Gladstone Investment Corporation 4.875% Notes due 2028 (GAINZ) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Gladstone Investment Corporation Fourth Quarter and Year Ended 03/31/2017 Earnings Call and Webcast. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. David Gladstone. You may begin, sir.

Thank you, Kevin, very nice introduction, and good morning to all of you. This is David Gladstone, and this is the quarterly and the year-end earnings conference call for shareholders and analysts of Gladstone Investment. Common stocks on NASDAQ trading symbol GAIN, and we have three preferred stocks at trade, that's GAINO, GAINN and GAINM. So thank you all again calling for calling in. We're always happy to talk to our loyal shareholders and potential shareholders as well as our analysts. And we'd like to give an update on the company and its investments. We'd like to give you our view of our business environment as well. Wish we could do more calls and try to do this with some of the press releases, but it -- we're only doing it once now, every quarter. Also you have an invitation that if you're in the Washington, D.C. area, we're in our offices in McLean, Virginia, located just outside of Washington, D.C, so please stop by and say hello. You'll see a few other members of our 60 team or so people here, and I think we have the finest people in the business. So first, we hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the Administrator for all the Gladstone public funds and related companies. He'll make a brief statement regarding forward-looking statements and other important information. Michael, take it away.

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933, Securities Exchange Act of 1934, including statements with regard to our future performance. And forward-looking statements involve certain risks and uncertainties and other factors, even though they're based on our current plans, which we believe to be reasonable. And many of these forward-looking statements can be identified by the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. And there are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including information listed under the caption Risk Factors in our Form 10-Q and 10-K filings as well as our shelf registration statement. All is filed with the SEC. These can all be found in our website, www.gladstoneinvestment.com or on the SEC's website, which is www.sec.gov. And the company undertakes no obligation to update or publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. And please also note that past performance or market information is not a guarantee of any future results. We also ask that you take the opportunity to visit our website, again, www.gladstoneinvestment.com. You could sign up for our e-mail notification service. You can also find us on Facebook, keyword, The Gladstone Companies; and on Twitter, @GladstoneComps. And today's call will be an overview of our results through March 31, 2017. So for a more detailed information, please read our Form 10-K and press release issued yesterday. And you can find these on our website, again, www.gladstoneinvestment.com. Now let's turn to Dave Dullum. He's the President of Gladstone Investment, and he'll give you an update on the fund and performance and outlook.

Thanks, Mike, and good morning to all. I am pleased to report today that Gladstone Investment had another strong fiscal quarter and year ended 3/31/17. In fact, we increased our net asset value, or NAV as we call it, from about $9.82 per share in the third quarter to $9.95 at this fiscal year-end and indeed for the 12 months ended 3/31/16 to 3/31/17 by $0.73 from $9.22 to $9.95. So we feel pretty good about that. Based on our results in April, we also have been able to announce an over 2% increase in our annual distribution rate to common stockholders for going from $0.75 per share to $0.77 per share annually. Now to put our results and certainly our report today in perspective, it is helpful to reiterate our business model and -- which focuses on the buyouts of U.S. businesses with what we call EBITDA, which is annual earnings before interest, taxes, depreciation and amortization, generally in a range between about $3 million and $10 million. Now our financial structure is always same, as we have said before, is for funding our buyouts, and they consist of secured first to second lien debt in combination with a direct equity investment, which really gives us significant equity ownership in these transactions. We are also differentiated from the traditional credit-oriented BDCs. In that, the target proportion of the equity-to-debt for the investments in our portfolio is about 25% equity to 75% debt at cost, which compares to most other BDC portfolios of around 10% equity and 90% debt. Now this is intentional on our part as our strategy and the stockholder value proposition is such that the debt portion of our investment provides income to pay and over time, we hope grow our monthly distributions. And as I just mentioned, we announced an increase in our monthly distributions in April. Secondly, along with the debt investment, we own significant equity positions and with our strategy focused on an increase in the equity value, which provides capital gains and other income on the exits of these transactions. Now as we execute the strategy, these potential capital gains and other income may then be distributed to our stockholders in the form of supplemental distributions. To this point, we recently did declare for our common stockholders the first of such supplemented distributions in the amount of $0.06 per share, which will be paid in June of this year 2017. Third, a further advantage to our approach is that as a provider of a significant portion of the equity and the debt in our transactions, we have that flexibility in establishing the term and the interest rate on the debt securities and certainly, some influence with our companies when we have to manage any downside protection. Now this ability may help in reducing the risk of our debt being refinanced also prior to maturity in periods of yield compression and such as the market we potentially -- currently is in today. So that is an added feature to us in terms relative to other credit-oriented BDCs. Now I'd like to, at this point though, sort of give a very quick sort of summary of our historical performance -- a scorecard, if you will, just to set every thought around where we've come from and where we are today and just take a step back and look to highlight some of GAIN's historical performance. As for many BDCs and other financial companies, we all remember 2008, 2009 was a difficult period, and it created somewhat of a reset for a number of companies, including our own. So I will use that as a starting point, and take a look at how GAIN has performed from the 3/31/10 period through 3/31/17, which, in fact, represents the last 7 full fiscal years. I'm going to try to include a little bit of issue around stockholder return, taking into account our strategy and the value proposition of providing consistent and increasing annual regular distributions and building realized GAIN opportunities through the underlying equity value of our buyout investments. So how have we done? Well, we've grown total assets from about $297 million to about $515 million at fair value. The debt portion at cost has grown from about $182 million to almost $378 million. This supports the growth in our regular monthly distributions for common share going from about $0.48 to $0.75 annually and of course, this recent increase now to $0.77 per share, which we announced in -- earlier this year. The equity portion has also grown from about $45 million to about $147 million at cost, and the NAV, net asset value, per share has increased from $8.74 to $9.95 over that same period. Now to put this asset growth in perspective, we need to highlight also that at 3/31/10, we had 13 buyout companies in our portfolio as compared to 35 companies at 3/31/17. However, we also exited 10 buyout companies over that 7 years. Therefore, we had made 32 acquisitions over this period of time so -- which is the lifeblood of our business. So the 10 exits also generated over $84 million in net realized gains and $20 million in other income. It is this equity growth and the exit activity that has allowed us to deliver on our objective of generating capital gains from the equity portion of our assets, including offsetting any losses incurred during the pre-2010 economic crisis. So this ultimately resulted in the recently declared supplemental distribution of $0.06 per share of common -- on common stock and our goal of continuing to make similar distributions on a semiannual basis. So in summary, since March 31, 2010, we have accomplished the following: one, we've had excellent growth in net assets, increasing NAV per share by $1.21 as of 3/31/17, increasing our monthly distributions per common share by almost $0.30 to $0.77 -- $0.77, excuse me, on an annual run rate and delivering on our buyout strategy by declaring supplemental distributions from net realized capital gains and undistributed earned income. Now as we go forward, we will continue with new buyouts, obviously, and we will manage the sale, the turnover or exit, if you will, in the portfolio, which is consistent with our strategy. We will continue to be guided by market conditions. In other words, assessing the risk and return in continuing to hold an investment versus exiting. And we'll be sensitive to preserving our portfolio of assets, which does produce income base for our monthly distributions. Since inception in 2005, meaning when GAIN initially went public, our buyout liquidity events have achieved an aggregate cash-on-cash return on the exit of the equity portion of those investments of approximately 3.6x, with a total increase to our net assets of -- which created a total increase to our net assets of about $105 million on the exit. Now during this fiscal year ended 3/31/17, we'd received full repayment of our $5 million debt investment in auto safety house in the fourth quarter, including about $0.5 million of other income. Secondly, we sold our investment at Acme Cryogenics in the first quarter, which resulted in a realized gain of $18.8 million plus $2.8 million of other income and the repayment of our $14.5 million debt investment at par. And we also sold our investment in Behrens Manufacturing in the third quarter, which resulted in a realized gain of $5.8 million, other income of around $9.9 million and the repayment of our $10 million debt investment at par. So for the fiscal year ended March 31, 2017, we have generated realized gains of over $24 million and other income of over $4 million from the exits of buyout investments. Now from time-to-time, we might rightsize the capital structure of the portfolio of the company, which will help provide operating flexibility in that company and therefore, improve the company's future success. And we did that actually in October as one of our investments. Now as we continue to grow, we must consider raising equity capital in a responsible manner. Since our IPO, and as of 3/31/2017, we raised equity in 2 secondary market transactions, the last being March of 2015. Now we did so again recently on May 9, where we sold 2.1 million shares at an offering price of $9.38 per share resulting in gross proceeds of about $20 million and net proceeds after commissions, discounts and estimated costs of about $18.6 million. Now while this net price after commissions and discounts per share of $9 was a discount of approximately 9.5% to our estimated NAV at the time of the offering in -- on May 9, we believe the offering follows our responsible capital raising efforts. So our results to date show that we've been able to invest proceeds constructively, which resulted in growing our NAV significantly while generating capital gains. And frankly, all of this really points to the fact that we are in a long-term business, that's the nature of our business. So time we work towards the longer aspects of where we're going. Now we need to keep doing deals, and so we're mindful that whenever we sell a portfolio of the company, it may reduce our income-producing asset base and as we've said before, income is very important to maintain the monthly distributions to stockholders. Therefore, deal generation clearly must continue to have a very high priority. As we typically discuss, we generate new investment opportunities where our team calls on independent sponsors, middle-market investment bankers and other sources to help create proprietary investment opportunities. We do not depend on others to negotiate our structure -- our investments. So generally, our investments do include partnering with management teams and other sponsors in the purchase of a business. And we believe our financing package, which includes both the secured debt and a majority of the equity is a competitive advantage as it gives the seller or the independent sponsor if one is involved and the management team that would be involved in the deal, a very high degree of comfort that the purchase will occur from at least the financing perspective. Now we believe that our strict adherence to investment fundamentals and our thorough due diligence process have enabled us to provide shareholder returns in both our consistent, regular monthly distributions as well as these supplemental distributions now, which will come from time to time. We made 2 new investments in this fiscal year, including one in the fourth quarter. We continue to build our pipeline and we're actively reviewing and conducting due diligence on a few new potential investments. And we're still operating in the buyout environment, frankly, where the competition for new investments is currently very high and purchase prices that we're seeing at least that are being paid are often contrary to our conservative value approach and expected financial return. Because we're targeting an equity portion return on our investments of around 2 to 3x cash on cash returns and our secured debt investments, primarily these first lien loans, typically carry a cash yield in the low teens and that, of course, balances the equity portion of our investment, which produces a blended current cash yield, which supports our stockholder distribution expectations. We also typically have success fees, which are generally due upon a change of control but may be paid in cash in advance in limited circumstances at the portfolio company's option. Now our investment focus has not changed as we generally invest in companies with consistent EBITDA and operating cash flow with a potential to expand and the areas we've historically been able to continue such as light specialty manufacturing, specialty consumer products and services, industrial products and services, our recent investment there was J.R. Hobbs in the HVAC industry, and certainly, from time to time, maybe some aerospace and energy, although we have minimal exposure there and we're very, very conservative when it comes to that category. So quickly, to recap our fund activity. During fiscal 2017, we invested about $71 million in existing portfolio of companies and 2 new acquisitions: The Mountain, which was early in the fiscal year; and during our quarter ended March 31, as I've mentioned, we invested about $29 million in J.R. Hobbs. We also received a repayment of about $5 million investment in auto safety house, which included $0.5 million success fee income. Subsequent to the year-end, we also successfully exited our $16.4 million investment in Mitchell Rubber Products, which resulted in net cash proceeds of about $19 million, which included the full repayment of our $13.6 million debt investments. So what does all of that mean for our look -- our outlook? Well, we will continue to strategically add accretive investments to grow the income-generating portion, which is the debt, and the equity portion of our assets and position our existing portfolio for potential exits, thus, maximizing distributions to stockholders. As mentioned earlier, we've declared the first supplemental distribution to common stockholders to be paid on June 2017, which is in addition to our monthly distributions. We anticipate paying semiannual supplemental distribution each fiscal year as the portfolio continues to mature, and we are able to manage exits and realize capital gains. These distributions are generally expected to be made from undistributed net capital gains but may also include, from time to time, undistributed net investment income. We, obviously, and our Board of Directors, will evaluate the amount and the timing of such semiannual supplemental distributions as we continue to execute our strategy. So this concludes my part of the presentation. I'd like to turn it over to our CFO, Chief Financial Officer, Julia Ryan, and she can give you a bit more detail on the actual financial performance for this past quarter and fiscal year-end. Julia?

Thanks, Dave, and good morning. The fund had a strong fiscal year with the exit of 2 portfolio companies at sizable gains, as Dave laid out earlier, and the addition of 2 new deals to replace those 2 exits. We also successfully issued a new series of term preferred stocks with gross proceeds of over $57 million and amended our credit facility, which, among other things, extended the maturity date and favorably impacted pricing and net available borrowing. At the end of March, we had over $515 million in assets consisting of over $501 million in investments at fair value, $3 million in cash and cash equivalents and about $11 million in other assets. On the liability side, at year-end, we had $69.7 million in borrowings, outstanding and our line of credit, about $139 million in term preferred stock, which includes the new Series D at liquidation value and about $5 million in other liabilities with -- which results in about $301 million in net assets. And the net asset value per share was $9.95 as of March 31, which is up $0.13 from December 31. And this primarily resulted from net unrealized depreciation of $4 million in this fourth fiscal quarter. This appreciation was principally due to an increase in the operating performance such as EBITDA, as Dave laid out earlier, of certain portfolio companies and to a lesser extent, a rise in comparable multiples. Overall, our fair value to cost was over 95%. Consistent with previous years, we continue to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We plan to continue this practice and update the externally-provided data on an annual basis for all of our significant equity investments. And now moving over to the income statement for the March quarter. Total investment income was $12.4 million compared to $13.4 million in the prior quarter. Total expenses net of credit were $7.1 million compared to $8.2 million in the prior quarter, which leaves net investment income of $5.3 million versus $2.2 million -- $5.2 million in the prior quarter. Net investment income remains relatively flat as the net decrease in income was offset by a decrease in net expenses. Other income was 10% of total investment income in the current quarter, and that compares to 12% in the prior period. As mentioned on previous calls, we expect other income, which is primarily composed of success fees and dividend income to remain meaningful but variable from quarter-to-quarter. Net expenses decreased by $1.1 million in the current quarter, which was primarily driven by $0.5 million decrease in bad debt expense and a $0.5 million increase in credits from the advisor. As a result of these factors, our net investment income per share remains at $0.17 per share in the current quarter. For the fiscal year, total investment income was $51.9 million compared to $51 million in the prior year. Total expenses net of credit was $29.5 million compared to $30.2 million in the prior year, which leaves net investment income of $22.4 million compared to $20.7 million in the prior year, which represents an increase of 8% in total net investment income. This increase was primarily driven by higher other income, both dividend income and success fee income, which was $5.7 million in the current year compared to $4.6 million in the prior year. And consistent with previous quarters, our current period net investment income, together with undistributed net investment income from prior periods or what we refer to as the spillover amount, more than covered our quarterly and annual distributions to stockholders, which is $0.1875 per common share for the quarter and $0.75 per common share for the fiscal year ended 3/31/17. Our distributions coverage ratio was about 230% this quarter and over 130% for the full fiscal year, which means, again, that our income more than covered our distribution. As of March 31, total undistributed income and total undistributed net realized gains were over $14 million or $0.47 per common share. We continue to actively manage our undistributed income and undistributed net realized gains with the ultimate goal to cover and over time, increase distributions to our stockholders. This may take the form of supplemental distributions like the one we just recently declared in April and which is to be paid in June. Now let's turn to realized and unrealized changes in our assets. For the fiscal year ended March 31, 2017, we recognized a net realized gain of $15.6 million, which consists of the realized gains related to those exits that Dave mentioned earlier as well as additional earn out proceeds from the exit of Funko in 2016. These gains were partially offset by a realized loss from one of our portfolio companies. During the March quarter, we recorded minimal realized activity. In addition, we recorded $4 million of net unrealized appreciation in the current quarter, which was due to improved performance of certain portfolios companies and to a lesser extent, a rise in multiple exits, as I mentioned earlier. For the year ended March 31, 2017, we recorded net unrealized appreciation of investments of $6.9 million consisting of $23.4 million of net appreciation and $16.6 million of reversals of previously-recorded net depreciation related to the exits and restructures we mentioned earlier. Such reversals of previously recognized appreciation or depreciation are recorded when those realization events occur. Certain loans of 2 portfolio companies are nonaccrual, representing about 3% of the fair value and about 4% of the cost basis of our total debt investments as of March 31, 2017. Now let's look at the portfolio make-up. And the approximate allocation between the debt and equity portion of our securities was 72% debt and 28% equity at cost. Our debt portfolio is well positioned for any interest rate increases with about 93% of our loans having variable rates with a minimum of floor and the remaining 7% having fixed rates. The weighted average yields on interest-bearing debt investments remained consistent quarter-over-quarter at about 12.8% in the recent quarter. For the full year, the weighted average yield on interest bearing debt investments was 12.7% compared to 12.6% in the prior year. The strong yield excludes success fees and our debt investments. We do not have any debt investments with a noncash or paid-in-kind interest feature so all of our interest incomes represents cash interest. Success fees are yield enhancements that are generally contingent upon a change of control such as an exit or a sale although there are certain circumstances when a portfolio company can elect to pay it earlier. We only recognize success fees in our income statement when they are earned, which generally coincides with the receipt of cash. For comparison purposes, if we had accrued these success fees as we would if it were paid-in-kind interest like some BDCs do, our weighted average yields on interest-bearing assets would approximate 15% during the most recent quarter. As of March 31, 2017, unrecognized contractual success fees totaled $24.2 million or $0.80 per common share. There is no guarantee that we will be able to collect any or all of those success fees or have any control over the timing of collection. From a credit priority standpoint, 100% of our loans are secured, with 75% having a first lien priority and the remaining 25% having a second lien priority in the capital structure of their respective portfolio companies. Overall, Gladstone Investment had another quarter and full fiscal year of strong operational performance, financing and investment origination and exit successes. We have maintained and subsequent to year-end increased our distribution rate while remaining committed to covering our distributions with income as we have done consistently in the past. And now I'll turn the call to David Gladstone.

Well, thank you, Julia. That was a great report. And David Dullum, good report especially the part about the history and things that we've gone through. And Michael, we appreciate the legal update. During the past year, we're able to report some great accomplishments. The sale, we've called it exits sometimes, but it's usually a sale or repayment of 2 investments -- an origination of 2 new investments to replace those. The issuance of our Series D preferred stock, the amendment of our credit facility to get that stronger in our favor and the continued strong performance of the portfolio companies we have in our portfolio today. And I believe we can continue the success that we've had in the past year going forward for our fiscal year ending March 31, 2018. The economy is getting stronger but there's still some people who say we may again enter into a recession, but we believe our company is well positioned to handle the potential downturn because of the diversification of many portfolio of companies in many different industries. To go through the list of things that people ask me, they say, "What are you worried about?" Well, we are still worried about the Federal Reserve, the direction regarding monetary policies and while we have variable rates on most of our loans, increasing rates will not hurt us as much as it would hurt the economy. And if the Fed does vote to increase rates, it's like only a quarter percent each time they do that. It's more of a psychological rate rise than it is a real impact. The main reason the Fed is pushing for higher rates is because they have to find buyers for all of the money that they're borrowing using treasury notes and T-bills. We get people to buy the U.S. Treasuries and issued when they're printing, so many of them. In order to get people to buy them, they have to have a pretty high rate compared to the rest of the world. The possibility of oil and gas price changes is always on our mind. Low oil prices, like we have today, a terrific benefit to consumers in many of the businesses, certainly, some of ours, but we have to remember that the oil industry is an integral part of the U.S. economy and losses there will equal pain in the economy and various places. Fortunate for us, we don't have significant investments related to oil and gas companies. Another area is the federal deficit, over $19 trillion now and continuing to decline as the government spending continues with no end in sight. After a round of spending -- this round that we're going through now, will be $20 trillion, all of the spending puts pressure on the Fed to find places to put all of this debt that we're piling up. This has to lead to more inflation as time goes on. All of us realize, too, that there's far too much regulations around healthcare, financial services, energy, emissions, minimum wages. We just see more and more regulations coming and these regulations are hindering the growth of businesses here in the United States, the performance of those business, the expansion of those businesses and job growth. We understand why big businesses move operations outside the United States to places like Latin America and Asia where there's less regulations and low taxes. But mid-sized businesses, similar to the ones we have in our investment portfolio, end up having to hire manufacturing operations outside the U.S. in order to stay competitive. This really needs to stop, and we're hopeful that it will change over the next year. We need realistic tax policies here in the United States and more than that, we need realistic regulation policies. And then finally, at this point in time, there's a tremendous positive feeling in the mid-sized small business area. The optimism index is at all-time high, business are expecting new administration cuts to taxes and cut to regulations and change out the current health policy on insurance and regulations that will be better to ensure for the well being of our population. Now I have to see some or all of these expected changes to happen. They've been promised. I'm very optimistic that some things will happen for the better. And those companies that import parts and products from Asia, there is some heartburn over the possibility that there will be a new tax on imports. At that point, we don't have any idea -- at this point, we don't have any idea what the new tax imports would be. We do know that we have the idea that any import tax may look like but how it will be applied is -- or phased-in is just not known. While some of our companies will buy parts and products from Mexico and Asia, we have to note that the tax on these will not be on a single company but across the board on all imports. So it will hit some of our companies and all of their competitors and we'll all see prices rise. And maybe, that lower tax rates in the U.S. companies and the import tax from imports will encourage foreign companies to open plants here and also some of our American plants not to go abroad. The auto manufacturing plants, as many of you know, have already moved here. BMW, Mercedes, Honda, and many others have already occurred and they're here in the United States manufacturing. That's a good sign. In light of all these concerns, our company has continued to be very selective in investing in new business. We ask these questions over and over again about what's going to happen to taxes before we make an investment and use our best knowledge to guess what's going to happen. Now on the other side. On April 2017, our Board of Directors declared an increase in our monthly distributions to our common stockholders now at $0.064 per common share for each of the months of April, May and June. This is an annual run rate of just a little less than $0.77 per share and that's a 2% increase over the prior year. In addition, the Board declared a supplemental distribution to our common stockholders of $0.06 per common share to be paid in June. The team at Gladstone Investments hopes to continue generating capital gains and other income to meet the supplemental distributions on a regular basis. As you can tell, the regular distribution is well covered, and we hope to raise the regular distributions again sometime in the future. Through the date of this call, we made 142 sequential monthly cash distributions to our common stockholders and additionally have paid several supplemental distributions. As of March 2017, we have distributed a total of $191 million or about $8.36 per share to common stockholders at the time of the payment. This is based on the number of shares at the time of the payment of each distribution. At the current distribution rate, our common stocks with common stock price being at $9.20 yesterday's close, the yield is current on the -- the yield on the current regular distribution is about $0.083 – 8.3%, and the yield including the June supplemental distribution of $0.06 per share is right at $0.09 -- 9%. This yield is far too high for such a successful relatively low-risk company and the stock price should increase to rightsize the yield. We have 3 series of preferred stocks. The Series B is trading at about 6.6%, the Series C is at about 6.3% and the Series D is at 6.1%. So in summary, Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions now from potential capital gains. We expect a good quarter for June 30, 2017 quarter end, and hope to continue to show you some strong returns on your investment in this fund. Now operator, if you'll come on board and then we'll have some questions from the analysts and some of our loyal shareholders.

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

Also, I think your review of GAIN's strategy in the prepared remarks was helpful for investors. Looking at your business strategy, could you tell us what the portfolio's average leverage is at your attachment point? And do you expect any improvement in the bid ask spread in the M&A market this year?

Mickey, this is Dave. On the first question, I want to be sure I understand the question, you're asking that leverage in our portfolio, meaning our portfolio of companies?

Yes.

So I would say, roughly about 4, 4x on EBITDA. If you took it across the portfolio, we have some of that obviously a bit lower and few of that are a bit higher but in sort of that 4-ish range. That's first. Secondly bid-ask on the M&A side. I mean, what we're seeing, from understanding the question as well, deals that we think are probably priced at around 6.5 to 7, maybe stretching times EBITDA, we're seeing some of those things going at 8 to even 9, 9-plus times EBITDA. So pretty high numbers, if you will.

And Mickey, that -- Mickey, this is David Gladstone. What you're talking about also is what's the growth factor? If you have a very high technology growth factor, you're going to have to pay up for it. If you're in the middle of the range like we are, it's usually a 6 or so.

Right, and that includes a control premium, correct?

Yes.

Okay. And just a couple of portfolio questions. Looking at Tread in the third fiscal quarter going into the -- going from the second fiscal quarter to the third fiscal quarter, its debt was marked up from about 75% of par to par and now it's back down to about 63%. Could you talk about what caused the reduction in the fourth fiscal quarter? And why has the valuation been volatile?

Well, part of it, Mickey, is that investment, as you know, is related to the mining industry, and it's just purely a function of what we've seen on a slight improvement on EBITDA from time to time and then, looking down, slight decline again. Right now, it's actually headed in, believe it or not, in a good direction. They're seeing a pickup in their business. So it's just really a function of the quarter-to-quarter kind of slight movement in the results and then how that affects the relative valuation from the debt side. So nothing major going on there, right?

All right. So in other words, you're looking at trailing sort of 12-month numbers and moving up and down?

Yes. Yes, sir.

And my last question is, could you just talk about the issues confronting Alloy Die? And what they're doing to resolve that?

Okay, so Alloy Die, it's a good business. We had to make some change at the management level, which we did. And we are seeing the results of that. And fundamentally, again, the business is sound. It's a temporary thing, frankly, and I think over the next 6 to 9 months, we'll see pretty significant improvement in that business. But fundamentally, again, no issues. Again, a temporary issue.

But -- so if I understand, Dave, you put it on nonaccrual because of the change in management? Or is there something related to the actual results?

Well, yes. The results were -- it was getting tight from a cash perspective, which, of course, forced us and made us to look at -- do some things, caused us to obviously change management and to give the company some flexibility, which I mentioned from time to time, one of our capabilities to do that without any dramatic upset in the business. We can do that to give it an ability to do what it needs to do with the new team we brought in and put in place to make it work. So that's really the answer.

Our next question comes from Kyle Joseph with Jefferies.

Actually, most of them have been answered but just a quick one. I was hoping you could discuss any exposure in the portfolio to the retail sector? Obviously, we've seen a lot of headlines there. As well as any discussions you guys have on potential investment opportunities you're seeing in the space given that is one sector, where we have seen relatively lower valuations?

Right, right. So hey, Kyle, Dave. We have, obviously, as you know in our portfolio, what we call specialty consumer-type products, which are not -- by retail, we mean certainly, brick-and-mortar hardcore retailers per se. We don't have anything there, we have obviously products, companies -- Brunswick Bowling is a good example. It's not a retail business, but it's a specialty-oriented consumer product. We have others so -- which we sell, obviously, the online business market as we know and frankly, all of those companies are performing pretty well. I don't have any in our portfolio that I would say we have any concern around what's going on and as probably what you're mentioning, you see what's happening in some of the major retailers, the Nordstroms, Macy's, et cetera. So -- and we're not looking at many in that category. We don't really look at any hardcore retail-type businesses. So anything we do is going to have some sort of unique specialty, I'll call it niche and a position that we think is defensible.

So Kyle, just to tag on to that. We don't have the stores for the distribution but most of our products are being distributed through stores and so there's an impact there. But to the extent that these products are sold online, we're in sync with what's going on in the transfer of distribution from retail stores to the Internet.

Our next question comes from Andy Stapp with Hilliard Lyons.

Would you provide some more details regarding the factors that led to the stock offering? Presumably, it would be to support new investment activity. And in your prepared remarks, you talked about the improvement in the investment pipeline but you also talked about pricing remains elevated. Just trying to reconcile everything.

Hey, Andy. Thanks for the question. So as I mentioned in the prepared remarks, the best we can say is, again, I use the word very carefully but we believe we've come at our times, we have done our offerings very constructively and responsibly when we've done them and we felt again, given where we are positioned today with the results we've achieved and where we see ourselves going over the next year or so that the timing was appropriate to do an equity offering. It does a lot of things, obviously. It does generate some capital, it does support our balance sheet, sets us in good shape relative to any equity versus debt ratios going forward. So we feel really good about where we are today. As far as the pipeline question, it's a constant battle. Frankly, as we all know, that's the business we're in. And so when I say the pipeline is building, it is. We look at a lot of deals, we have our team, which is 10 folks focused on this particular company. We're always looking at new stuff, we don't win every deal we look at, so we just have to keep the battle going. So I feel generally good about our position in the marketplace and as I mentioned earlier, we're not going to stretch and do a deal with a crazy multiple because it's not going to help our returns. And so I don't know if that helps to answer it but we're just -- we're set to do -- to keep doing what we've been doing and keep trying to generate results we've generated today over time.

And Andy, think about it this way. We have an opportunity to either keep the capital gains and pay the tax on it as a way of growing or we can pay out the capital gains and that means we have to raise equity some other way in order to grow the business. So we've taken the grounds of letting the capital gains go out and letting our shareholders pay their taxes on their gains the way they do and then that means we have to turn around and do some equity offerings from time to time.

Okay. And would you talk about the outlook for more successful exits?

Well, we've, as I mentioned, we managed our exits and we've had a couple this past year and then one right at a subsequent event. And we'll keep looking and doing what we need to do to meet our goals as we go forward. The portfolio currently is 35 companies. We take a hard look as going out over the couple of years and think through how to manage them to make them successful exits and obviously, we'll see more of them as we go forward.

Okay. And GI Plastek, B-Dry and Jackrabbit had some meaningful valuation reductions during the quarter. Just if you could provide some colors on those companies, please?

Go ahead.

Andy, this is Julia. As Dave mentioned and alluded to for something like Tread, these 3 also fall on that same category where if you have temporary changes in operating performance, those generally get reflected in our fair values quarter-over-quarter. So you may see fluctuations there that don't indicate a permanent decline in the value.

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to David Gladstone.

All right. Thank you all for calling in. Those were good questions. Hope you have some more at next quarter and hopefully we can show you some good results, and that's the end of this conference call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.