Q2 2023 Rand Capital Corp Earnings Call

Participants

Daniel Patrick Penberthy; President & CEO; Rand Capital Corporation

Margaret Whalen Brechtel; Executive VP, Treasurer, CFO & Secretary; Rand Capital Corporation

Craig Mychajluk; SVP of Operations; Kei Advisors LLC

Presentation

Operator

Greetings. Welcome to Rand Capital Corporation's Second Quarter 2023 Financial Results. (Operator Instructions) Please note, this conference is being recorded. At this time, I'll turn the conference over to Craig Mychajluk. Craig, you may now begin.

Craig Mychajluk

Thanks, and good morning, everyone. We appreciate your interest in Rand Capital and for joining us today for our second quarter 2023 financial results conference call. On the line with me are Dan Penberthy, our President and Chief Executive Officer; and Margaret Brechtel, 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 to Slide 2, where I'd like to point out some important information. 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. You 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 at sec.gov.
During today's call, we'll also discuss some non-GAAP financial measures. 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?

Daniel Patrick Penberthy

Thank you, Craig, and good morning, everyone. Our second 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 investments 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.
We paid a regular quarterly cash dividend of $0.25 per share during the second quarter and just over a week ago, announced a regular quarterly cash dividend for the third quarter, 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 $4.7 million in new and follow-on investments while receiving $8.8 million 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.
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 $66.8 million. 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 sales. Helping to offset this was our new investments. On a year-to-date basis, however, our portfolio value expanded 9% or $5.3 million from December 31, 2022.
We made an investment in one new portfolio company and one follow-on investment that totaled $4.7 million during the quarter. Those transactions are highlighted on Slide 5. The largest investment was $4.3 million to INEA, which consisted of $3.3 million of subordinated debt at a 12% interest rate with an additional 2% payment in kind, alongside $1 million of preferred equity. INEA is a stocking distributor of controlled expansion on alloys, electronic grade nickels, refractory-grade metals and alloys and also soft magnetic alloys.
We've also made a follow-on debt investment of $390,000 in portfolio company ITA. This is to support the working capital needs and new manufacturing equipment for the company. Rand's total debt and equity investment in ITA has a fair value of $4.0 million at quarter end.
We had two 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 $6.8 million in proceeds, which included a net gain of $2.5 million. The other exit was a small one as we sold Rand's legacy equity position rather and that was in Somerset Gas.
Lastly, we have also added to our 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 that has netted us a realized gain of $1.7 million. At quarter end, we still hold 194,934 shares of ACV, which represented approximately 5% of the portfolio's fair value. 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 illustrates the diversity in our portfolio and the change in industry mix during the second quarter. 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. 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 end, 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 #5 spot, while DSD drops out giving its sale. Tilson continues to remain the largest fair value investment at $10.6 million or 16% of our total portfolio.
With that, I'll turn it over to Margaret to review our financials in greater depth.

Margaret Whalen Brechtel

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 second quarter. Total investment income was $1.8 million, 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 second quarter of 2023.
Total investments were approximately $1.3 million during the second quarter compared with a credit of $96,000 in the prior year second quarter. This increase largely reflects a change in accrued capital gain incentive fees to the company's external investment adviser, 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 second quarter 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 second quarter. 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 were $816,000 compared with $567,000 in the second quarter of 2022. Second quarter net investment income was $493,000 or $0.19 per share compared with $1.4 million or $0.55 per share in 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. Net assets at June 30, 2023, were $61.4 million, up more than 3% from the end of the first quarter of 2023. This reflects -- 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 in 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 $8.4 million, and we did not repurchase any shares during the quarter. We held approximately $7.4 million 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 $14.3 million of availability under our senior secured revolving credit facility at June 30, 2023. Our total outstanding borrowings of $10.7 million carried an interest rate of 8.59% at quarter end. With our strong cash position, after quarter end in July, we paid down $3 million of our outstanding borrowings. On July 25, 2023, Rand's Board of Directors declared a quarterly cash dividend of $0.25 per share. 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.

Daniel Patrick Penberthy

Thanks, Margaret. The second quarter shows continued investment income growth as we scale the business by investing nearly $4 million 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 strengthened 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 Rand Capital. We look forward to updating you on all of our third quarter 2023 results, which will be reported in November, and we hope you have a great day.

Operator

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