CAPITAL SOUTHWEST CORP

Capital Southwest Corporation is an internally managed closed-end, non-diversified investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. The company specializes in providing customized debt and equity financing to lower middle market companies in a broad range of industry segments located primarily in the United States. The lower middle market has traditionally been underserved, as operating margin and growth pressures, as well as regulatory concerns, have caused many financial institutions to de-emphasize services to LMM companies in favor of larger corporate clients and more liquid capital market transactions. The company also invests in securities that would be rated below investment grade if they were rated.

The company competes for attractive investment opportunities with other financial institutions, including direct lenders, BDCs, junior capital lenders and banks. Many of its competitors are substantially larger and have considerably greater financial, technical and marketing resources, and may have a lower cost of funds and access to funding sources not available to the company. The company believes it is able to be competitive primarily on the basis of the experience and contacts of its management team and its responsive and efficient investment analysis and decision-making processes. The company also maintains investment grade ratings from both Moody's Ratings Services and Fitch Ratings, which provide the opportunity and flexibility to obtain additional, attractive long-term financing options.

The company generates revenue primarily through interest income from its debt investments and capital appreciation from its equity and equity-related investments. Its investment objective is to produce attractive risk-adjusted returns by generating current income from debt investments and realizing capital appreciation from equity and equity-related investments. The company invests primarily in first lien debt securities, secured by security interests in portfolio company assets, and also may invest in equity interests in its portfolio companies alongside its debt securities. The company focuses on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. Because the company is internally managed, it does not pay any external investment advisory fees, but instead directly incurs the operating costs associated with employing investment and portfolio management professionals.

The company's core business is to target senior debt investments and equity investments in LMM companies. Its target companies generally have annual EBITDA between $3.0 million and $25.0 million ¹, and its investments generally range in size from $5.0 million to $50.0 million ². The company's LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company and typically have a term of up to five years from the original investment date. The company also often seeks to invest in the equity securities of its LMM portfolio companies. As of March 31, 2026, the weighted average rating of the investments in the portfolio at fair value was 1.95 ³. The company's investment portfolio is diversified across numerous industry sectors; the largest sector concentrations by fair value as of March 31, 2026 included Healthcare Services, Media and Marketing, Consumer Services, Consumer Products, Food Agriculture and Beverage, Transportation, Business Services, Research Consulting Services, Financial Services, Industrial Machinery, Industrial Products, Software and IT Services, Industrial Services, Commercial Services and Supplies, Pharmaceuticals Biotechnology Life Sciences, Healthcare Equipment Supplies, Environmental Services, Telecommunications, Specialty Retail, Healthcare Products, Education, Restaurants, Movies Entertainment, Energy Services Midstream, Distribution, Technology, and Building Infrastructure Products.

The company's investment portfolio is composed of debt securities and equity securities across numerous portfolio companies. As of March 31, 2026, the company held debt securities in a wide range of sectors, including first lien loans, second lien loans, subordinated debt, and unsecured convertible notes. The company also held equity securities including preferred stock, common equity, warrants, and earnouts. The company's investment in CapTrin Partners LLC, a joint venture formed with Trinity Capital Inc. on January 22, 2026 ⁴, is owned equally by the company and Trinity, with each holding a 50% equity interest and making a $50 million capital commitment ⁵, of which $21.0 million ⁶ has been funded by each of the company and Trinity as of the date of the filing. CapTrin was established for the purpose of primarily investing in first out senior secured debt opportunities in the LMM.

On January 22, 2026 ⁷, the company and Trinity Capital Inc. formed CapTrin Partners LLC, a joint venture established for the purpose of primarily investing in first out senior secured debt opportunities in the LMM. CapTrin is owned equally by the company and Trinity, with each holding a 50% equity interest and making a $50 million capital commitment ⁸, of which $21.0 million ⁹ has been funded by each of the company and Trinity as of the date of the filing. The company also received a license from the SBA for Capital Southwest SBIC II, LP on April 17, 2025 ¹⁰ to operate as an SBIC. During the fiscal year, the company had $245.0 million ¹¹ in borrowings outstanding under its Corporate Credit Facility and $100.0 million ¹² in borrowings outstanding under its SPV Credit Facility. The company also had $230.0 million ¹³ in aggregate principal amount of 2029 Convertible Notes and $350.0 million ¹⁴ in aggregate principal amount of September 2030 Notes outstanding as of March 31, 2026.

For the fiscal year ended March 31, 2026, total investment income was $213.0 million ¹⁵, compared to $193.3 million ¹⁶ for the prior fiscal year. Net investment income was $107.5 million ¹⁷, compared to $99.0 million ¹⁸ in the prior year. Net increase in net assets resulting from operations was $107.5 million ¹⁹, compared to $99.0 million ²⁰ in the prior year. Net asset value per share as of March 31, 2026 was $16.27 ²¹. The company's asset coverage for borrowed amounts as of March 31, 2026 was 209% ²².

The company intends to continue borrowing under its senior secured revolving credit facility and its special purpose vehicle financing credit facility in the future, and may increase the size of these facilities, add additional credit facilities, or otherwise issue additional debt securities or other evidences of indebtedness in the future. The SBIC licenses held by the SBIC Subsidiaries allow them to issue SBA-guaranteed debentures, which carry long-term fixed interest rates that are generally lower than interest rates on comparable bank loans and other debt. The company believes that lower-cost SBA leverage will continue to be a part of its capital base through the SBIC Subsidiaries, providing a stable, long-term component of its capital structure with proper matching of duration and cost compared to its LMM portfolio company investments. The company also maintains investment grade ratings from both Moody's Ratings Services and Fitch Ratings, which provide the opportunity and flexibility to obtain additional, attractive long-term financing options to supplement its capital structure, including the unsecured notes with fixed interest rates it issues.

The company's internally managed structure provides it with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and allows the company the opportunity to leverage its non-interest operating expenses as it grows its investment portfolio. The company believes that its internally managed structure allows it to directly incur the operating costs associated with employing investment and portfolio management professionals rather than paying external investment advisory fees.

The company's investment strategy involves a team approach, whereby its investment team screens potential transactions before they are presented to the investment committee for approval. The company continuously monitors the status and progress of its portfolio companies, as well as its investment thesis developed at the time of investment. The company offers managerial assistance to its portfolio companies and provides them access to its investment experience, direct industry expertise and contacts. The same investment team leader that was involved in the investment process continues to be involved in the portfolio company post-investment. The company utilizes an internally developed investment rating system to rate the performance of and monitor the expected level of returns for each debt investment in its portfolio.

The company intends to continue borrowing under its Corporate Credit Facility and its SPV Credit Facility in the future, and may increase the size of these facilities, add additional credit facilities, or otherwise issue additional debt securities or other evidences of indebtedness in the future. As of March 31, 2026, the Corporate Credit Facility provides a revolving credit line of up to $510.0 million ²³ of which $245.0 million ²⁴ was drawn. As of March 31, 2026, the SPV Credit Facility provides total commitments of $200.0 million ²⁵ of which $100.0 million ²⁶ was drawn. The company also had $230.0 million ²⁷ in aggregate principal amount of 2029 Convertible Notes and $350.0 million ²⁸ in aggregate principal amount of September 2030 Notes outstanding as of March 31, 2026. The company intends to distribute to its shareholders substantially all of its income to maintain its qualification as a RIC.

The company is subject to risks associated with changes in interest rates. The Federal Reserve has reduced its benchmark interest rate by 0.25% in each of September 2025, October 2025 and December 2025, bringing the benchmark rate to the 3.50% to 3.75% range ²⁹. The Federal Reserve maintained this range at its January, March and April 2026 meetings. If interest rates decline and the company is in a prolonged low interest rate environment, the difference between the total interest income earned on interest-earning assets and the total interest expense incurred on interest-bearing liabilities may be compressed, reducing net income, due to the fixed interest rates on the 2029 Convertible Notes, the September 2030 Notes and the SBA Debentures. Conversely, in an elevated interest rate environment, such difference could potentially increase thereby increasing net income. However, if interest rates remain elevated, there is a risk that portfolio companies in which the company holds floating rate loans will be unable to pay interest amounts, which could increase the risk of payment defaults.

The company faces risks from political, social and economic uncertainty, including the ongoing conflict between Russia and Ukraine, turmoil in the Middle East, and changes to U.S. tariff and import/export regulations. The U.S. government continues to enact and propose the imposition of new tariffs on specific countries and commodities, and the current administration has announced widely applicable tariffs pursuant to the Trade Act of 1974, effective February 24, 2026 ³⁰. These developments have created significant uncertainty about the future relationship between the United States and certain other countries with respect to trade policies, treaties and new and increased tariffs, which may have a material adverse effect on global economic conditions and the stability of global financial markets. The company also faces risks from inflation, which has increased the costs of labor, energy and raw materials and has adversely affected consumer spending, economic growth and its portfolio companies' operations.

The company's financial condition and results of operations depend on its ability to effectively allocate and manage capital, and any unrealized losses may be an indication of future realized losses which could reduce income available to make distributions. The company's business model depends to a significant extent upon strong referral relationships, and the inability to develop or maintain these relationships could adversely affect the business. All of the company's assets are subject to security interests under its Corporate Credit Facility and SPV Credit Facility, except for assets held by the SBIC Subsidiaries, and if the company defaults on its obligations, it may suffer adverse consequences including foreclosure on its assets. As of March 31, 2026, the company had $245.0 million ³¹ in borrowings outstanding under its Corporate Credit Facility and $100.0 million ³² in borrowings outstanding under its SPV Credit Facility. The company's current debt obligations contain various covenants that, if not complied with, could accelerate repayment obligations and materially and adversely affect liquidity, financial condition, results of operations and ability to pay distributions. The company is subject to U.S. federal income tax imposed at corporate rates on its earnings if it is unable to qualify as a RIC under subchapter M of the Code. As of March 31, 2026, 91.9% ³³ of the company's total assets consisted of qualifying assets, and a failure to maintain this threshold could preclude the company from investing according to its current business strategy.

Management's message emphasizes the company's internally managed structure as a key advantage, noting that because the company is internally managed, it does not pay any external investment advisory fees, but instead directly incurs the operating costs associated with employing investment and portfolio management professionals. Management believes this structure provides a beneficial operating expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and allows the company the opportunity to leverage its non-interest operating expenses as it grows its investment portfolio. The strategic priorities emphasized include continuing to leverage the experience of the management team in investing in and lending to LMM companies across changing market cycles, applying rigorous underwriting policies and active portfolio management, and utilizing long-standing relationships to source deals. Management also highlights the benefit of the SBIC licenses held by the SBIC Subsidiaries, which allow them to issue SBA-guaranteed debentures that carry long-term fixed interest rates generally lower than interest rates on comparable bank loans and other debt, providing a stable, long-term component of the company's capital structure.