Rand Capital Q2 2023 Earnings Call Transcript

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August 4, 2023

There are 4 speakers on the call.

Operator

Welcome to Rand Capital Corporation's 2nd Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. Please note this conference is being recorded. At this time, I'll turn the conference over to Craig Mychajluk. Craig, you may now begin.

Speaker 1

Thank you, and good morning, everyone. We appreciate your interest in Rand Capital and for joining us today for our Q2 2023 Financial Results Conference Call. On the line with me are Dan Penberthy, our President and Chief Executive Officer and Margaret Prechtel, our Executive Vice President and Chief Financial Officer. A copy of the release and slides that accompany our conversation is available at randcapital.com. If you're following along in the slide deck, please turn Slide 2, where I'd like to point out some important information.

Speaker 1

As you are likely aware, we may make some forward looking statements during this presentation. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from where we are today. Can find a summary of these risks and uncertainties and other factors in the earnings release and other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or@sec.gov. During today's call, we'll also discuss some non GAAP financial measures.

Speaker 1

We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles. We have provided reconciliations of non GAAP measures with comparable GAAP measures in the tables that accompany today's earnings release. With that, please turn to Slide 3, and I'll hand the discussion over to Dan. Dan?

Speaker 2

Thank you, Craig, and good morning, everyone. Our 2nd quarter results reflected the strength and execution of our strategy With continued earnings momentum driven by the addition of debt investments originated during the quarter and a recognized sizable gain from the exit of our debt and equity in DSD or Dealer Solutions and Designs. We delivered total investment growth of 34% for the quarter, which reflects increased interest from portfolio companies and higher fee income. For the quarter, net investment income per share was $0.19 And on an adjusted basis, a non GAAP financial measure, which excludes the capital gains incentive fee accrual expense Was $0.38 per share. Margaret will review these changes in more detail later.

Speaker 2

We paid a regular quarterly cash dividend of $0.25 per share during the Q2 and just over a week ago Announced our regular quarterly cash dividend for the Q3, which will also be $0.25 per share. We believe that our deal flow and our unique position in the market will help to continue to support future dividends. Other notable highlights during the quarter included nearly $4,700,000 in new and follow on investments, While receiving $8,800,000 from portfolio investment sales and debt repayments. If you turn to Slide 4, You could see our portfolio mix between debt and equity and the changes during the past quarter. At quarter end, Our portfolio consisted of investments in 29 companies, down 1%, which reflects the sale of DSD and also Somerset Gas, Offset by one new investment, which I'll talk to on the next slide.

Speaker 2

The portfolio comprises approximately 60% In fixed rate debt investments, and this reflects an improvement over the past quarter and since the year ended 2022. The remaining mix at the end of the quarter comprised 29% in equity investments in private companies And 11% in publicly traded equities consisting of other BDCs and our ACV Auctions holdings. The fair value of our investments totaled $66,800,000 This was down sequentially, Largely due to the partial sale of our ACV shares and the valuation adjustment on Open Exchange as well as the DSD sale. Hoping to offset this was our new investments. On a year to date basis, however, our portfolio value expanded 9% And one follow on investment that totaled $4,700,000 during the quarter.

Speaker 2

Those transactions are highlighted on Slide 5. The largest investment was $4,300,000 to INEA, which consisted of $3,300,000 of subordinated debt at a 12% interest rate with an additional 2% payment in kind alongside $1,000,000 of preferred equity. INEA is a stocking distributor of controlled expansion and alloys, electronic grade Nichols, Refractory grade metals and alloys and also soft magnetic alloys. We've also made a follow on debt investment of 390 dollars in portfolio company ITA. This is to support the working capital needs and new manufacturing equipment for the company.

Speaker 2

Rand's total debt and equity investment in ITA has a fair value of $4,000,000 at quarter end. We had 2 exits during the quarter. DSD was sold during June 2023, which resulted in full repayment of our subordinated debt And the sale of our preferred equity investments. In total, Rand received $6,800,000 in proceeds, which included a net gain of $2,500,000 The other exit was a small one as we sold Rand's legacy The equity position rather and that was in Somerset Gas. Lastly, we have also added liquidity position by trimming some of our holdings in ACV Auctions for which we sold 125,000 shares during the quarter At an average price of $14.03 this has netted us a realized gain of $1,700,000 At quarter end, we still hold 194,934 shares of ACV, which represented approximately 5% of the portfolio's fair value.

Speaker 2

Recently, ACV has been trading at the $16 to $18 share range, And we have our shares valued at $17.32 at quarter end. As always, we'll continue to evaluate our holdings in ACV as we consider our future liquidity needs. The charts on Slide 6 illustrate the diversity in our portfolio And the change in industry mix during the Q2, given the impact of the new investment in INEA, The sale of DSD, along with fair value changes, we saw notable changes in our industry mix. Distribution, a rather new industry within our mix, was due to the investment in INEA, which now makes up 7% of our total. Additionally, our automotive mix decreased 7 percentage points due to the also due to the sale of DSD.

Speaker 2

There were also some smaller adjustments as manufacturing went up 2 percentage points, software went down 2 percentage points, And overall, we continue to value the diversity of this portfolio. Slide 7 lists our top 5 portfolio companies at quarter Representing almost half of our total portfolio. There was one change in the ranking since the last quarter With INEA moving up to the top 5 ranking at the number 5 spot, while DSD drops out giving its sale. Tilson continues to remain the largest fair value investment at $10,600,000 or 16% of our total portfolio. With that, I'll turn it over to Margaret to review our financials in greater depth.

Speaker 3

Thank you, Dan, and good afternoon, everyone. I'll start on Slide 9, which provides an overview of our financial summary and operational highlights for the Q2. Total investment income was $1,800,000 and this is up 34% over last year, Driven by a 47% increase in interest income from portfolio companies and higher fee income. The higher interest from portfolio companies reflects 6 new debt instruments that originated over the past year. Of our 29 total portfolio company investments, 22 contributed to our total investment income during the Q2 of 2023.

Speaker 3

Total investments were approximately $1,300,000 during the Q2 compared with a credit of $96,000 in the prior year Q2. This increase largely reflects a change in accrued capital gain incentive fees to the company's external investment advisor, Rand Capital Management, LLC. The current period includes $491,000 of capital gains incentive fee expense compared with a credit of $663,000 for the Q2 of 2022. Our current total expenses, which reflects $259,000 in interest expense, given use of our Senior revolving credit facility that we entered into last year. There was no corresponding expense during the prior year Q2.

Speaker 3

As a reminder, we are required to accrue capital gain incentive fees on the basis of net realized capital gains and losses and net unrealized Capital gains and losses at the close of the period. Excluding the capital gains incentive fee, adjusted expenses, which is a non GAAP financial measure, We're $816,000 compared with $567,000 in the Q2 of 2022. 2nd quarter net investment income was $493,000 or $0.19 per share compared with $1,400,000 or $0.55 per share and last year's period. On an adjusted basis, which is a non GAAP financial measure and excludes the capital gain incentive fee accrual expense, Net investment income was $0.38 per share, up 31% from $0.29 per share in last year's period. Slide 10 provides a waterfall graph of the change in net asset value for the quarter.

Speaker 3

Net assets at June 30, 2023 were $61,400,000 up more than 3% from the end of the Q1 of 2023. This increase reflects solid net investment income and the net realized gains, partially offset by a decrease in unrealized depreciation and investments and 645,000 dollars and dividend distributions to shareholders during the quarter. As a result, the net asset value Per share at June 30, 2023 was $23.79 compared with $23 at March 31, 2023. As highlighted in Slide 11, we have a strong balance sheet and significant liquidity That positions us well for future investments. Cash at quarter end was approximately 8,400,000 And we did not repurchase any shares during the quarter.

Speaker 3

We held approximately $7,400,000 in liquid BDC and ACV auction shares, which can provide near term funding capital for investments as we have demonstrated in past periods. In addition, based on our borrowing base formula, Rand has $14,300,000 of availability under our senior secured revolving credit facility at June 30, 2023. Our total outstanding borrowings of $10,700,000 carry an interest rate of $8,590,000 atquarterend. With our strong cash position after quarter end in July, we paid down $3,000,000 of our outstanding borrowings. On July 25, 2023, Rand's Board of Director declared a quarterly cash dividend of $0.25 per share.

Speaker 3

The cash dividend will be paid on or about September 14, 2023 to shareholders of record as of August 31, 2023. With that, I will turn the discussion back to Dan.

Speaker 2

Thanks, Margaret. The 2nd quarter shows continued investment income growth as we scale the business Investing nearly $4,000,000 in subordinated debt instruments along with related equity investments in these privately held lower middle market companies. We believe we can continue to execute our strategy as we look to the second half of the year and beyond. With our strength in balance sheet and liquidity position, we expect to leverage our cash on hand and our credit facility To invest in new opportunities that will provide higher yields in order to drive our earnings potential and support a growing dividend well into the future. Thank you for joining us today and for your ongoing and continued interest in Ranch Capital.

Speaker 2

We look forward to updating you on all of our

Operator

This will conclude today's conference. You may disconnect your lines at this time.

Speaker 2

Thank you for your participation.

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Earnings Conference Call
Rand Capital Q2 2023
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