Capital Southwest Corporation: IVQ 2025 Performance Rating

The BDC Reporter seeks to rate every public BDC's most recent quarterly financial performance, based on recurring and non-recurring earnings; changes in net book value; return on capital; credit standing and a host of other metrics we gather from the public disclosures and what is said on conference calls.

The rating scale is very similar to the one most BDCs use to evaluate their own portfolios. A 1 rating applies to overall performance above reasonable expectations for a BDC; a 2 indicates perdformance is as expected. Ratings 3 through 5 are reserved for under-performance, going from mild (3); to moderate (4) to poor.

A few weeks ago, Saratoga Investment (SAR) was the first out of the gate because its quarter ends one month before everyone else. The BDC saw its earnings increase, NAVPS remain flat and an already almost perfect credit book improve further. We rated SAR a 1 for a second quarter in a row.

Now BDC earnings season is truly underway and the first BDC we've had the opportunity to review from top to bottom is Capital Southwest Corporation (CSWC). This lower middle market BDC - often compared to Main Street Capital (MAIN) and also internally managed - received a rating of 2 in the IIIQ 2025. Read on for the most recent write-up and rating

Capital Southwest: IVQ 2025 Performance

Just about everything went right for CSWC in the IVQ 2025. That was not a great surprise when the final results were released, and the conference call was held, because the BDC had previewed many key metrics earlier. Still, it's worth noting that both investment income and NII were up in absolute terms and only (1) cent lower per share because of new shares issued. At a time when lower interest rates are pressuring revenues, this was a performance that exceeded expectations. Likewise, CSWC's NAVPS increased from $16.62 to $16.75, helped again by accretive new share sales, but still a Good Thing. Also, the portfolio grew, which promises further income growth ahead, and the portfolio yield fell only along with rates, or slightly better. Then there is the upcoming JV, which will both expand the BDC's reach and, they say, generate a high ROE. Spillover Income did drop by about (10%) to $1.02 a share, but management did indicate a realized gain was booked this year, which might increase that spillover again.

As we already knew, the BDC also maintained both its regular and special dividends in IQ 2026 and seems fated to do so again in future quarters.

All this amounted to superior performance - worthy of a rating of 1 on our 5-point performance scale at the BDC Reporter, but there was a fly or two in the ointment. CSWC did end up incurring ($2mn) in realized and unrealized losses in the period. Not terrible and two-thirds less than last quarter. We might have waved that away if not for the increase in non-accruals. These increased from 6 to 8 companies. No companies were removed, and 2 new ones were added. The percentage of assets on non-accrual both at cost increased from very low to a more or less "normal" level of 3.2% at cost and 2.6%.

We also continue to expect the BDC will payout $2.56 per share in 2026 - unchanged from 2025's level - an accomplishment under current market conditions and without over-leveraging the balance sheet.

We also looked at the BDC's exposure to software companies in the portfolio. We identified 7, and none are showing any signs of credit stress. We'll be delving deeper into the subject, which has been all the rage in the last few days.

We gave CSWC a rating of 2 on our 5-point scale, the same as the quarter before.