キャピタル・サウスウエスト（CSWC）2027年度第2四半期決算説明会：コミットメント額は過去最高の3億9100万ドル

主要な要点

• キャピタル・サウスウェストの2027年度第2四半期における税引前投資純利益は3,720万ドル（1株当たり0.58ドル）となった。総投資収益は前四半期の6,100万ドルから6,720万ドルに増加した。
• 新規投資約束額は、新規ポートフォリオ企業14社および既存企業16社を合わせて過去最高の3億9,100万ドルに達した。新規ポートフォリオ企業向けのアレッジ（融資組成）はすべて第1受託シニア担保付債権であった。
• クレジット・ポートフォリオは前年同期比28%増の22億ドルに拡大した。加重平均利回りは10.9%で、キャピタル・サウスウェストの担保を通じた加重平均レバレッジはEBITDAの3.7倍となった。
• 取締役会は、第3四半期の1株当たり合計配当金を0.64ドルと発表した。これには普通配当0.58ドルと特別配当0.06ドルが含まれる。未分配課税所得は1株当たり0.92ドルに増加した。
• 1株当たりNAV（純資産価値）は16.61ドルから16.64ドルに上昇した。同社はATM（At-The-Market）募集プログラムを通じて、当時の1株当たりNAVの148%に相当する平均価格で6,700万ドルを調達した。
• ノンアクルーアル（未収利息不計上）投資の割合は、公正価値ベースでポートフォリオの1.1%から1.4%に上昇した。経営陣は、当四半期の債権評価損の大部分はポートフォリオ全体の悪化ではなく、個別企業3社の状況によるものだとしている。

主要財務データ

事業および業績ハイライト

キャピタル・サウスウェストは、新規ポートフォリオ企業14社に対して第1受託シニア担保付債権に3億1,400万ドル、株式に1,300万ドルを投資した。また、既存企業16社に対しても第1受託債権に6,300万ドル、株式に100万ドルを実行した。

新規投資の加重平均シニアレバレッジは負債/EBITDA倍率で3.4倍、LTV（融資比率）は33%、加重平均スプレッドは6.5%であった。経営陣によると、同社は過去12ヶ月間に約1,600件の案件を精査したが（2026年度は1,200件、2025年度は1,000件）、成約率は2%未満に維持された。

四半期末時点で、クレジット・ポートフォリオの99%が第1受託シニア担保付であり、1社あたりの平均エクスポージャーは約0.8%であった。クレジット・ポートフォリオの約92%がスポンサー支援を受けており、公正価値ベースのポートフォリオの89%は、同社の5段階の社内評価基準で「1」または「2」の評価を獲得している。

ポートフォリオのキャッシュフロー・カバレッジは、前回の基準金利ピーク時の最低値2.9倍から3.5倍に改善した。株式共同投資ポートフォリオには102件の投資（公正価値1億9,200万ドル）が含まれており、取得原価の120%で評価されている。これは3,160万ドル（1株当たり0.48ドル）の含み益に相当する。

また、キャピタル・サウスウェストはトリニティ・キャピタルとの2番目のジョイントベンチャーとなる「Desert Star」を設立し、3年間で2,500万ドルの出資（エクイティ・コミットメント）を実施する予定である。同ファンドは、主にキャッシュフローがプラスのソフトウェアおよびテクノロジー企業への債権投資に注力する。経営陣は、Desert Starは適切な資金配分であり、同社の核となるローワーミドルマーケット戦略の変更を示すものではないと強調した。

資本構造および経営見通し

同社は2031年9月満期の6.75%無担保社債3億5,000万ドルを発行した。関連する金利スワップにより、実質的にSOFR＋2.16%の変動金利に変換された。

キャピタル・サウスウェストはさらにコーポレート・クレジットファシリティーの融資枠を5億1,000万ドルから5億9,500万ドルに引き上げ、適用借入マージンを2.15%から2.00%に削減、10〜15ベーシスポイントのSOFR調整を撤廃し、満期を2031年9月に延長した。これらの取引により、同社には2029年まで返済期日が到来する負債が存在しない。

投資チームの拡大を反映し、経営陣は四半期当たりの巡航（ノーマライズド）融資組成額が過去の約1億5,000万ドルから2億5,000万ドル近くに上昇すると見込んでいる。12月四半期について、経営陣は返済額が大幅に増加すると予想しており、過去3四半期合計（約1億ドル）の約2倍に達する可能性があると指摘した。

同社は規制上のレバレッジを目標範囲である0.9倍〜1.0倍以内に維持する意向である。追加的なリソースの投下に伴い、営業費用比率（オペレーティング・レバレッジ）は1.4%〜1.5%で推移すると見込まれている。

経営陣は管理報酬を含めてCapTrinから10%台半ばのリターンを目標としており、Desert Starについても本格稼働後は14%〜16%のリターンを見込んでいる。CapTrinの出資約定額は、現在出資済みの約2,500万ドルから、今後12ヶ月間で5,000万ドルに増加する見通しである。

また、経営陣は業績、実現益、未分配課税所得の残高に応じて、2027年中に普通配当および特別配当の一方または両方の増配が可能であると述べた。

リスクおよび注視事項

基準金利の上昇は、キャピタル・サウスウェストの大部分を占める変動金利型資産の利回りを向上させる可能性がある一方で、借入先のキャッシュフローを圧迫し、BDCの資金調達コストを増加させる可能性があると経営陣は認めている。同社は、自社の固定金利負債、ポートフォリオの分散、および借り手の比較的保守的なレバレッジが、金利上昇時の防壁になると考えている。

当四半期の債権評価損約1,000万ドルの原因となったのは、ウォッチリスト登録物件3件の投資であった。これらには破産から脱却した洗車会社、買収統合の実行課題に直面している屋根工事会社、ノンアクルーアル状態が続いているポストプロダクションCGI企業が含まれる。経営陣はこれらの事象を個別企業固有のものと説明した。

洗車会社への投資は、参入市場における過剰建設、インフレの圧力、過大なレバレッジを伴う資本構造にも直面している。屋根工事会社へのエクスポージャーは、暴風雨被害の少なさと買収主導型戦略の実行における問題から影響を受けている。

アナリスト質疑応答の要点

• クレジットの耐性：経営陣は、3.5倍のキャッシュフロー・カバレッジ、低いLTV（融資比率）、1社あたりの低い平均エクスポージャー、金利上昇サイクル突入時における低いノンアクルーアル比率を挙げ、ポートフォリオは以前よりも次の金利上昇サイクルに対する備えができていると述べた。
• 返済とレバレッジ：12月四半期に予想される返済は、規制上のレバレッジを同社の目標範囲である0.9倍〜1.0倍以内に抑えるのに寄与する見通しである。
• ジョイントベンチャー：CapTrinは、同社の直接的なバランスシートの目標リターンに適合しない、より大規模で低スプレッドの融資競争においてキャピタル・サウスウェストを支援するよう設計されている。Desert Starは小口のテクノロジー融資に特化した別個の戦略であり、キャピタル・サウスウェストが50-50の議決権と個々の投資に対する承認権を保持する。
• 配当維持能力：経営陣は、1株当たり約1.00ドルの未分配課税所得残高を十分な水準と見なしている。残高が0.50ドル以下に減少した場合、四半期当たり0.06ドルの特別配当に対する下支え効果は限定的になると示唆した。
• 株式の売却機会：経営陣は、早ければ3月四半期にもポートフォリオから1件の売却が実現し、売却プロセス次第で約1,000万〜1,500万ドルの売却益を創出する可能性があると提示した。
• 融資保護条件：経営陣は、ローワーミドルマーケットでの融資組成には引き続き完全なコベナンツ・パッケージが含まれていると述べた。与信構造は堅固に維持されており、価格設定が市場におけるより変動的な要因となっている。

決算説明会文字起こし全文

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Thank you for joining today's Capital Southwest Second Quarter Fiscal Year 2027 Earnings Call. Participating on the call today are Michael Sarner, Chief Executive Officer; Chris Rehberger, Chief Financial Officer; Josh Weinstein, Chief Investment Officer; Amy Baker, Executive Vice President of Accounting; and Morganne Stewart, Director of Communications. I will now turn the call over to Morganne.

Morganne Stewart

Thank you. I would like to remind everyone that in this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law.

I will now hand the call over to our President and Chief Executive Officer, Michael Sarner.

Michael Sarner

Thanks, Morganne, and thank you, everyone, for joining us for our second quarter fiscal year 2027 earnings call. We are pleased to be with you today and look forward to discussing our results for the quarter. Our portfolio continued to deliver consistent results during the second fiscal quarter. We generated pretax net investment income of $0.58 per share, which was supported by strong recurring earnings. Our undistributed taxable income balance remains robust at $0.92 per share, reflecting consistent realization activity.

We remain confident in our ability to continue covering both our regular and supplemental dividends through the earnings power of the portfolio. Our Board of Directors has declared a $0.58 per share regular dividend for the December quarter paid out monthly over October, November and December 2026. They have also declared a quarterly supplemental dividend of $0.06 per share payable in December, bringing total dividends declared for the third fiscal quarter to $0.64 per share. Deal flow in the lower middle market has been robust. The quarter was exceptionally active on the origination front, driven by both the strength of our sponsor relationships and the continued growth of our investment team. We closed a record $391 million in total new commitments across 14 new portfolio companies and 16 existing portfolio companies.

Our new portfolio companies this quarter span 11 industries, reflecting our ability to source deals across the lower middle market. For the new deals that closed during the September quarter, weighted average senior leverage was 3.4x debt-to-EBITDA and weighted average loan-to-value was 33%, providing a substantial equity cushion beneath our debt. Our recent origination success has been supported by the sizable growth of our organization. Over the past 18 months, we have expanded our team from 27 to 46 employees, significantly increasing our sourcing and underwriting capacity. CapTrin, our strategic joint venture with Trinity Capital, has also broadened the range of opportunities we can competitively pursue.

Together, these efforts have helped us build a substantially larger pipeline. In fact, over the last 12 months, we have screened approximately 1,600 opportunities, up from 1,200 in fiscal year 2026 and 1,000 in fiscal year 2025. And while our pipeline has grown, we remain highly selective with a close rate below 2%. We believe this reflects both our disciplined underwriting process and the depth of our relationships and sourcing capabilities in the lower middle market.

Looking at the current macro lending environment, it seems more likely than not that we're heading back toward a higher for longer rate environment. In a recent article, I discussed how a renewed rise in base rates could affect BDCs. The short answer is that higher rates aren't simply good or bad for BDC earnings. Higher rates will certainly increase portfolio yields, but they could also put pressure on borrower cash flows and raise the BDC's own cost of capital. I think if rates move higher, you can see greater separation across the industry with credit quality, portfolio company leverage, funding costs and balance sheet liquidity becoming increasingly important differentiators.

For Capital Southwest, we believe we are well positioned if rates move higher. Our assets are predominantly floating rate, much of our debt is fixed rate, and our portfolio companies have conservative leverage of approximately 3.7x. We have also gained experience and insight from navigating the previous rate cycle when SOFR rose above 5.5% and saw firsthand how our lower middle market portfolio performed. While every rate cycle is different, we believe the combination of our asset sensitivity, liability structure and conservative portfolio leverage positions us well if base rates move higher.

Beyond our core balance sheet activity, we continue to broaden the ways we access attractive investment opportunities. This quarter, we partnered with Trinity Capital to form Desert Star, our second joint venture together with a $25 million equity commitment. Desert Star gives us access to the technology lending market, allowing us to gain exposure through a granular portfolio of investments in an area where we have not historically focused. We expect to deploy our equity commitment over several years as we take a measured approach to investing in this area of the market.

Turning to our capital structure. We significantly strengthened our balance sheet during the quarter. We issued $350 million of 5-year unsecured notes and amended, extended and upsized our corporate credit facility. This amendment meaningfully reduced our cost of capital while providing additional capacity and flexibility to support future growth. Following these transactions, we have no debt maturities until 2029. In connection with the unsecured note issuance, we also entered into our first interest rate swap. Chris will provide more detail on these activities in his remarks.

Rounding out a solid quarter, we raised $67 million in gross equity proceeds through our ATM program. Our ability to access this program continues to be a meaningful competitive advantage for Capital Southwest. In a market where fewer publicly traded BDCs are trading above book value, our improved price-to-book valuation gives us a differentiated ability to raise growth capital that is accretive to NAV and supportive of long-term shareholder value.

I will now hand the call over to Josh to review more specifics of our investment activity.

Josh Weinstein

Thanks, Michael. As previously mentioned, this quarter, we deployed a total of $391 million across new and existing portfolio companies. This consisted of $314 million of first lien senior secured debt and $13 million of equity across 14 new portfolio companies. Across 16 existing portfolio companies, we invested $63 million in first lien senior secured debt and $1 million in equity this quarter. Additionally, during the quarter, we generated $74 million of proceeds from portfolio company exits at a weighted average IRR of 14.5%. Our credit portfolio ended the quarter at $2.2 billion, representing 28% year-over-year growth from $1.7 billion as of September 2025.

Importantly, 100% of new portfolio company debt originations were first lien senior secured. And as of quarter end, 99% of the credit portfolio remained first lien senior secured with a weighted average exposure per company of only 0.8%. This level of portfolio granularity reflects our disciplined approach to risk management as we continue to scale the balance sheet. The vast majority of our deal activity continues to be first lien senior secured loans to private equity-backed companies. Approximately 92% of our credit portfolio is sponsor-backed, which provides strong governance, operational support and when needed, the potential for junior capital.

In the lower middle market, we frequently have the opportunity to invest in our portfolio companies' equity. When the thesis is compelling, we take a minority position pari passu alongside the private equity sponsors. As of quarter end, our equity co-investment portfolio consisted of 102 investments with a total fair value of $192 million, representing 8% of our total portfolio. This equity portfolio was marked at 120% of our cost, representing $31.6 million of embedded unrealized appreciation or $0.48 per share. These positions continue to give our shareholders meaningful upside participation in growing lower middle market businesses, driven by both operational improvements and strategic add-on acquisitions.

Our market remains competitive with both bank and nonbank lenders continuing to pursue high-quality opportunities. While that competition has resulted in tighter pricing over the past several years, we have begun to see spreads widen over the past few quarters. New originations this quarter had a weighted average spread of 6.5%. Despite the competitive environment, the depth of our sponsor relationships and the continued growth of our investment team are expanding the opportunities we are able to originate. Since launching our credit strategy in 2015, we have completed transactions with more than 145 private equity firms nationwide. Over the last 12 months alone, we have closed new platform investments with 22 sponsors with whom we had not previously partnered. We believe the breadth and continued expansion of those relationships position us well to source attractive opportunities while remaining highly selective.

Our portfolio now consists of 153 companies comprised of 89.4% to first lien senior secured debt, 1% to second lien senior secured debt, 8% to equity co-investments and 1.5% to joint ventures. The credit portfolio generated a weighted average yield of 10.9% with a weighted average leverage through our security of 3.7x EBITDA. At origination, all loans are initially assigned an investment rating of 2 on a 5-point scale, with 1 being the highest rating and 5 being the lowest. At quarter end, 89% of the portfolio at fair value was rated a 1 or a 2. Cash flow coverage has also continued to improve, increasing to 3.5x from a low of 2.9x during the peak of base rates. We remain pleased with the overall performance of the portfolio and believe it remains well positioned as we continue to grow. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.

Chris Rehberger

Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $37.2 million or $0.58 per share. For the quarter, total investment income increased to $67.2 million from $61 million in the prior quarter. The increase was primarily driven by a $4.6 million increase in cash interest income, coupled with an increase of $1 million in fees and other income. The increase in fee income was driven by increased arranger fees due to larger origination volumes than in the prior quarter. Importantly, PIK as a percentage of total investment income decreased to 7.4% from 8% in the prior quarter.

On the expense side, G&A increased by approximately $400,000 from the prior quarter. This increase was driven entirely by proxy solicitation expenses related to our shareholder vote on increasing our authorized shares, which is a nonrecurring item. As of the end of the quarter, our loans on nonaccrual represented 1.4% of our investment portfolio at fair value compared to 1.1% at the end of the prior quarter. We continue to demonstrate strong dividend coverage with 109% cumulative coverage since launching our credit strategy. Our UTI balance increased to $0.92 per share this quarter from $0.87 per share in the June quarter.

In addition, we continue to hold significant unrealized appreciation across our equity portfolio. As a result, we remain confident in our ability to grow our UTI balance and continue paying quarterly supplemental dividends over time. LTM operating leverage ended the quarter at 1.4%, a meaningful improvement from the 1.6% observed a year ago in September 2025. Notably, this improvement occurred despite adding 14 employees over the last 12 months. Going forward, we expect to continue to add resources to our team while maintaining operating leverage in the 1.4% to 1.5% range. Our operating leverage remains significantly better than the BDC industry median of approximately 2.5%, underscoring the inherent efficiency of the internally managed BDC model.

NAV per share increased to $16.64 per share, up from $16.61 per share in the prior quarter. The primary driver of the increase in NAV per share was accretion from our equity ATM program, partially offset by net realized and unrealized depreciation on the investment portfolio. As Michael mentioned earlier, during the quarter, we amended our corporate credit facility, which increased total commitments to $595 million from $510 million, reduced our borrowing applicable margin to 2% from 2.15%, removed the incremental SOFR adjustment of 10 to 15 basis points and extended the maturity to September 2031 from August 2028. As a result, our earliest debt maturity is now in 2029, providing us with greater long-term funding certainty.

Additionally, we raised $350 million in new unsecured bonds bearing 6.75% fixed interest and maturing in September 2031. In conjunction with the unsecured bond offering, we entered into an interest rate hedge, which effectively swaps the September 2031 notes to SOFR plus a 2.16% spread. Finally, we raised approximately $67 million in gross equity proceeds during the quarter through our equity ATM program, at a weighted average share price of $24.50 per share or 148% of the prevailing NAV per share, reinforcing our ability to raise capital efficiently and accretively.

Our liquidity position remains robust with approximately $647 million in cash and undrawn commitments across our 2 credit facilities. In total, this represents more than 1.6x coverage of the $394 million in unfunded commitments across the portfolio. During the quarter, we also received approval to increase our applicable -- or excuse me, our available leverage in the SBIC II fund to $250 million, providing additional flexibility beyond our current $175 million commitment. The SBA program continues to be an attractive source of capital for us, offering both a competitive cost of funds and reliable long-term liquidity to support portfolio growth.

Regulatory leverage ended the quarter at 1:1 debt to equity. We will continue to raise secured and unsecured debt capital as well as equity through our ATM program in a methodical and opportunistic manner to ensure we maintain significant liquidity and a conservatively constructed balance sheet with adequate covenant cushions. Finally, we continue to make meaningful progress with CapTrin Partners, one of our joint ventures with Trinity Capital. The JV currently holds approximately $127 million in first lien securities in 14 portfolio companies with a weighted average leverage of 1.3x debt to EBITDA. We expect to continue originating low leverage, high-quality investments within this structure.

I'll now hand the call back to Michael for some final comments.

Michael Sarner

Thank you, Chris, Josh, Amy and Morganne and all the employees who help us tell the story on a quarterly basis. And thank you, everyone, for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Operator

[Operator Instructions] Our first question comes from Mickey Schleien of Clear Street.

質疑応答

Mickey Schleien

Michael, you recorded about $15 million of unrealized depreciation on debt investments, if I'm not mistaken. Which individual investments were the main drivers? And was that primarily borrower-specific or indicative of some broader credit deterioration?

Michael Sarner

Yes. There's -- thanks for the question, Mickey. There was essentially 3 companies that are on our watch list that had significant depreciation during the quarter. One is a car wash business that you're probably familiar with that had gone through bankruptcy. It's come out of bankruptcy. And I think cyclicality related to inflation is still harming that business. Probably the balance sheet is probably still a little overlevered to where it is. So we'll see how that lands. There's a roofing business that was a roll-up strategy. I think the execution on that has had some hiccups and they're trying to course correct that. And then the other one is an older name that's been on nonaccrual for a while in the post-production CGI for the entertainment industry. And that's sort of a 2021 deal that had basically COVID issues, based on elevated EBITDA coming out of COVID. And so I think they're all fairly idiosyncratic from one another. Those 3, I think, had about $10 million of the depreciation for the quarter, and the rest of it was really immaterial.

Mickey Schleien

That's really helpful. I think in your prepared remarks, you talked about the potential for interest rate increases. And I agree that every cycle is different. But could you give us a sense of how concerned you are about borrowers at the tail end of your portfolio? I mean averages and medians are interesting, but the problems are at the tail end if the forward curve turns out to be correct and the Fed tightens several more times.

Michael Sarner

I think I'd answered the question just, kind of, going back to where we were when rates were 5.5%. Our interest coverage across the portfolio, I understand we're talking about, sort of, on a detailed perspective, got down to 2.9x where it is 3.5x today. But I also think the strength of the portfolio today where it was then, we have lower nonaccruals than we did going into that cycle. I think our portfolio -- loan to values are lower. If you look at the deals we just did this quarter, which is almost $400 million, now we're at 3.4x and 33% loan to value. I would just tell you, I think that our portfolio -- on top of that, the granularity that resides in the portfolio at about 76 basis points. I think we're better prepared for a higher rate cycle now than we were going into the last cycle, and we came out of that pretty clean, I would say.

Mickey Schleien

Okay. A couple more, if I can. You had record originations and balance sheet leverage is now 1.25x on a debt-to-equity basis. So given your current pipeline and available liquidity, how should we think about investment activity going forward? And where do you -- what's your target debt-to-equity ratio on the balance sheet?

Michael Sarner

So on the origination activity, I think we're -- historically, before the growth in our investment team, which I think we cited on the call, has grown 40% over the last 24 months. A lot of those are senior individuals. So I think our total originations this quarter is going to grow from where it was $150 million-ish a quarter to something closer to $250 million a quarter. The other question was how much on the equity raise?

Chris Rehberger

Yes. So Mickey, I'll take the second question. So leverage, we typically look at on a regulatory basis. And so we've said in the past, our target is 0.9 to 1x regulatory. So we're certainly at the top end of that range. I wouldn't expect it to go above that. Part of the reason for that this quarter is, obviously, we were seeking shareholder approval for our authorized shares. We didn't get that until September. So actually, I think we did a really good job raising $67 million of equity in about a month. The other thing I would say is we are expecting a repayment cycle in this December quarter, which we hadn't seen in a few quarters. And so you should think about leverage, kind of, moderating in the 0.9 to 1x range regulatory leverage going forward.

Michael Sarner

Yes. I mean, in the last 3 quarters, I think we saw maybe $100 million of repayments, and we would expect that number to be maybe twice as much just in the 12/31 quarter alone.

Mickey Schleien

Okay. And lastly, and I appreciate your patience. So with CapTrin continuing to grow and now the launch of Desert Star, how meaningful could these JVs become to earnings over the next maybe year? And what returns are you targeting on your invested equity in those ventures? And how should we think about the timing of dividend income from them?

Michael Sarner

Sure. Let me just start by maybe framing -- so these 2 different JVs probably for 2 different purposes. Obviously, CapTrin is really a strategic venture, which allows us to be more competitive in deals that are sub-6%. That fund, we think since it's originating our core assets is going to grow over time. I think that we expect probably about a mid-teens return as the manager in that fund. I think the fund itself is about 13%, but we are getting scrape and some fees associated with it. Desert Star, on the other hand, so whereas we are the sourcing and originating and managing the assets for CapTrin, the inverse is true for Desert Star where Trinity is -- they're in that seat of originating the assets. We've committed $25 million, which will be funded over the next 3 years, and we expect a return of somewhere in the same 14% to 16% return once that facility is fully ramped.

Chris Rehberger

Yes. For the earnings power, Mickey, what I would say is it's going to take -- we've got $50 million in equity committed to the fund alongside Trinity $50 million, so $100 million total. It's probably going to take us 12 to 15 months to get that fully funded. So we'll ramp from what we have funded today, which is around $25 million up to $50 million over the next 12 months, generating, as Michael said, sort of a 13%, 14% return.

Mickey Schleien

That's really helpful.

Michael Sarner

The other thing I wanted to add too, so Desert Star, it's mostly going to be software deals. And the question is like why are we doing that today? If you look at what those deals look like in the market over the last 2 years, these are deals that were negative cash flow, negative EBITDA -- they are being funded off at 2 to 4x ARR. So not cash flow loans and it's not assets that we would frequent in. That market has changed. I think since all the headline noise coming out of the last fall, there's less lenders in the market. Deals today are all cash flow. I would say all of the deals that we've seen are positive cash flow, positive EBITDA, they're 1x ARR, full set of covenants.

And when we're thinking about the partnership, we believe we're pretty good at what we do is in the sponsored finance, lower middle market, but we don't frequent with scale in software technology. And as underwriters, the more deals you look at, the better decisions you'll make. And so our viewpoint is partnering with an expert in the field, which we consider Trinity an expert in the venture side, getting involved with them and having a small investment of granular size is a measured approach to investing in that industry without taking excess risk.

Mickey Schleien

If I could just follow up. You said those deals are going to be primarily cash flow positive. There's been a lot of talk about the impact of AI on these companies and the argument that small software companies are particularly at risk because it's just so hard for them to build a moat. Can you give us a sense at least as to the scale of these businesses in terms of the EBITDA you're targeting?

Josh Weinstein

Well, it's really across the board in the lower middle market to the middle market. So Trinity typically in those deals are doing businesses that are in the $5 million to $25 million of EBITDA.

Mickey Schleien

So that -- so these software technology deals would still fall into that range?

Josh Weinstein

Yes, they're direct -- most of the deals will be directly originated by Trinity and not bigger club deals and syndicated deals.

Operator

Our next question is from Melissa Wedel from UBS.

Melissa Wedel

When I listen to what you've talked about with regard to the second JV, it really seems like just, sort of, reading between the lines, you really want to keep those 2 groups of assets separate, and that's the rationale for 2 separate JVs rather than combining into one. Is that fair?

Michael Sarner

Yes, absolutely. I mean, I said, CapTrin is a very strategic vehicle. It is adding value to this organization because maybe I'll reframe it again is that between $5 million and $8 million of EBITDA in the lower middle market is where we have real specialty. But when deals get slightly larger, and these are safer companies, they tend to price sub-6%, and those deals don't fit perfectly into our target ROE. And so having this JV allows us to compete and win on deals where we think that the spread should be below 6%, and we are able to create a structure, a first out, last out structure that provides the necessary yield. So that in and of itself is the strategic venture that we're focused on with growth. As you said, the $25 million investment into Desert Star is really just that consider a single investment, which has granular risk relative to the number of companies that will be embedded within it.

Chris Rehberger

Yes. And maybe more directly, generally speaking, there's not going to be any crossover between the 2 joint ventures. I mean, today, there actually is one asset. But going forward, we do expect them to be separate strategies and separate asset allocations.

Melissa Wedel

Okay. I also had a follow-up on the comment that you made about expecting more of a repayment cycle in the fourth quarter. I was hoping you could elaborate on that in terms of what's driving, sort of, elevated repayments that you expect in 4Q? And is that something that might be matched on the origination side?

Michael Sarner

Well, I'll say this, we've seen 2 large originations come back and large to us is $30 million to $40 million, and we're expecting 1/3 of the same size towards the end of the quarter. Originations are going to be closer, I would imagine, to what I stated earlier, like, a normal quarter for the amount of professionals we have scouring the nation, which is probably $250 million. I'd probably ask, Josh, if you want to chime in on that.

Josh Weinstein

Yes. I think the lower middle market M&A activity is actually pretty good right now. I know that the middle market and upper middle market has been a lot less activity. And so some of that's just timing of some of the sale processes of portfolio companies of ours.

Operator

The next question is from Chris Muller with Citizens.

Christopher Muller

I guess, on the growth of the investment team, is there more hiring that you guys expect to do there? And when you guys bring new people on to the platform, how long does it typically take for them to fully ramp up?

Michael Sarner

So I think the answer to the question in terms of -- I do expect us to continue to hire people. I think one of the areas of growth that we've had over the last 18 months is hiring and building an operations team, so to work on deals that end up in our watch list, and that's been huge value add within the organization. So that's been a number of people. I think Josh mentioned, I believe, that we've hired 2 senior people, the originators, and there's others that have come up through our system that are now firing on all cylinders, if you will. So I would expect us to continue to hire in the mid- to the lower end. We probably staffed up our infrastructure on the back office fully, and that will probably grow at a slower clip at the moment. But Josh, I hand it over to you.

Josh Weinstein

Yes, I would say, obviously, commenting on the time to ramp, it depends on the position. We had -- we hired an originator -- dedicated originator earlier this year who had been in the lower middle market for the last 5 to 10 years. So the ramp-up period was pretty short. And then on the deal team front, the underwriting front, sort of, depends on the position, but we hired a principal level and a VP level underwriter who -- both of whom had lower middle market direct lending experience. So the ramp-up period again is very, very short. When we hire a junior underwriter from straight-up underwriter investment banking, it's a little bit longer, but it's still within a few months, they can get up to speed and significantly add value.

Christopher Muller

Got it. That's helpful. And then I guess, given the focus on tech and the Desert Star JV, will we see some equity positions in there? Or is it going to all just be debt investments?

Michael Sarner

So Desert Star it's all debt inside the fund. But I also want to, kind of, react to that, that, again, this is a $25 million check over 3 years. I would -- I do not want to overemphasize this is a change in strategy or overallocation to technology and software. This is an opportunity to invest alongside someone that we respect in the industry and make a nice 15% return.

Operator

Our next question is from Robert Dodd with Raymond James.

Robert Dodd

Congratulations on another good quarter. A couple of questions. I mean, first, on the ramp, obviously, headcount, you've just talked about it and the amount of incremental pipeline you're seeing. I mean, when I look at pipeline, can you characterize how much of it is now coming from -- in the deal closings is coming from, kind of, newer relationships versus more established? I mean, I just think the risk profile is different. If you've known a sponsor for a decade, you know how they think, you know how they invest. If it's somebody -- if it's a sponsor that's a new relationship over the last 18 months, it might not be more risky, but there's more uncertainty. So I mean, is there a different approach in terms of how you assess deal flow and pipeline that's coming from those newer relationships versus those longer-standing ones? And are those newer relationships the factor that's driving the increase in originations right now? And how should we think about the relative uncertainty of long-standing relationships versus newer ones?

Michael Sarner

The first thing I would answer on that is our close rate has come down from 2% closer to, I think, 1.7%. So by and large, your question is true. We're accepting a lot less deals because the people that join us do have to go through a process of learning us and us learning them. I think, Josh, you want to give some more detail on it.

Josh Weinstein

Yes. I think -- look, I mean, I think it takes years to cultivate a relationship where you, sort of, touched on this where you create that trust level and you, kind of, know each other very well. What I would say is the way that this generally plays is that you meet a new relationship or you get a new relationship and you may not see a deal from them for a few months or you see a deal and then you get to see how each other think, what kind of deals they're looking at, how we think about the deal. You likely don't win a deal from a relationship that you create for a year or 2, maybe even 3 years. And that's one of the reasons why our pipeline is growing because we had a couple of -- we have one new originator who's driving a lot of growth.

But we also have a couple of originators who have been doing it for 3 or 4 years. And some of those relationships that they created 3, 4 years ago are coming to the forefront now. And so you start to see, okay, maybe they saw 0 or 1 deal in the first year they, sort of, created that relationship, but then taking multiple trips to that specific city or seeing them at conferences and getting to know people better, year 3 and 4 is when you start to see all their deal flow, that kind of thing. And so that's one of the real reasons why we're driving a lot more pipeline and a lot more deal flow right now from relationships that we started 3 or 4 years ago and have cultivated over that time period.

Michael Sarner

One anecdotal too, Robert, is that, like, we hired a business development professional MD in January. So I guess we're here in November now. And he's brought in sizable amount of traffic on deals. And we've closed 2 deals with him over this 10 months. So obviously, that deal flow is there, but his win rate will increase once again, when we get more comfortable with his deal flow and vice versa as well.

Robert Dodd

Got it. On one, I got to go to back to Desert Star. Yes, I mean, it's small. You're only allocating $25 million. But what's your edge on reviewing those software deals? Obviously, Trinity has one, long-established lender in that segment of the market. But what do you bring to the table other than capital, right? Because obviously, it's your capital that's been put at risk, or shareholders' capital that's been put at risk in principle. I mean, what's the value add that you bring on rejecting a deal if it's inappropriate, when it's tech specific? I mean, you could have just bought $25 million of Trinity stock, so to speak. I'm not recommending that. But why this approach if it's not your area of expertise?

Michael Sarner

So I would probably agree with that phrasing. I think, first of all, yes, we bring cash to the deal. But in both joint ventures, we have 50-50 voting rights. At the end of the day, these businesses are still lower middle market, small businesses that our guys are experts in the field in underwriting. The reason why we don't focus on doing software deals ourselves is, kind of, what I said earlier. If we see 100 deals, and close 2, you'd like to think that you force-ranked the best 2 deals, and those are going to be the best deals that you could have invested in. In our pipeline, we may only see 10 deals on software in a given year. And if we're investing 2 out of 10, now that's 20%, you have to assume those deals may not have been the best deal. So I think in this circumstance, we still bring the underwriting to the table. We certainly bring the cash, and we have all of the input similar that they have with us on any particular deal to be the deal if we don't get comfortable with it. Josh, you want to add anything?

Josh Weinstein

Yes. I mean, like, the way that we think about it is just a very -- it's a good way for us to deploy a small amount of capital into a strategy that we have not focused on in a very granular way. And so -- and we get to approve the amounts and the deals, and we can see a deal and say we don't really like that one, and I don't want to put it in. So we get to, kind of, handpick the deals. You're right, they have a lot more expertise in tech investing than we do, and we want to leverage that. And we want to leverage their relationships with sponsors without taking a big bet in, sort of, software and tech lending.

Robert Dodd

Got it. Got it. If I can, one more. Your spillover, your UTIs, it's back approaching $1 again. I mean, it's a good problem to have to support the dividend. Is there any conceptual rule of thumb, I mean, how much you would be willing to accept if that keeps building, eventually something has to be done about it, which obviously the special dividends or supplemental dividends is the way to deal with that. I mean, is it just -- is there a way we should think about that in terms of, like, how much you would like to keep as a max or a minimum on that side of the -- because obviously it's embedded in NAV as well. So I mean, how -- what should we be thinking about on how much UTI is acceptable in your view?

Michael Sarner

Sure. So I would tell you that rule of thumb, we think $1 of UTI is a strong balance. On the inverse side, we would tell you that anything $0.50 and below at a $0.06 per quarter would be too small. The other thing I would add, kind of, where you're going with the question is we've been talking over the last probably 18 months about some sizable exits that were going to occur, and we saw the UTI was going to jump considerably. Those actually -- those companies are performing, but they pushed their sale processes. So we've grown our UTI organically through under distributing the dividend. We've grown it through small granular equity exits. And we still do expect probably one of those in 2027 and maybe the other one either 27 at the end of 2028.

So we could see that balance grow sizably. What does that mean? I would tell you that we would look to increase the $0.06 over time once we get comfortable where that UTI balance is. And you didn't ask but I'd say on the regular dividend. I'd say, look, we've done what we believe is a pretty strong job of managing NII down through a rate cycle that came down to 3%, 3.5% and maintain our dividend at 100%. With the strength of our deal team, with the strength of the originations this quarter and with the likelihood of rates increasing, we are fairly bullish that it's possible that either or both the supplemental and the regular dividends will be growing probably in 2027.

Operator

Our next question is from Sean-Paul Adams with B. Riley Securities.

Sean-Paul Adams

This was actually the second mention of car wash businesses this morning in the context of consumer-facing businesses feeling a pullback in spending. With Wash & Wax and Apple Roofing getting added to nonaccrual this quarter, I think Campany Roof is also marked below par. You guys now have 2 roofing businesses and a car wash, kind of, facing consumer pressure. Beyond those, which other parts of the portfolio are you guys seeing exposed to a slowdown in low-end consumer spending?

Josh Weinstein

It's interesting. I think that the consumer spending on car wash that we're in is part of the story. But a big part of it also is some of the execution and also an overbuild in car wash centers specifically. And so it's specific to the geographies that we -- that this company is focused in. So it's -- certainly, consumer spending has been -- has attributed to the underperformance, but it's a little bit of -- a lot of it was capital structure, overbuild in the specific geographies. And so that was a big part of the story as well.

On the roofing side, I think it's pretty much across the board that roofing -- you've had a couple of bad storm years. So one of our businesses is heavily focused on storm. And so you've had a couple of bad storm years, which happens, and that's driven some of the weakness there. And then it's also just been -- a lot of it has been execution, too. I mean like a lot of it's been execution on roll-up strategies across the board from what I've heard across the industry, not just our portfolio companies. So let's say, consumer spending, particularly on the roofing side, a lot of the roofing, for example, one of our businesses, it's specifically an insurance-driven business. So that's not going to really -- there may be a little bit of consumer spending in there, but it won't be a lot.

Operator

Our next call is from Erik Zwick with Lucid Capital Markets.

Erik Zwick

I appreciate all the commentary on the new originations in the quarter in terms of average spreads and leverage. I guess one thing I hadn't heard you mention, unless I missed it, was just any commentary you have on structure and covenants, whether there's been any changes there in the most recent quarter relative to maybe the past year or so?

Michael Sarner

Yes. I mean, honestly, one thing you have to understand, on every origination we do, they're going to have full set of covenants. I mean, if they're going to be in a lower middle market, our big advantage is the fact that we can get full covenants that we can have low leverage in LTV. And so we take advantage of that in each and every case. I guess, Josh, would you have anything to add on that?

Josh Weinstein

Yes. The structures have stayed really, really firm. I mean that's the bottom line. And part of that's driven by our discipline and part of that is driven by the market discipline in the lower middle market. So the combination of both, I think, has driven us to have really strong credit agreements really for a long time. And so the more fluid dynamic in the lower middle market is pricing and structures have not wavered all that much.

Erik Zwick

That's good to hear. And curious, just in terms of the increased SBA capacity, what percentage of the pipeline today would be SBA eligible?

Chris Rehberger

Yes. So we've been pretty consistent on this point. I think roughly 75% of the deals that we see or that come in for serious consideration are SBIC eligible. And so SBIC II continues to ramp. I think we're not quite at the point to take the additional $75 million of leverage just yet, but that will probably happen in the next quarter or so.

Erik Zwick

And then last one for me. You mentioned potential repayment cycle in calendar 4Q. Curious on the equity realization side. I know it's sometimes a little bit harder to have an outlook out past more than a quarter or so there, but just any potential equity realizations towards the end of the year?

Michael Sarner

So the capital that's coming back this quarter is primarily debt only. I can't think of any gains.

Chris Rehberger

We have one small equity gain that we expect to come back later in the quarter. Obviously, that's subject to the sale process.

Michael Sarner

But looking forward to early -- it could be as soon as the March quarter, we do have one of the -- again, one of the assets that we, kind of, discussed over time might have an exit that could be fairly sizable, sizable between $10 million and $15 million.

Operator

I am showing no further questions at this time. I would now like to turn it back to Michael Sarner, CEO, for closing remarks.

Michael Sarner

We appreciate everybody taking the time today to listen in and appreciate all the questions. That was a pretty spirited conversation, and I appreciate it. We look forward to telling the story again next quarter, and hope everybody has a good rest of the week.