Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — IPO Roadshow (June 2023)
45 slides from Capital Southwest's IPO roadshow presentation, Jun 7, 2023
Slide 1: Capital Southwest Corporation June 2023
Capital Southwest Corporation June 2023 Capital Southwest Corporation 8333 Douglas Avenue, Suite 1100 | Dallas, Texas 75225 | 214.238.5700 | capitalsouthwest.com Filed Pursuant to Rule 433 Issuer Free Writing Prospectus dated June 7, 2023 Relating to Preliminary Prospectus Supplement dated June 7, 2
Slide 2: Important Notices
Page 2 Important Notices • These materials and any presentation of which they form a part are neither an offer to sell, nor a solicitation of an offer to purchase, any securities of Capital Southwest. • These materials and the presentations of which they are a part, and the summaries contained herei
Slide 3: Forward-Looking Statements
Page 3 • This presentation contains forward-looking statements relating to, among other things, the business, market conditions, financial condition and results of operations of Capital Southwest, the anticipated investment strategies and investments of Capital Southwest, and future market demand. A
Slide 4: Summary Offering Terms
Page 4 Summary Offering Terms Term Commentary Company: Capital Southwest Corporation Deal Size: $50 million (base-deal) Security: Notes due 2028 Price: $25.00 per note Rate: 7.75% area Moody’s Rating: Baa3 Optional Redemption: 2025 Maturity: 2028 Use of Proceeds: Repay indebtedness, make new portfol
Slide 5: CSWC Senior Management
Page 5 CSWC Senior Management Bowen S. Diehl • Joined Capital Southwest in March 2014 • Former Co-Head of Sponsor Finance Group at American Capital • 20+ years of investing experience in middle market debt and equity • BE – Vanderbilt University. MBA – UT Austin • Lives in Dallas with wife and three
Slide 6: CSWC Company Overview
Page 6 • CSWC was formed in 1961, and elected to be regulated as a BDC in 1988 • Publicly-traded on Nasdaq: Common Stock (“CSWC”) • Internally Managed BDC with RIC tax treatment for U.S. federal income tax purposes • 26 employees based in Dallas, Texas • Total Balance Sheet Assets of $1.3 B as of Ma
Slide 7: Pre-2015 Challenges
Page 7 Pre-2015 Challenges Significant Market Discount to NAV • Until spin off announcement, CSWC traded at a significant discount to NAV • Virtually 100% of CSWC’s portfolio was invested in equity • There was significant concentration in two industrial companies, with very large embedded capital ga
Slide 8: Solution: 2015 Tax Free Spin of Industrial Assets
Page 8 Publicly- Traded Equities $219 Cash $88 Debt $3 LP Interest $9 Other Equity $67 Solution: 2015 Tax Free Spin of Industrial Assets CSWC Pre-Spinoff - 6/30/14 CSWC Portfolio - 6/30/2014 (1) (1) 6/30/2014 portfolio mix is pro forma for the spin off of the CSW Industrials companies (2) Data from
Slide 9: Portfolio Rotation to Income Generation
Page 9 Portfolio Rotation to Income Generation 6/30/2014 (excl. CSWI Companies) 3/31/23 Investable Assets Since June 2014, CSWC transformed its investment portfolio from 1% in income earning assets to 88% as of March 2023 • Exited 24 pre-spin-off legacy portfolio equity investments, generating $288
Slide 10: Credit Investment Strategy
Page 10 CORE: Lower Middle Market (“LMM”): CSWC led or Club Deals ◦ Companies with EBITDA between $3 MM and $20 MM ◦ Typical leverage of 2.0x – 4.0x Debt to EBITDA through CSWC debt position ◦ Commitment size up to $35 MM with hold sizes generally $5 MM to $35 MM ◦ Both sponsored and non-sponsored d
Slide 11: Track record and capital raising milestones
Page 11 • Built investment and finance teams made up of people with long track records of investing in the middle market • Of the 26 employees, 24 joined CSWC since launching the middle market lending strategy • CSWC: Invested $2.1 B in 130 middle-market portfolio companies • 68 portfolio company ex
Slide 12: Fiscal Year 2023 Highlights
Page 12 Fiscal Year 2023 Highlights Financial Highlights (1) Operating Leverage calculated as last twelve months operating expenses (excluding interest expense) divided by average annual assets • Investments at Fair Value of $1.2 B compared to $937 MM in prior year, an increase of 29% • Pre-Tax Net
Slide 13: Q4 2023 Highlights
Page 13 • Q4 2023 Pre-Tax Net Investment Income (“NII”) of $22.8 MM or $0.65 per share compared to $0.60 per share in the prior quarter, an increase of 8% • Paid $0.53 per share Regular Dividend and $0.05 per share Supplemental Dividend for the quarter ended March 31, 2023 ◦ Increased Regular Divide
Slide 14: Track Record of Consistent Dividends Continues
Page 14 • In the last twelve months ended 3/31/2023, CSWC generated $2.30 per share in Pre-Tax NII and paid out $2.03 per share in Regular Dividends ◦ LTM Pre-Tax NII Regular Dividend Coverage of 113% • Cumulative Pre-Tax NII Regular Dividend Coverage of 108% since December 2015 • Total of $3.71 per
Slide 15: History of Value Creation
Page 15 History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase from Credit Strategy of $12.38 per share through 3/31/2023
Slide 16: Q4 2023 Originations
Page 16 $67.3 MM in total new committed investments to five new portfolio companies and nine existing portfolio companies Q4 2023 Originations Portfolio Originations Q4 2023 Name Industry Type Total Debt Funded at Close ($000s) Total Equity Funded at Close ($000s) Unfunded Commitments at Close ($000
Slide 17: Portfolio Exits Q4 2023
Page 17 Portfolio Exits Q4 2023 Name Industry Type Net Proceeds ($000s) Realized Gain /(Loss) ($000s) IRR Amware Fulffillment LLC Distribution First Lien $16,838 $3 13.0% Total / Wtd. Avg $16,838 $3 13.0% Track Record of CSWC Exits Continues • During the quarter, CSWC exited one debt investment, gen
Slide 18: CSWC Investment Portfolio Composition
Page 18 CSWC Investment Portfolio Composition Note: All metrics above exclude the I-45 SLF (1) At March 31, 2023 and December 31, 2022, we had equity ownership in approximately 62% and 59%, respectively, of our investments (2) The weighted-average annual effective yields were computed using the effe
Slide 19: Investment Rating Migration
Page 19 Approximately 96% of all debt investments are currently rated a "1" or "2" as credit portfolio continues to demonstrate strong performance Investment Rating 12/31/2022 Investment Rating Upgrades Investment Rating Downgrades 3/31/2023 # of Loans Fair Value ($MM) % of Portfolio (FV) # of Loans
Slide 20: Credit Portfolio Heavily Weighted Towards First Lien Investments
Page 20 Credit Portfolio Heavily Weighted Towards First Lien Investments 96% of credit portfolio in first lien senior secured loans with an average investment hold size of 1.3% as of 3/31/23 Credit Portfolio Heavily Weighted to First Lien 64% 28% 8% 82% 10% 8% 4% 10% 86% 90% 8% 2% 6% 92% 2% 93% 7% 9
Slide 21: CSWC Portfolio Mix as of March 31, 2023
Page 21 CSWC Portfolio Mix as of March 31, 2023 at Fair Value Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Current Investment Portfolio of $1.2 B continues to be diverse across industries (Note 1) I-45 SLF consists of 95% first lien senior secured debt (Note 2) E
Slide 22: Senior Loan Fund (I-45)
Page 22 • Joint Venture with Main Street Capital Corporation (NASDAQ: “MAIN”) • Fund invests in predominately Upper Middle Market first lien loans • Total maximum fund size of ~$200 MM • Total Equity Commitment of $101 MM from CSWC (80%) and MAIN (20%) • Total Debt Commitment of $100 MM through Cred
Slide 23: I-45 SLF Portfolio Overview
Page 23 I-45 SLF Portfolio Overview Current I-45 Portfolio (By Industry) I-45 SLF loan portfolio of $144 MM is 95% first lien senior secured debt with average hold size of 2.8% of the I-45 portfolio (1) For the quarter ended March 31, 2023, three portfolio companies are excluded from this calculatio
Slide 24: CSWC Capitalization
Page 24 • $400 MM Credit Facility: led by ING Capital (eleven banks) • $235 MM drawn as of 3/31/23 • Matures August 2026; Term SOFR + 215 • $130 MM Leverage Commitment from SBIC • $120 MM in Debentures drawn as of 3/31/23 • $140 MM January 2026 Notes • Matures January 2026, 4.50% Fixed • $150 MM Oct
Slide 25: Significant Unused Debt Capacity with Long-Term Duration
Page 25 Significant Unused Debt Capacity with Long-Term Duration Earliest debt maturity occurs in January 2026 Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment January 2026 Notes (1) $140.0 MM 4.50% January 2026 $140.0 MM N/A I-45 Credit Facility (2) $100.0 MM Ter
Slide 26: Internally Managed BDC Advantages
Page 26 Internally Managed BDC Advantages • We operate under a shareholder friendly Internally Managed structure which: • Aligns management incentives with long term sustainable shareholder value creation • Historically has rewarded performing Internally Managed BDCs with price to book premiums of 0
Slide 27: Operating Leverage Trend
Page 27 Operating Leverage Trend Continue to realize operating efficiencies of internally managed structure Total Assets Operating Expenses(1) as % of Average Total Assets Note: Operating Leverage calculated as last twelve months operating expenses (excluding interest expense) divided by average ann
Slide 28: NAV per Share Bridge for Quarter Ended 3/31/2023
Page 28 NAV per Share Bridge for Quarter Ended 3/31/2023 Earnings / Dividends $0.07 per Share Investment Portfolio Valuation Change $(0.12) per Share Other Corporate $0.17 per Share Note: "Other Corporate" consists primarily of $0.06 per share in change in restoration plan liability
Slide 29: Interest Rate Sensitivity
Page 29 Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure (1) Note: Illustrative change in annual NII is based on a projection of CSWC’s existing debt investments as of 3/31/2023, adjusted only for changes in Base Interest Rate. Base Interest Rate used in this analysis is 3-Mont
Slide 30: Appendix A: Investment Team
Page 30 Appendix A: Investment Team
Slide 31: Investment Team with Strong Credit Experience
Page 31 Investment Team with Strong Credit Experience Name Title Years Experience Year Joined CSWC Relevant Experience Bowen Diehl Chief Executive Officer / CIO 27 2014 - Managing Director and Co-Head of Sponsor Finance at American Capital - Merrill Lynch Investment Banking - Chase Securities Invest
Slide 32: Appendix B: Underwriting & Portfolio Management
Page 32 Appendix B: Underwriting & Portfolio Management
Slide 33: Disciplined Investment Process: Investment Criteria
Page 33 Disciplined Investment Process: Investment Criteria Experienced Management Team with Meaningful Equity Ownership • Relevant experience and track record of success • Significant economic interest in the future success of the company Strong Competitive Position Sustainable Business Model Diver
Slide 34: Disciplined Process: Focus on Capital Preservation
Page 34 Disciplined Process: Focus on Capital Preservation • Extensive network of long standing private equity, intermediary, and co-lender relationships • Team effort led by senior members • Systematic CRM- driven relationship tracking • Emphasis on partnership-centric approach • Structural and siz
Slide 35: LTM Deal Pipeline as of 3/31/23
Page 35 LTM Deal Pipeline as of 3/31/23 Total Deals Reviewed 869 Indicative Terms Submitted 216 Initial IC Review 47 Diligence & Final IC Approval 21 21 Portfolio Investments & 34 Add-Ons / Upsizes $465.4mm Invested 869 deals reviewed, $465.4 million closed in LTM ending 3/31/23 Lower Middle Market
Slide 36: CSWC Taps Into a Broad Network of Deal Sources
Page 36 CSWC Taps Into a Broad Network of Deal Sources Intermediaries and Lending Partners Private Equity
Slide 37: Portfolio Monitoring Process
Page 37 • Team-based approach with objectives to: • Continually evaluate portfolio • Identify potential problems early • Prompt deal teams to proactively address issues • Monitoring mechanisms • Monthly/quarterly financials • Regular communication with management/sponsor/agent • Board observation/me
Slide 38: Valuation Process Overview
Page 38 Valuation Methodologies Utilized: • DCF • Comparable Public Companies • Comparable Transactions • Market Yield Pricing Analysis • Market Quotes • Third Party Offers • Liquidation Value • Option Pricing Models Step 3 Valuation Team reviews preliminary internal valuation results with CFO Valua
Slide 39: Appendix C: Financial Statements
Page 39 Appendix C: Financial Statements
Slide 40: Balance Sheet
Page 40 Balance Sheet (In Thousands, except per share amounts) Quarter Ended 6/30/22 Quarter Ended 9/30/22 Quarter Ended 12/31/22 Quarter Ended 3/31/23 Assets Portfolio Investments $1,006,640 $1,056,931 $1,150,046 $1,206,388 Cash & Cash Equivalents 18,770 30,238 21,686 21,585 Other Assets 28,549 26,
Slide 41: Income Statement
Page 41 Income Statement (In Thousands, except per share amounts) Quarter Ended 6/30/22 Quarter Ended 9/30/22 Quarter Ended 12/31/22 Quarter Ended 3/31/23 Investment Income Interest Income $18,260 $22,119 $27,639 $31,622 PIK Interest Income 687 1,384 1,501 1,870 Dividend Income 2,186 2,527 2,382 2,2
Slide 42: Portfolio Statistics
Page 42 Portfolio Statistics (1) CSWC utilizes an internal 1 - 4 investment rating system in which 1 represents material outperformance and 4 represents material underperformance. All new investments are initially set to 2. Weighted average investment rating calculated at cost (2) Excludes CSWC equi
Slide 43: Investment Income Detail
Page 43 Investment Income Detail Constructing a portfolio of investments with recurring cash yield (In Thousands) Quarter Ended 6/30/22 Quarter Ended 9/30/22 Quarter Ended 12/31/22 Quarter Ended 3/31/23 Investment Income Breakdown Cash Interest $17,414 $21,173 $26,619 $30,712 Cash Dividends 2,186 2,
Slide 44: Key Financial Metrics
Page 44 Key Financial Metrics Strong Pre-Tax Net Investment Income and Dividend Yield driven by net portfolio growth and investment performance (1) Return on Equity is calculated as the quarterly annualized Pre-Tax NII, Realized Earnings, or Total Earnings, respectively, divided by equity at the end
Slide 45: Corporate Information
Page 45 Corporate Information Board of Directors Senior Management Fiscal Year End Inside Director Bowen S. Diehl March 31 Bowen S. Diehl President & Chief Executive Officer Independent Directors Independent Auditor David R. Brooks Michael S. Sarner RSM US LLP Chicago, ILChristine S. Battist Chief F