Annual report pursuant to Section 13 and 15(d)

INVESTMENTS

v3.23.1
INVESTMENTS
12 Months Ended
Mar. 31, 2023
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS INVESTMENTS
Fair Value
In accordance with ASC 820, we determine the fair value of our investments 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 those in 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.
As of March 31, 2023 and 2022, 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.
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. There were no transfers in or out of Level 1, 2 and 3 during the years ended March 31, 2023 and 2022, respectively.
As of March 31, 2023 and 2022, 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 March 31, 2023:
Secured first lien debt
$ 437,517  $ —  $ —  $ 437,517 
Secured second lien debt
75,734  —  —  75,734 
Preferred equity
222,585  —  — 

222,585 
Common equity/equivalents
17,707  — 

27 
(A)

17,680 
Total Investments at March 31, 2023
$ 753,543  $   $ 27  $ 753,516 
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 March 31, 2022:
Secured first lien debt
$ 425,087  $ —  $ —  $ 425,087 
Secured second lien debt
67,958  —  —  67,958 
Preferred equity
217,599  —  —  217,599 
Common equity/equivalents
3,752  — 

74 
(A)
3,678 
Total Investments at March 31, 2022
$ 714,396  $   $ 74  $ 714,322 
(A)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 investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of March 31, 2023 and 2022, 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
Valued Using Level 3 Inputs

March 31,

2023 2022
Non-Control/Non-Affiliate Investments
Secured first lien debt
$ 279,748  $ 233,673 
Secured second lien debt
50,842  66,917 
Preferred equity
164,534  139,927 
Common equity/equivalents(A)
1,724  1,533 
Total Non-Control/Non-Affiliate Investments
496,848  442,050 

Affiliate Investments
Secured first lien debt
157,769  191,414 
Secured second lien debt
24,892  1,041 
Preferred equity
58,051  77,672 
Common equity/equivalents
15,243  1,432 
Total Affiliate Investments
255,955  271,559 

Control Investments
Secured first lien debt
  — 
Secured second lien debt
  — 
Preferred equity
  — 
Common equity/equivalents
713  713 
Total Control Investments
713  713 

Total investments at fair value using Level 3 inputs
$ 753,516  $ 714,322 
(A)Excludes our investment in Funko with a fair value of $27 thousand and $74 thousand as of March 31, 2023 and 2022, respectively, which was valued using Level 2 inputs.
In accordance with ASC 820, the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of March 31, 2023 and 2022. 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
Fair Value as of
Valuation
Technique/
Methodology
Unobservable
Input
Range / Weighted-Average as of
March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022
Secured first lien debt $ 432,126  $ 411,023  TEV EBITDA multiple
4.4x – 7.7x /
6.4x

3.4x – 9.3x /
7.0x
EBITDA
$4,251 – $19,083 /
$10,764

$3,990 – $13,707 /
$8,221
Revenue multiple
0.3x – 0.6x /
0.3x

0.7x – 0.7x /
0.7x
Revenue
$15,483 – $109,615 /
$94,957

$14,072 – $14,072 / $14,072
5,391  14,064  Yield Analysis Discount Rate
19.4% – 19.9% / 19.7%

11.3% – 15.2% /
14.6%
Secured second lien debt 62,750  39,637  TEV EBITDA multiple
5.4x – 6.6x /
6.2x

5.6x – 6.8x /
6.0x
EBITDA
$4,112 – $6,379 /
$5,501

$3,953 – $5,488 /
$4,959
Revenue multiple N/A
0.7x – 0.7x /
0.7x
Revenue N/A
$14,072 – $14,072 /
$14,072
12,984  28,321  Yield Analysis Discount Rate
14.0% – 14.0% /
14.0%

10.0% – 12.2% /
 11.6%
Preferred equity 222,585  217,599  TEV EBITDA multiple
4.4x – 7.7x /
5.9x

3.4x – 9.3x /
6.8x
EBITDA
$4,251 – $19,083 /
$9,486

$1,210 – $13,707 /
$6,926
Revenue multiple
0.3x – 0.6x /
0.4x

0.7x – 0.7x /
0.7x
Revenue
$15,483 – $109,615 /
$69,247

$14,072 – $14,072 /
$14,072
Common equity/equivalents(A)
17,680  3,678  TEV EBITDA multiple
4.7x – 7.2x /
6.4x

4.8x – 8.4x /
5.8x

EBITDA
$1,105 – $30,833 /
$6,273

$829 – $13,707 /
$5,709

Revenue multiple N/A
0.7x – 0.7x /
0.7x

Revenue N/A
$14,072 – $14,072 /
$14,072
Total $ 753,516  $ 714,322 
(A)Fair value as of both March 31, 2023 and 2022 excludes our investment in Funko with a fair value of $27 thousand and $74 thousand, respectively, which was valued using Level 2 inputs.
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 discount rates or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide our portfolio’s changes in fair value, broken out by security type, during the years ended March 31, 2023 and 2022 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Year ended March 31, 2023:
Fair value as of March 31, 2022
$ 425,087  $ 67,958  $ 217,599  $ 3,678  $ 714,322 
Total gain (loss):


Net realized gain (loss)(A)
—  (10,000) 20,778  —  10,778 
Net unrealized appreciation (depreciation)(B)
(29,552) (5,235) 11,216  13,622  (9,949)
Reversal of previously recorded (appreciation) depreciation upon realization(B)
—  10,001  (12,250) —  (2,249)
New investments, repayments and settlements(C):


Issuances / originations
107,200  5,188  21,000  380  133,768 
Settlements / repayments
(50,800) (6,596) —  —  (57,396)
Sales(D)
—  —  (35,758) —  (35,758)
Transfers(E)
(14,418) 14,418  —  —  — 
Fair value as of March 31, 2023
$ 437,517  $ 75,734  $ 222,585  $ 17,680  $ 753,516 

Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Year ended March 31, 2022:
Fair value as of March 31, 2021
$ 368,688  $ 102,897  $ 159,478  $ 2,671  $ 633,734 
Total gain (loss):


Net realized gain (loss)(A)
(10,000) —  23,725  —  13,725 
Net unrealized appreciation (depreciation)(B)
756  2,956  111,405  (15,027) 100,090 
Reversal of previously recorded (appreciation) depreciation upon realization(B)
860  —  (26,053) —  (25,193)
New investments, repayments and settlements(C):


Issuances / originations
68,638  9,648  14,472  —  92,758 
Settlements / repayments
(48,898) (2,500) —  —  (51,398)
Sales
—  —  (49,394) —  (49,394)
Transfers(E)
45,043  (45,043) (16,034) 16,034  — 
Fair value as of March 31, 2022
$ 425,087  $ 67,958  $ 217,599  $ 3,678  $ 714,322 
(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective years ended March 31, 2023 and 2022.
(B)Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the respective years ended March 31, 2023 and 2022.
(C)Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, 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.
(D)Includes $13.4 million of proceeds from the recapitalization of Old World Christmas, Inc. ("Old World") and $12.3 million of proceeds from the recapitalization of Horizon Facilities Services, Inc ("Horizon").
(E)2023: Transfers include (1) secured second lien debt of Ginsey with a total cost basis and fair value of $12.2 million, which was converted into secured first lien debt in August 2022 and (2) secured first lien debt of PSI Molded Plastics, Inc. with a total cost basis and fair value of $26.6 million, which was converted into secured second lien debt in September 2022.
2022: Transfers represent (1) secured second lien debt of J.R. Hobbs with a total cost basis and fair value of $52.5 million and $$52.4 million, respectively, which was converted into secured first lien debt in June 2021, (2) secured first lien debt of D.P.M.S., Inc. ("Danco") with a total cost basis and fair value of $12.3 million and $7.3 million, respectively, which was converted into secured second lien debt of Galaxy Technologies Holdings, Inc. (“Galaxy Technologies Holdings”) in September 2021, (3) preferred equity of Galaxy Technologies, Inc. ("Galaxy") with a total cost basis and fair value of $11.5 million and $16.0 million, respectively, which was converted into common equity of Galaxy Technologies Holdings in September 2021 and (4) preferred equity of SOG Specialty Knives & Tools, LLC with a total cost and fair value of $0.6 million and $0.0 million, respectively, which was converted into common equity of Gladstone SOG Investments, Inc. in December 2021.
Investment Activity
During the fiscal year ended March 31, 2023, the following significant transactions occurred:
In May 2022, we invested an additional $6.4 million in the form of secured first lien debt in Nocturne Luxury Villas, Inc. ("Nocturne") to fund an add-on acquisition.
In June 2022, we exited our investment in Bassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of $3.0 million and a realized gain on preferred equity of $4.7 million. In connection with the sale, we received net cash proceeds of $57.6 million, including the repayment of our debt investment of $48.0 million at par.
In June 2022, we invested $21.0 million in a new portfolio company, Dema/Mai Holdings, Inc. (“Dema/Mai”), in the form of preferred equity to acquire Mai Mechanical, LLC, a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered in Denver, Colorado, from J.R. Hobbs, an existing portfolio company. In July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund the acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders.
In July 2022, we recapitalized our investment in Horizon and invested an additional $30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of $12.3 million, which were recognized as a $10.1 million return of preferred equity cost basis and a realized gain of $2.2 million, as well as dividend income of $3.1 million and success fee income of $1.7 million.
In August 2022, in conjunction with a refinancing at Ginsey, our $13.3 million secured second lien debt investment was reduced to $12.2 million and converted to secured first lien debt. The reduction in our cost basis was the result of a $5.1 million payment made by Ginsey to extinguish our secured borrowing liability, which was partially offset by an additional investment in Ginsey of $4.0 million. Refer to Note 5 - Borrowings for discussion of the secured borrowing liability.
In October 2022, we invested an additional $8.4 million in the form of secured first lien debt in Nocturne to fund an add-on acquisition.
In November 2022, our $1.5 million secured second lien debt investment in Country Club Enterprises, LLC ("CCE") was repaid at par. In connection with the repayment, we received success fee income of $1.1 million and our $1.0 million guaranty was released. Refer to Note 11 - Commitments and Contingencies for discussion of the guaranty.
In December 2022, we recapitalized our investment in Old World and invested an additional $15.5 million in the form of secured first lien debt. In connection with this investment, we received proceeds of $17.9 million, of which $13.4 million was recognized as a realized gain and $4.5 million was recognized as dividend income.
In December 2022, we replaced our previously outstanding secured second lien term loan and secured second lien delayed draw term loan to The Mountain with a total aggregate cost basis of $13.2 million with a new $3.2 million secured second lien term loan, which resulted in a realized loss of $10.0 million.
In February 2023, we replaced our two previously outstanding secured first lien revolving lines of credit to The Mountain with an aggregate cost basis of $4.3 million with a new secured first lien revolving line of credit with a $4.7 million commitment.
Investment Concentrations
As of March 31, 2023, our investment portfolio consisted of investments in 25 portfolio companies located in 19 states across 14 different industries with an aggregate fair value of $753.5 million. Our investments in Old World, Horizon, Dema/Mai, Nocturne, and Brunswick Bowling Products, Inc., represent our five largest portfolio investments at fair value, and collectively comprised $322.3 million, or 42.8%, of our total investment portfolio at fair value as of March 31, 2023.
The following table summarizes our investments by security type as of March 31, 2023 and 2022:
March 31, 2023 March 31, 2022
Cost Fair Value Cost Fair Value
Secured first lien debt $ 471,439  65.4  % $ 437,517  58.1  % $ 429,457  64.2  % $ 425,087  59.5  %
Secured second lien debt 84,158  11.7  % 75,734  10.1  % 81,147  12.1  % 67,958  9.5  %
Total debt 555,597  77.1  % 513,251  68.2  % 510,604  76.3  % 493,045  69.0  %
Preferred equity 149,099  20.7  % 222,585  29.5  % 143,079  21.4  % 217,599  30.5  %
Common equity/equivalents 15,934  2.2  % 17,707  2.3  % 15,565  2.3  % 3,752  0.5  %
Total equity/equivalents 165,033  22.9  % 240,292  31.8  % 158,644  23.7  % 221,351  31.0  %
Total investments
$ 720,630  100.0  % $ 753,543  100.0  % $ 669,248  100.0  % $ 714,396  100.0  %
Investments at fair value consisted of the following industry classifications as of March 31, 2023 and 2022:
March 31, 2023 March 31, 2022
Fair Value
Percentage of
Total Investments
Fair Value Percentage of
Total Investments
Diversified/Conglomerate Services $ 268,954  35.7  % $ 307,403  43.0  %
Home and Office Furnishings, Housewares, and Durable Consumer Products 143,685  19.1  % 125,440  17.6  %
Buildings and Real Estate 60,571  8.0  % —  —  %
Hotels, Motels, Inns, and Gaming 58,713  7.8  % 37,923  5.3  %
Leisure, Amusement, Motion Pictures, and Entertainment 47,616  6.3  % 46,514  6.5  %
Healthcare, Education, and Childcare 37,445  5.0  % 39,252  5.5  %
Mining, Steel, Iron and Non-Precious Metals 25,998  3.5  % 24,250  3.4  %
Chemicals, Plastics, and Rubber 24,891  3.3  % 26,618  3.7  %
Aerospace and Defense 22,215  2.8  % 25,296  3.5  %
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 20,088  2.7  % 13,823  1.9  %
Telecommunications 18,987  2.5  % 32,467  4.6  %
Cargo Transport 14,707  2.0  % 14,533  2.0  %
Diversified/Conglomerate Manufacturing 9,646  1.3  % 14,064  2.0  %
Other < 2.0% 27  0.0  % 6,813  1.0  %
Total investments
$ 753,543  100.0  % $ 714,396  100.0  %
Investments at fair value were included in the following geographic regions of the U.S. as of March 31, 2023 and 2022:

March 31, 2023 March 31, 2022
Location
Fair Value
Percentage of
Total Investments
Fair Value
Percentage of
Total Investments
Northeast $ 266,612  35.4  % $ 194,100  27.2  %
West 197,989  26.3  % 158,607  22.2  %
South 171,056  22.7  % 188,978  26.4  %
Midwest 117,886  15.6  % 172,711  24.2  %
Total investments
$ 753,543  100.0  % $ 714,396  100  %
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio for the next five fiscal years and thereafter, assuming no voluntary prepayments, as of March 31, 2023:

Amount
For the fiscal years ending March 31:
2024 $ 81,218 
2025 89,614 
2026 202,419 
2027 144,096 
2028 38,250 
Thereafter — 
Total contractual repayments $ 555,597 
Investments in equity securities 165,033 
Total cost basis of investments held as of March 31, 2023:
$ 720,630 
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net 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 March 31, 2023 and 2022, we had gross receivables from portfolio companies of $2.2 million and $1.7 million, respectively. As of March 31, 2023 and 2022, the allowance for uncollectible receivables was $1.6 million and $1.3 million, respectively.