Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS

v3.22.4
INVESTMENTS
 9 Months Ended
Dec. 31, 2022
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS INVESTMENTS
Fair Value
In accordance with ASC 820, we determine the fair value of our investments to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists, or instances where prices vary substantially over time or among brokered market makers; and
•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
As of December 31, 2022 and March 31, 2022, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs.
We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. There were no transfers in or out of Level 1, 2 and 3 during the nine months ended December 31, 2022 and 2021, respectively.
As of December 31, 2022 and March 31, 2022, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:
Fair Value Measurements
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of December 31, 2022:
Secured first lien debt
 $ 447,491  $ —  $ —  $ 447,491 
Secured second lien debt
 76,169  —  —  76,169 
Preferred equity
 221,774  —  — 

221,774 
Common equity/equivalents
 15,029  — 

31 
(A)
 14,998 
Total Investments as of December 31, 2022
 $ 760,463  $ —  $ 31  $ 760,432 
Fair Value Measurements
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of March 31, 2022:
Secured first lien debt
 $ 425,087  $ —  $ —  $ 425,087 
Secured second lien debt
 67,958  —  —  67,958 
Preferred equity
 217,599  —  —  217,599 
Common equity/equivalents
 3,752  —  74 
(A)
 3,678 
Total Investments as of March 31, 2022
 $ 714,396  $ —  $ 74  $ 714,322 
(A)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to certain restrictions.
The following table presents our investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of December 31, 2022 and March 31, 2022, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:
Total Recurring Fair Value Measurements
Reported in Consolidated Statements
of Assets and Liabilities
Valued Using Level 3 Inputs
December 31, 2022 March 31, 2022
Non-Control/Non-Affiliate Investments
Secured first lien debt $ 283,344  $ 233,673 
Secured second lien debt 49,551  66,917 
Preferred equity 166,168  139,927 
Common equity/equivalents(A)
2,249  1,533 
Total Non-Control/Non-Affiliate Investments 501,312  442,050 
Affiliate Investments
Secured first lien debt 164,147  191,414 
Secured second lien debt 26,618  1,041 
Preferred equity 55,606  77,672 
Common equity/equivalents 12,036  1,432 
Total Affiliate Investments 258,407  271,559 
Control Investments
Secured first lien debt —  — 
Secured second lien debt —  — 
Preferred equity —  — 
Common equity/equivalents 713  713 
Total Control Investments 713  713 
Total investments at fair value using Level 3 inputs $ 760,432  $ 714,322 
(A)Excludes our investment in Funko with a fair value of $31 thousand and $74 thousand as of December 31, 2022 and March 31, 2022, respectively, which was valued using Level 2 inputs.
In accordance with ASC 820, the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of December 31, 2022 and March 31, 2022. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted-average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.
Quantitative Information about Level 3 Fair Value Measurements
Fair Value as of Valuation
Technique/
Methodology		 Unobservable
Input		 Range / Weighted-Average as of
December 31,
2022		 March 31,
2022		 December 31,
2022		 March 31,
2022
Secured first
lien debt		 $ 442,028  $ 411,023  TEV EBITDA multiple
3.1x – 7.9x /
6.2x
3.4x – 9.3x /
7.0x
EBITDA
$3,973–$18,548 /
$10,962
$3,990 - $13,707/$8,221
Revenue multiple
0.3x – 0.6x /
0.3x
0.7x – 0.7x /
0.7x
Revenue
$12,461 – $107,907 /
$88,029
$14,072 – $14,072/$14,072
5,463  14,064  Yield Analysis Discount Rate
15.1% – 18.9% / 17.2%
11.3% – 15.2% / 14.6%
Secured second
lien debt		 63,153  39,637  TEV EBITDA multiple
5.6x – 7.8x /
 6.7x
5.6x – 6.8x /
6.0x
EBITDA
$3,221 – $6,669 /
$5,113
$3,953 – $5,488 / $4,959
Revenue multiple
0.5x –0.5x /
0.5x
0.7x – 0.7x
/0.7x
Revenue
$12,461 – $12,461 /
$12,461
$14,072 – $14,072 / $14,072
13,016  28,321  Yield Analysis Discount Rate
13.3% – 13.3% /
13.3%
10.0% – 12.2% / 11.6%
Preferred
equity		 221,774  217,599  TEV EBITDA multiple
3.1x – 7.9x /
5.9x
3.4x – 9.3x /
6.8x
EBITDA
$3,973 – $18,548 /
$9,640
$1,210 – $13,707 / $6,926
Revenue multiple
0.3x – 0.6x /
0.4x
0.7x – 0.7x /
0.7x
Revenue
$12,461 – $107,907 /
$53,486
$14,072 – $14,072 / $14,072
Common equity/
equivalents(A)
14,998  3,678  TEV EBITDA multiple
4.3x – 7.8x /
7.2x
4.8x – 8.4x /
5.8x
EBITDA
$969 – $27,118 /
$5,302
$829 – $13,707 / $5,709
Revenue multiple
0.5x – 0.5x /
0.5x
0.7x – 0.7x /
 0.7x
Revenue
$12,461 – $12,461 /
$12,461
$14,072 – $14,072 / $14,072
Total $ 760,432  $ 714,322 
(A)Fair value as of both December 31, 2022 and March 31, 2022 excludes our investment in Funko with a fair value of $31 thousand and $74 thousand, respectively, which was valued using Level 2 inputs.
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in discount rates or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide our portfolio’s changes in fair value, broken out by security type, during the three and nine months ended December 31, 2022 and 2021 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 Secured
First Lien
Debt		 Secured
Second Lien
Debt
Preferred
Equity
 Common
Equity/
Equivalents		 Total
Three Months ended December 31, 2022:
Fair value as of September 30, 2022
 $ 420,907  $ 76,751  $ 229,430  $ 10,789  $ 737,877 
Total gain (loss):
Net realized gain (loss)(A)
—  (10,000) 13,372  —  3,372 
Net unrealized appreciation (depreciation)(B)
(2,516) (266) (7,656) 3,829  (6,609)
Reversal of previously recorded (appreciation) depreciation upon realization(B)
—  10,001  —  —  10,001 
New investments, repayments and settlements(C):
Issuances / originations
 29,900  1,183  —  380  31,463 
Settlements / repayments
 (800) (1,500) —  —  (2,300)
Sales(D)
—  —  (13,372) —  (13,372)
Transfers(E)
—  —  —  —  — 
Fair value as of December 31, 2022
 $ 447,491  $ 76,169  $ 221,774  $ 14,998  $ 760,432 

Secured
First Lien
Debt		 Secured
Second Lien
Debt
Preferred
Equity
 Common
Equity/
Equivalents		 Total
Nine Months Ended December 31, 2022
Fair value as of March 31, 2022 $ 425,087  $ 67,958  $ 217,599  $ 3,678  $ 714,322 
Total gain (loss):
Net realized gain (loss)(A)
—  (10,000) 20,318  —  10,318 
Net unrealized appreciation (depreciation)(B)
(21,328) (4,800) 10,405  10,940  (4,783)
Reversal of previously recorded (appreciation) depreciation upon realization(B)
—  10,001  (12,250) —  (2,249)
New investments, repayments and settlements(C):
Issuances / originations
 106,950  5,188  21,000  380  133,518 
Settlements / repayments
 (48,800) (6,596) —  —  (55,396)
Sales(D)
—  —  (35,298) —  (35,298)
Transfers(E)
(14,418) 14,418  —  —  — 
Fair value as of December 31, 2022
 $ 447,491  $ 76,169  $ 221,774  $ 14,998  $ 760,432 
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
 Total
Three Months ended December 31, 2021:
Fair value as of September 30, 2021
 $ 431,413  $ 68,489  $ 228,931  $ 7,592  $ 736,425 
Total gain (loss):
Net realized gain (loss)(A)
—  —  21,939  —  21,939 
Net unrealized appreciation (depreciation)(B)
(1,741) (200) 12,427  (5,166) 5,320 
Reversal of previously recorded (appreciation) depreciation upon realization(B)
—  —  (25,425) —  (25,425)
New investments, repayments and settlements(C):
Issuances / originations
 37,000  5  —  —  37,005 
Settlements / repayments
 (32,838) —  —  —  (32,838)
Sales
 —  —  (41,768) —  (41,768)
Transfers(E)
—  —  —  —  — 
Fair value as of December 31, 2021
 $ 433,834  $ 68,294  $ 196,104  $ 2,426  $ 700,658 
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
 Total
Nine Months Ended December 31, 2021:
Fair value as of March 31, 2021
 $ 368,688  $ 102,897  $ 159,478  $ 2,671  $ 633,734 
Total gain (loss):
Net realized gain (loss)(A)
—  —  23,725  —  23,725 
Net unrealized appreciation (depreciation)(B)
1,491  3,925  91,782  (16,279) 80,919 
Reversal of previously recorded (appreciation) depreciation upon realization(B)
60  —  (26,053) —  (25,993)
New investments, repayments and settlements(C):
Issuances / originations
 65,450  6,515  12,600  —  84,565 
Settlements / repayments
 (46,898) —  —  —  (46,898)
Sales
 —  —  (49,394) —  (49,394)
Transfers(E)
45,043  (45,043) (16,034) 16,034  — 
Fair value as of December 31, 2021
 $ 433,834  $ 68,294  $ 196,104  $ 2,426  $ 700,658 
(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended December 31, 2022 and 2021.
(B)Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the respective periods ended December 31, 2022 and 2021.
(C)Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D)The three and nine months ended December 31, 2022, includes $13.4 million of proceeds from the recapitalization of Old World Christmas, Inc. ("Old World"). The nine months ended December 31, 2022 also includes $12.3 million of proceeds from the recapitalization of Horizon Facilities Services, Inc.
(E)There were no transfers in the three months ended December 31, 2022. For the nine months ended December 31, 2022, transfers include (1) secured second lien debt of Ginsey with a total cost basis and fair value of $12.2 million, which was converted into secured first lien debt in August 2022 and (2) secured first lien debt of PSI Molded Plastics, Inc. with a total cost basis and fair value of $26.6 million, which was converted into secured second lien debt in September 2022.
For the three and nine months ended December 31, 2021, transfers include preferred equity of SOG Specialty Knives & Tools, LLC with a total cost and fair value of $0.6 million and $0.0 million, respectively, which was converted into common equity of Gladstone SOG Investments, Inc. in December 2021.
For the nine months ended December 31, 2021, transfers also include (1) secured second lien debt of J.R. Hobbs with a total cost basis and fair value of $52.5 million and $52.4 million, respectively, which was converted into secured first lien debt in June 2021, (2) secured first lien debt of D.P.M.S., Inc. with a total cost basis and fair value of $12.3 million and $7.3 million, respectively, which was converted into secured second lien debt of Galaxy Technologies Holdings, Inc. (“Galaxy Technologies Holdings”) in September 2021, and (3) preferred equity of Galaxy Technologies, Inc. with a total cost basis and fair value of $11.5 million and $16.0 million, respectively, which was converted into common equity of Galaxy Technologies Holdings in September 2021.
Investment Activity
During the nine months ended December 31, 2022, the following significant transactions occurred:
•In May 2022, we invested an additional $6.4 million in the form of secured first lien debt in Nocturne Villa Rentals, Inc. ("Nocturne") to fund an add-on acquisition.
•In June 2022, we sold our investment in Bassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of $3.0 million and a realized gain on preferred equity of $4.7 million. In connection with the sale, we received net cash proceeds of $57.6 million, including the repayment of our debt investment of $48.0 million at par.
•In June 2022, we invested $21.0 million in a new portfolio company, Dema/Mai Holdings, Inc. (“Dema/Mai”), in the form of preferred equity to acquire Mai Mechanical, LLC, a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered in Denver, Colorado, from J.R. Hobbs, an existing portfolio company. In July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund the acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders.
•In July 2022, we recapitalized our investment in Horizon and invested an additional $30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of $12.3 million, which were recognized as a $10.1 million return of preferred equity cost basis and a realized gain of $2.2 million, as well as dividend income of $3.1 million and success fee income of $1.7 million.
•In August 2022, in conjunction with a refinancing at Ginsey, our $13.3 million secured second lien debt investment was reduced to $12.2 million and converted to secured first lien debt. The reduction in our cost basis was the result of a $5.1 million payment made by Ginsey to extinguish our secured borrowing liability, which was partially offset by an additional investment in Ginsey of $4.0 million. Refer to Note 5 - Borrowings for discussion of the secured borrowing liability.
•In October 2022, we invested an additional $8.4 million in the form of secured first lien debt in Nocturne to fund an add-on acquisition.
•In November 2022, our $1.5 million secured second lien debt investment in Country Club Enterprises, LLC ("CCE") was repaid at par. In connection with the repayment, we received success fee income of $1.1 million and our $1.0 million guaranty was released. Refer to Note 10 - Commitments and Contingencies for discussion of the guaranty.
•In December 2022, we recapitalized our investment in Old World and invested an additional $15.5 million in the form of secured first lien debt. In connection with this investment, we received proceeds of $17.9 million, of which $13.4 million was recognized as a realized gain and $4.5 million was recognized as dividend income.
•In December 2022, we entered into a new $3.2 million secured second lien term loan with The Mountain, replacing our previously outstanding second lien term loan and second lien delayed draw term loan with an aggregate cost basis of $13.2 million, which resulted in a realized loss of $10.0 million.
Investment Concentrations
As of December 31, 2022, our investment portfolio consisted of investments in 25 portfolio companies located in 19 states across 14 different industries with an aggregate fair value of $760.5 million. Our investments in Old World, Horizon, Dema/Mai, Brunswick Bowling Products, Inc., and Nocturne represented our five largest portfolio investments at fair value and collectively comprised $328.7 million, or 43.2%, of our total investment portfolio at fair value as of December 31, 2022.
The following table summarizes our investments by security type as of December 31, 2022 and March 31, 2022:
December 31, 2022 March 31, 2022
Cost Fair Value Cost Fair Value
Secured first lien debt $ 473,189  65.5  % $ 447,491  58.8  % $ 429,457  64.2  % $ 425,087  59.5  %
Secured second lien debt 84,158  11.7  % 76,169  10.0  % 81,147  12.1  % 67,958  9.5  %
Total debt 557,347  77.2  % 523,660  68.8  % 510,604  76.3  % 493,045  69.0  %
Preferred equity 149,099  20.6  % 221,774  29.2  % 143,079  21.4  % 217,599  30.5  %
Common equity/equivalents 15,934  2.2  % 15,029  2.0  % 15,565  2.3  % 3,752  0.5  %
Total equity/equivalents 165,033  22.8  % 236,803  31.2  % 158,644  23.7  % 221,351  31.0  %
Total investments
 $ 722,380  100.0  % $ 760,463  100.0  % $ 669,248  100.0  % $ 714,396  100.0  %
Investments at fair value consisted of the following industry classifications as of December 31, 2022 and March 31, 2022:
December 31, 2022 March 31, 2022
Fair Value Percentage of
Total Investments		 Fair Value Percentage of Total Investments
Diversified/Conglomerate Services $ 269,749  35.5  % $ 307,403  43.0  %
Home and Office Furnishings, Housewares, and Durable Consumer Products 147,533  19.4  % 125,440  17.6  %
Buildings and Real Estate 63,127  8.3  % —  —  %
Hotels, Motels, Inns, and Gaming 59,308  7.8  % 37,923  5.3  %
Leisure, Amusement, Motion Pictures, and Entertainment 48,146  6.3  % 46,514  6.5  %
Healthcare, Education, and Childcare 37,638  5.0  % 39,252  5.5  %
Chemicals, Plastics, and Rubber 26,618  3.5  % 26,618  3.7  %
Mining, Steel, Iron and Non-Precious Metals 23,044  3.0  % 24,250  3.4  %
Aerospace and Defense 20,891  2.7  % 25,296  3.5  %
Telecommunications 19,453  2.6  % 32,467  4.6  %
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 18,109  2.4  % 13,823  1.9  %
Cargo Transport 15,265  2.0  % 14,533  2.0  %
Diversified/Conglomerate Manufacturing 9,140  1.2  % 14,064  2.0  %
Other < 2.0% 2,442  0.3  % 6,813  1.0  %
Total investments $ 760,463  100.0  % $ 714,396  100.0  %
Investments at fair value were included in the following geographic regions of the U.S. as of December 31, 2022 and March 31, 2022:
December 31, 2022 March 31, 2022
Location Fair Value Percentage of
Total Investments		 Fair Value Percentage of
Total Investments
Northeast
 $ 273,897  36.0  % $ 194,100  27.2  %
West
 198,589  26.1  % 158,607  22.2  %
South
 173,259  22.8  % 188,978  26.4  %
Midwest
 114,718  15.1  % 172,711  24.2  %
Total investments $ 760,463  100.0  % $ 714,396  100.0  %
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2022:

Amount
For the remaining three months ending March 31, 2023
 $ 27,500 
For the fiscal years ending March 31:
2024 55,468 
2025 89,614 
2026 202,419 
2027 144,096 
Thereafter 38,250 
Total contractual repayments $ 557,347 
Investments in equity securities 165,033 
Total cost basis of investments held as of December 31, 2022:
 $ 722,380 
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of December 31, 2022 and March 31, 2022, we had gross receivables from portfolio companies of $2.5 million and $1.7 million, respectively. As of December 31, 2022 and March 31, 2022, the allowance for uncollectible receivables was $1.5 million and $1.3 million, respectively.