Rand Capital Corporation (NASDAQ:RAND) Q3 2023 Earnings Call Transcript

Rand Capital Corporation (NASDAQ:RAND) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Greetings, and welcome to Rand Capital Corporation’s third quarter fiscal year 2023 financial results. At this time, all participants are in a listen-only mode. [Operator Instructions]. It is now my pleasure to introduce Craig Mahalik, Investor Relations. Thank you. You may begin.

Craig Mahalik: Thank you, and good afternoon, everyone. We appreciate your interest in Rand Capital and for joining us today for our third 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 are 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?

Dan Penberthy: Thank you, Craig, and good afternoon, everyone. There was a recurring theme as our results once again reflected the strength and execution of our strategy as we continued to deploy capital, largely centered on high-quality debt investments. Total investment income grew 12% for the quarter and was driven by the sustained growth in interest income from our portfolio companies. For the quarter, net investment income per share was $0.31, which was down year over year. The contributing factor of which affecting this decline were higher expenses tied to our debt financing, which has been put to work to fund future growth. Our net asset value per share of $23.77 was relatively flat for the quarter, but up 6% since year-end 2022.

See also Ark Invest Stock Portfolio: Top 11 Picks and Wall Street Analysts Are Downgrading These 10 Stocks.

Q&A Session

We’ve completed two new investments during the quarter that totaled $7.8 million, which I will highlight in a few slides. And even after those investments, we continue to end the quarter with significant liquidity to put to work for future investments. The company paid a quarterly cash dividend of $0.25 per share during the third quarter. We believe that our deal flow and unique position in the market will continue to support future dividends, and following past practice, we expect to announce our fourth quarter dividend in early December. If you turn to slide 4, you can see our portfolio mix between debt and equity, and it changes during the past quarter. At quarter end, our portfolio consisted of investments with a fair value of nearly $75 million across 30 portfolio businesses.

This is up, one, given the two new investments, and was offset by one exit of a former equity investment that was previously listed at no fair value and which provided a tax loss. The portfolio comprised approximately 63% in fixed rate debt investments, which has continued to increase since the past quarter and the year ended 2022. The annualized weighted average yield of those debt investments was 13.45%. The remaining mix at the end of the quarter comprised 27% in equity investments in private companies and 10% held in publicly traded equities, primarily consisting of our other BDC investments and our ACV Auction stock. At quarter end, we still held almost 195,000 shares of ACV which does represent approximately 4% of our portfolio’s total fair value.

We had our ACV shares valued at $15.18 at quarter end, and we will continue to evaluate these holdings as we consider our future liquidity needs. As I mentioned, during the quarter we completed two new investments that fit well within our investment objectives and demonstrate our ability to attract opportunities in the current market environment. These transactions are highlighted on slide 5. The largest investment totaled $4.0 million to all of our people. This included $3 million of senior debt at a 16% interest rate, which also includes a PIK, or payment in kind interest, and a $1 million preferred equity investment that also carries a 12% dividend. All About People is a full service staffing and executive search firm with a growing focus on the healthcare industry.

The other investment was $3.8 million in First Coast Mulch. This consists of a $3.4 million subordinated note at 13% and also an interest earning convertible note of $420,000 convertible to future equity. First Coast Mulch is a commercial mulch installation company that covers Northern and Central Florida markets. The charts on slide 6 illustrate the diversity in our portfolio and the change in industry mix during the third quarter. Given the impact of the new investments in All About People and First Coast Mulch along with other fair value changes, we saw notable changes in this industry mix. Professional services, which has been our largest industry mix, increased eight percentage points to now 40% of the total. Manufacturing went down three points, consumer products down two points, and there were a few other smaller industries that were adjusted by a percentage point.

Overall, we continue to value the diversity of our industry represented across the total portfolio. Slide 7 lists our top five portfolio companies at quarter end. There was no change in the ranking since last quarter. Tilson continues to remain the largest fair value investment at $10.6 million or 14% of our total portfolio. The one change you may notice is that our top five now represent 42% of our total portfolio versus 47% last quarter. This reflects the overall fair value growth of the total portfolio. With that, I’ll turn it over to Margaret to review our financials in greater depth.

Margaret Brechtel: Thanks, Dan, and good afternoon, everyone. I will start on slide 9, which provides an overview of our financial summary and operational highlights for the third quarter of 2023. Total investment income was $1.7 million, which is up 12% over last year, driven by a 40% increase in interest income from portfolio companies. The higher interest from portfolio company reflects seven new debt instruments that we originated over the last year. Of our 30 total portfolio investments, 23 contributed to our total investment income during the third quarter. We did see lower dividend income during the quarter, which was largely due to a large prior year dividend from Carolina Skiff, which did not repeat in the third quarter of 2023.