365		9.4		85,495		10.7		76,386		9.9		127,575		16.0
Total Investments	$	816,140	100.0	%	$	799,497	100.0	%	$	771,011	100.0	%	$	796,260	100.0	%

Our investments at fair value consisted of the following industry classifications as of December 31, 2024 and September 30, 2024:


	December 31, 2024				September 30, 2024
Industry Classification	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
Healthcare, Education, and Childcare	$	219,831	27.5	%	$	101,707	12.8	%
Diversified/Conglomerate Manufacturing	168,992		21.1		160,264		20.1
Diversified/Conglomerate Service	145,704		18.2		179,032		22.5
Beverage, Food, and Tobacco	85,303		10.7		88,327		11.1
Aerospace and Defense	62,359		7.8		153,096		19.2
Automobile	27,652		3.5		28,286		3.6
Machinery	23,404		2.9		21,816		2.7
Cargo Transportation	20,200		2.5		20,200		2.5
Oil and Gas	20,007		2.5		20,554		2.6
Personal and Non-Durable Consumer Products	10,895		1.4		13,586		1.7
Other, < 2.0%	15,150		1.9		9,392		1.2
Total Investments	$	799,497	100.0	%	$	796,260	100.0	%

Our investments at fair value were included in the following U.S. geographic regions as of December 31, 2024 and September 30, 2024:


	December 31, 2024				September 30, 2024
Location	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
West	$	269,153	33.7	%	$	249,082	31.3	%
South	255,493		31.9		314,010		39.4
Midwest	237,470		29.7		192,897		24.2
Northeast	37,381		4.7		40,271		5.1
Total Investments	$	799,497	100.0	%	$	796,260	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, 2024:


		Amount
For the remaining nine months ending September 30:	2025(A)	$	12,470
For the fiscal years ending September 30:	2026	161,593
	2027	187,614
	2028	218,630
	2029	92,945
	Thereafter	67,778
	Total contractual repayments	$	741,030
	Adjustments to cost basis of debt investments	(1,255)
	Investments in equity securities	76,365
	Investments held as of December 31, 2024 at cost:	$	816,140

(A)Includes debt investments with contractual principal amounts totaling $0.5 million for which the maturity date has passed as of December 31, 2024.

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, 2024 and September 30, 2024, we had gross receivables from portfolio companies of $2.2 million and $1.7 million, respectively. The allowance for uncollectible receivables was $59 thousand and $75 thousand as of December 31, 2024 and September 30, 2024, respectively.