Prepared remarks
Good morning, everyone. Thank you for being here. Welcome to the Saratoga Investment Corp. Fiscal First Quarter 2026 Financial Results Conference Call. Please be aware that today's call is being recorded. I will now hand the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please proceed, sir.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first quarter 2026 earnings conference call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal first quarter 2026 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28, so any reference to Q1 results reflects our May 31 quarter-end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights for this quarter include a 17.9% increase in adjusted net investment income per share from the previous quarter, continued growth of net asset value, a strong return on equity that surpasses the industry average, two new portfolio company investments, and importantly, a solid performance from our core BDC portfolio amidst a volatile macro environment. Building on our robust dividend distribution history, we announced a base dividend of $0.25 per share per month, equating to $0.75 per share for the second quarter of fiscal 2026. This annualized dividend of $0.75 per share represents an 11.8% yield based on the stock price of $25.44 as of July 7, 2025, offering strong current income from an investment perspective. Our Q1 adjusted net investment income of $0.66 per share reflects the impact of declining short-term interest rates and spreads on our largely floating-rate assets, coupled with recent repayments.
Consequently, we had $224 million in cash at quarter-end, ready to be used for investments or to repay existing debt. During the quarter, we observed a slowdown in deal volume and M&A activity in the lower middle market due to recent tariff changes and a reduction in new debt issuances. Despite these challenges, our portfolio experienced several debt repayments and an equity realization in Q1, along with healthy new originations that produced $2.9 million in realized gains and $50.1 million invested in two new portfolio companies, six follow-ons, and new investments in several BB CLO debt securities. Our strong reputation and unique market position, alongside ongoing development of sponsor relationships, continue to create attractive investment opportunities, while we remain prudent in making new commitments in the current volatile environment. We believe Saratoga is well-positioned to face both potential opportunities and challenges in the future.
The core of our strong operational performance lies in the quality and resilience of our $968.3 million portfolio, which has resolved all four challenged situations. Our core non-CLO portfolio increased in value by $2.6 million this quarter, while the CLO and JV saw a small decrease of $0.2 million. Additionally, we achieved $0.6 million in net realized appreciation on an equity realization and multiple debt repayments that led to $2.2 million in life-to-date realized gains, further net gains of $0.7 million from escrow payments on Netreo and HemaTerra investments, and $0.2 million of net appreciation in our new BB investments, resulting in an overall portfolio fair value increase of $3.8 million for the quarter. By quarter-end, our total portfolio fair value was 2.1% below cost, while the core non-CLO portfolio was 1.7% above cost. Our financial performance and strong earnings power reflect our solid underwriting in growing portfolio companies and sponsors in carefully chosen industry segments.
For the first quarter, our net interest margin significantly expanded from $13.7 million last quarter to $15.6 million, spurred by a $1.4 million rise in non-CLO interest income as the full benefits of Q4 originations were realized and repayments occurred primarily late in Q1. Average yields were relatively stable, bolstered by a $0.5 million drop in interest expense, marking the full-quarter effect of the repayment of $44 million in SBIC II debentures at year-end and the partial-period impact of retiring the $20 million 8.75% baby bond this quarter. Also, the full-period impact of 1.2 million shares issued through the ATM program in Q4 and a partial period of an additional 0.2 million shares issued in Q1 resulted in a $0.04 per share dilution to NII per share. Our overall credit quality has remained stable this quarter, with 99.7% of credits rated in our highest category. The two investments still on nonaccrual status, Zollege and Pepper Palace, both of which have been effectively restructured, represent only 0.3% and 0.6% of fair value and cost, respectively.
With 90% of our investments at quarter-end in first lien debt, generally supported by strong enterprise values and balance sheets in industries that have performed well historically during stress, we believe our portfolio and company leverage are well-structured for future economic conditions and uncertainties. As we continue to manage through the challenges of the current geopolitical landscape and the volatility in the broader macro environment, we maintain confidence in our experienced management team, robust pipeline, strong leverage structure, and high underwriting standards to steadily enhance the size, quality, and investment performance of our portfolio in the long term and deliver exceptional risk-adjusted returns to our shareholders. Particularly in this uncertain environment, balance sheet strength, liquidity, and net asset value preservation are of utmost importance to us. By quarter-end, we maintained a significant $430 million investment capacity available to support our portfolio companies, with $136 million accessible through our existing SBIC III license and $70 million from our two revolving credit facilities, along with $224 million in cash.
This cash position improves our regulatory leverage from 163.8% to 188.1% net leverage, netting available cash against outstanding debt. Now, let’s review Saratoga Investments' fiscal '26 first quarter key performance indicators compared to the quarters ending May 31, 2024, and February 28, 2025. Our quarter-end net asset value was $396.4 million, up 7.8% from $367.9 million last year and up 0.9% from $392.7 million last quarter. Our adjusted net investment income was $10.1 million this quarter, down 29.3% from last year but up 26.2% from last quarter. Adjusted net investment income per share was $0.66, down 37.1% from $1.05 last year, while up 17.9% from $0.56 last quarter. The adjusted NII yield stood at 10.3% for this quarter, down from 15.5% last year but up from 8.4% last quarter. The latest 12-month return on equity was 9.3%, a rise from 4.4% last year and an increase from 7.5% last quarter, surpassing the industry average of 7%.
Our NAV per share was $25.52, down from $26.85 last year and down from $25.86 last quarter. Notably, the recent shift to monthly dividend distributions resulted in the March and April dividend record dates being applied in this first quarter for an additional one-time dividend, which reduced NAV per share by $0.50. Excluding this one-time event, NAV per share would have increased to $26.02, reflecting a $0.16 or 0.6% rise. While the previous year experienced markdowns on a few credits in our core BDC, our strong recent results have yielded a 9.3% return on equity for the past 12 months, which is above the industry average of 7%. Furthermore, our long-term average return on equity over the last 11 years of 10.2% exceeds the industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, outperforming the industry in eight of the last 11 years and consistently positive every year.
It is also noteworthy that the weighted average common shares outstanding in Q1 amounted to 15.3 million, up from 14.5 million and 13.7 million shares in the previous quarter and last year's first quarter, respectively. Adjusted NII was $10.1 million this quarter, down 29.3% from last year but up 26.2% from last quarter. This increase in adjusted NII compared to the previous quarter was mainly due to the non-recurrence of the $2.4 million annual excise tax recognized in the prior quarter. The decrease from the first quarter of last year was driven by lower assets under management from significant recent repayments and decreased base interest rates. The weighted average interest rate on the core BDC portfolio was 11.5% this quarter, down from 12.6% in the first quarter of the previous year and unchanged from last quarter. The decline in yield from last year mainly reflects reductions in the SOFR base rate over the past year.
Total expenses for this first quarter of 2026, excluding interest and debt financing expenses, base management fees, incentive fees, and income and excise taxes, decreased by $0.1 million to $2.8 million compared to $2.9 million last year, while it increased by $1.4 million from $1.4 million last quarter. This represents 0.8% of average total assets on an annualized basis, consistent with last quarter, and down from 1% last year. Our assets under management have consistently grown since we took over the BDC 14 years ago, although there was a slight recent decrease due to significant repayments. This quarter, we saw considerable repayments once more, offsetting healthy originations. This recent decline in AUM doesn't diminish our long-term growth expectations for AUM. The quality of our credits remains strong, with only the two recently restructured Pepper Palace and Zollege credits on non-accrual, aligning with last quarter's status.
Our management team is diligently working to maintain this positive long-term trend as we utilize our substantial available capital in our pipeline while being appropriately cautious in this evolving credit and volatile economic environment. Now, I would like to turn the call over to Henri to discuss our financial results and the composition and performance of our portfolio.
Thank you, Chris. Moving on to Slide 6. NAV was $396.4 million as of fiscal quarter end, a $3.7 million increase from last quarter and a $28.5 million increase from the same quarter last year. During this quarter, $6.4 million of new equity was raised at or above net asset value, respectively, through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased in 22 of the past 31 quarters, seeing a decrease this quarter solely due to the transition to monthly dividends in March, resulting in the March and April dividend record date both falling into the first fiscal quarter, reducing NAV per share by an additional $0.50. Excluding this one-time reduction, NAV per share would have risen to $26.02, reflecting a 0.6% increase. Over the long term, our net asset value has steadily increased since 2011 and grown by $3.55 per share or 16% over the past 8 years.
Also we have again added the KPI slides 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 2 years. Slide 30 is a new slide comparing our non-accruals to the BDC Industry. You will see that our non-accrual rate of 0.6% of cost is significantly lower than the industry average of 3.7%, and that the broader industry has experienced an increase in non-accruals of 0.3% since the previous quarter, while ours have remained steady and low. This highlights the strength in credit quality of our core BDC portfolio. Moving on to Slide 7. You will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was up $0.10 in Q1 primarily due to: first, the non-recurrence of the annual excise tax, which was $0.13 in the previous quarter related to unpaid spillover; and second, an increase of $0.09 in non-CLO net interest income, reflecting the full period impact of Q4 originations.
This was offset by an increase in operating expenses, excluding excise taxes and dilution from the increased net ATM and DRIP share count, reducing NII by $0.06 and $0.04, respectively. On the lower half of the slide, NAV per share decreased by $0.34, primarily due to the $0.50 reduction from the change to a monthly dividend payment structure discussed earlier. Net realized gains and unrealized depreciation added $0.25 to NAV per share. There was no dilution from the ATM and DRIP program. Slide 8 outlines the dry powder available to us as of quarter-end, which totaled $430.3 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 44% without the need for external financing, with $224 million of quarter-end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing also very accretive.
In addition, all $301 million of our baby bonds, effectively all our 6% plus debt, is callable now, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $968 million of AUM at fair value, and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture, and various new BB investments.
Our first lien percentage is 86.9% of our total investments, of which 22% is in first lien last out positions. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield remained unchanged from last quarter at 11.5%, despite the 10 basis points reduction in average SOFR. The CLO yield decreased to 13.7% from 16.4% last quarter, reflecting the inclusion of the new BB CLO debt investments to this category that have a yield of approximately 10%. Slide 11 shows how our investments are diversified through primarily the U.S., and on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 40 distinct industries in addition to our investments in the CLO JV and BB CLO debt securities, which are all included as structured finance securities.
Moving on to Slide 13. 7.9% of our investment portfolio consists of equity interest, which remains an important part of our overall investment strategy. This slide shows that for the past 13 fiscal years, we had a combined $42.5 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This includes $2.2 million of realized gains on the sale of our identity equity investment this quarter. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.
Thank you, Henri. Today, I will give an update on the market since we recently spoke with everyone in May and then comment on our current portfolio performance and investment strategy. Year-to-date deal volumes in our market have been down significantly every month as compared to 2024 and are down further still as compared to 2021 through 2023. We believe that M&A activity will invariably revert to historical levels, but that pickup in deal volume appears to be postponed for the time being. The combination of historically low M&A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full, as lenders compete to win deals especially premium ones. We've also experienced repayment activity from some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods.
As we noted on last quarter's call, this may naturally prompt the question of, what is our approach to operating in this difficult asset deployment climate. First, the Saratoga management team has successfully managed through a number of credit cycles over many years, and that experience has made us particularly aware of being disciplined when making investment decisions and being proactive in managing our portfolio. Taking this approach has allowed us to produce unlevered realized returns in our core non-CLO portfolio of 15%. The weighted average return on our exits this quarter were consistent with our track record at 14.9%. We'll continue to invest in high-quality assets and will not lower our investment standards and take on more risk than we feel is prudent, just because the market is presently difficult. We believe our shareholders will appreciate this approach in the long run. Second, we're greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort.
We have a new Managing Director joining us this summer, who has a strong origination and investment track record in our markets. We've also recently hired a VP of Portfolio Management and a business development analyst, and we have 2 new investment associates joining us this summer. All of these investments will allow our professionals to better leverage themselves and shift more emphasis on investment origination. While we have developed a strong presence in the lower end of the middle market, the number of companies in our marketplace is vast compared to the traditional middle market and is occupied with hundreds of thousands of businesses. We believe the number of deal sources in our market that we have yet to build relationships with far exceeds the number that we have. Further, our market benefits from a natural underpinning of deal flow, driven by business owners seeking to transition ownership as they age.
We're in the early stages of our expanded business development initiatives but have already seen some positive results in our current pipeline and in the most recent portfolio company we closed in April. Third, our existing portfolio serves as a healthy source of deal flow. Our payoffs, as again seen this quarter, tend to be lumpy as our portfolio investments reached scale and maturity, while our new portfolio companies tend to be small initially and provide an embedded resource for asset deployment as we support their growth. Because of the nature of the way we invest our capital in this manner, follow-on activity has exceeded our new portfolio company deployment in each of our past 5 fiscal years. In summary, the way we're approaching the currently challenging environment is to first stay disciplined on asset selection; second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth.
The relationships and overall presence we've built in the marketplace, combined with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. In the midst of these market conditions, we had $50 million of gross originations in the lower end of the middle market this quarter. Now before leaving this topic, I'll also point out that we continue to believe that the lower end of the middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger, and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater.
As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. A new initiative I'd like to highlight is that we have recently seen a new opportunity to invest in BB and BBB CLO debt securities. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates, while also providing enhanced yields relative to comparably rated corporate debt securities. Further, our underwriting process driven by quantitative metrics that measure individual manager and deal-level performance allows us to identify those managers and deals we believe will outperform over the long term and provide attractive risk-adjusted returns for our shareholders. During this past quarter, we invested in 9 different CLO BB securities across 7 different CLO managers for a total notional amount of $13 million.
We anticipate third-party managed CLO BBs and, to a lesser extent, CLO BBBs will play a role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets. Our underwriting bar remains high as usual. In a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies, as demonstrated with 8 follow-ons in calendar year 2025 thus far, and we have invested in 3 new platform investments this calendar year as well. More recently, during calendar Q2, we closed 1 new portfolio company. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours.
Portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. They remain the same 2 portfolio companies that we are actively managing as discussed in previous quarters. But in general, our portfolio companies are healthy, and the fair value of our core BDC portfolio is 1.7% above its cost. 86.9% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. At quarter-end, we have the same 2 investments on nonaccrual, namely Pepper Palace and Zollege, consistent with last quarter.
We continue to hold them on nonaccrual following their restructurings, with Zollege particularly demonstrating notable improvement in company performance. Looking at leverage on the same slide, you can see that industry debt multiples increased north of 5x with unitranche loans in the mid-5s. Total leverage for our overall portfolio decreased slightly to 5.22x, excluding Pepper Palace and Zollege, reflecting lower leverage across several portfolio companies. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024, despite the current M&A activity in the lower middle market remaining low. This recent increase of deal sourced as is a result of our recent business development initiatives, with 18 of the term sheets issued over the last 12 months being from deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.
As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the non-accrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investments. Our approach and underwriting strategy has always been focused on being thorough and cautious at the same time. Since our management team began working together almost 15 years ago, we've invested $2.36 billion in 122 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 82 of those investments, achieving gross unlevered realized returns of 15% on $1.26 billion of realizations.
Even taking into account the recent credit write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.4%. Total realized gains for the quarter were $2.9 million, of which this quarter's identity realization produced a gross IRR of 22.6% with a $2.2 million realized gain, continuing our track record of successful capital deployment. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien debt. Consistent with previous couple of quarters, we have only 2 investments on nonaccrual. Although both Pepper Palace and Zollege have been restructured, we are still classifying Pepper Palace as red and Zollege as yellow, with a combined fair value of $6.9 million, including equity. Pepper Palace continues to be managed actively with several initiatives underway. Zollege has demonstrated notable improvements in company performance that resulted in a $1.1 million appreciation in its value this quarter.
In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.6 million of net appreciation, including Pepper Palace and Zollege, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remained strong as seen by our track record on this slide. Now moving on to Slide 17. You can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower-cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back to our CEO. Chris?
Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended May 31, 2025, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended August 31, 2025, marking the second quarter of our new dividend payment structure. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the current interest rate and macro environment's impact on our earnings. Moving to Slide 19. Our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 22%, beating the BDC index's 3% for the same period by over 7 times. Our longer-term performance is outlined on the next Slide 20. Also our 5-year and 3-year returns both place us above the BDC index.
And since Saratoga took over management of the BDC in 2010, our total return has been 826% versus the industry's 294%. On Slide 21, you can further see our last 12 months' performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield, and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth and dividend coverage are lagging in this past year, this is largely due to last year's 2 discrete non-accrual investments previously discussed as well as the aforementioned impact of the shift to a new dividend structure impacting this quarter's NAV per share growth. In addition, we had significant recent repayments that have reduced Q1's NII as AUM has recently shrunk, resulting in us having healthy levels of cash to deploy.
In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. We also continue to be one of the few BDCs who have grown NAV accretively over the long term with our long-term return on equity at 1.5 times the industry average. Moving on to Slide 22. All of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined in this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 11.1%, ensuring that we are strongly aligned with our shareholders.
Looking ahead on Slide 23, as we navigate through a reshaped yield curve environment with decreasing short term and increasing long-term rates and an uncertain economic outlook in the face of an ever-evolving geopolitical landscape, we remain confident that our reputation, experienced management team, robust pipeline and historically strong underwriting standards and time and market tested investment strategy will serve us well to continue to steadily increase our portfolio size, quality, and investment performance over the long term. This will allow us to deliver exceptional risk adjusted returns to shareholders and to navigate through the current challenges in the market and uncover opportunities in the current and future environment. Recognizing the challenges posed by the current tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure, and liquidity places us in a strong position to successfully address these types of uncertainties. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.
Questions and answers
Our first question will be coming from Erik Zwick of Lucid Capital Markets.
I wanted to kind of just start on your commitment to kind of getting back to AUM expansion, and I realize there's some variables outside of your control that have kind of driven the declines over the past couple of quarters. But as you kind of frame up the opportunities now, it sounds like the efforts you've made on kind of the nonsponsored origination side are showing some positive trends. I think the things that are harder to predict now are just the level of prepayments going forward. And I guess, to some extent, you may have some visibility into potential relatively large maturities that could be coming due over the next quarter or 2. But as you kind of frame those all together, what is your expectation for your ability to return growing the portfolio over the next quarter or 2?
I will start and then pass it to Mike. You expressed it very well. Redemptions are hard to predict, just like our originations. One key focus has been on portfolio quality. While our assets under management have decreased because our originations are lower than our redemptions, the credit quality of our portfolio remains very strong. We believe our credit performance significantly outshines the industry average. Currently, there is a considerable influx of capital into the private credit sector, but the overall M&A market has slowed down due to tariffs and other factors. M&A activity has typically been a major driver for financing, but there is a lot of refinancing occurring instead. This creates a mismatch between supply and demand, which we are managing very carefully. It is not in our interest or our shareholders' interest to put more assets to work that may not be strong assets. Therefore, we have had to be cautious.
We have encountered many opportunities but have not moved on as many because of concerns over quality, primarily credit quality, and in some cases, pricing. With that said, we have revitalized our new business efforts. As Mike mentioned, we have been hiring more people and have a strong pipeline. We believe this will benefit us over time. However, we have learned to be careful in selecting our opportunities and markets. Focusing on quality credits rather than pursuing growth in assets under management for its own sake will be crucial in the long run. Mike, would you like to add anything?
Yes. I'd like to provide some additional insights and directly address one of your points regarding redemptions, which Chris highlighted as unpredictable. However, based on our current understanding, we don't foresee any immediate issues in that area. We anticipate that our redemption experience will generally resemble what we've encountered in the past. Our pipeline is expanding, not just with non-sponsored deals, but through new relationships with several lower middle market sponsors and investor groups that we haven't historically worked with. The lower end of the middle market we focus on is quite fragmented, and it's impressive how every time we visit new cities to explore deal opportunities, we discover new groups we weren't previously aware of. To take a step back, it's beneficial to consider our business in general. We firmly appreciate being at the lower end of the middle market, as it has led us to achieve substantial returns, averaging 15% over time with minimal volatility and very low loss experiences in mainly senior debt.
This segment is appealing because it allows for more thorough underwriting and enables us to provide significant value to our borrowers and ownership groups, distinguishing our approach from the upper end of the middle market that often prioritizes the lowest price and most favorable borrower terms. We have the opportunity to establish genuine relationships with management teams and ownership groups, typically having Board observation rights or engaging actively with those we lend to. This level of interaction supports a healthy pipeline of follow-ons, as indicated in my prepared remarks, where over the past five years, our follow-on activity in dollars has outstripped our new origination efforts, reflecting the strong relationships we've developed. However, this approach entails much more hands-on work, especially in asset selection and underwriting. Given our extensive experience, we understand the importance of staying disciplined in these areas while also closely monitoring our portfolio.
Being attentive to the businesses we lend to enables us to nurture follow-on growth, although it does require additional time and effort. In a typical market with historical levels of deal activity, we can grow at a healthy rate, usually outpacing repayments. Currently, in the lower end of the middle market, we are facing a considerably low level of deal activity, one of the lowest we have observed in a long time. Therefore, we've concluded that investing in people is crucial. The investments I mentioned earlier are designed to enable our deal professionals to allocate more of their time toward outward-facing origination efforts, allowing them to leverage their capabilities more effectively. We're already beginning to see positive outcomes from this focus in our pipeline, which we believe will set us back on a growth trajectory while maintaining discipline in our asset selection.
I appreciate the very detailed commentary there. Kind of taking some of that and realizing that the near-term growth is likely to continue to still be challenged kind of given all of the factors that you've mentioned there, it seems that the run rate of NII could continue to come in below the kind of declared dividend here for the near term. So could you just remind us, I don't think I have it for the most recent quarter, kind of where the spillover level is, either dollar terms or on a per share basis?
Yes, Erik. As a reminder, we had just over $3 at year-end, and we paid out $1.24 in this quarter. Currently, we are just under $2 from the February spillover. Additionally, we've also earned some earnings since March 1, so we are likely closer to the $2.50 level right now.
Henri, okay. And then just kind of continuing on the theme of growth being challenged in the near term, you have quite a bit of liquidity on the balance sheet and capacity to lend further. You do have some notes coming due later this year and some in early calendar '26 as well. So just kind of thoughts on how you would look to kind of replace those today with new notes versus maybe using the revolver. And I guess there's also the unknown of where rates may be. I think the market over the next year is forecasting about another 100 basis points in Fed funds cut. But whether or not we get those, I think still remains to be seen. But just curious on your thoughts on kind of the liability and funding side of the balance sheet.
We usually deal with challenges as they arise due to the many factors involved in our situation. By the time we confront those issues, we will be in a favorable position with our ample liquidity. This gives us considerable flexibility in managing any upcoming maturities, supported by our significant credit facilities and cash reserves. However, our strategy will largely depend on the next six months of originations and the overall outlook for asset deployment. Things can change rapidly, as we've seen recently, and we anticipate a markedly different economic landscape in the next three to six months. It could improve, decline, or remain stable. Since we are not economists, our focus is on maintaining flexibility and conservatism. We believe it's not prudent to take undue risks at this time. As the situation evolves, we will make informed decisions, and I apologize for not providing a definitive answer now, as we are not managing things in that manner. Our strong liquidity position and well-performing portfolio leave us with numerous options, which we will keep available as circumstances develop.
Yes. No, that makes sense. Optionality is very positive to have. So that's great. And last topic for me, then I'll step aside, in terms of the new CLO, the BB investments kind of maybe 2 questions. One, were those new primary issues? Or were those purchased in the secondary market? And secondarily, just kind of thinking maybe longer term, it sounds like you're attracted to that asset class. How large could you potentially see that portfolio come relative to the total investment portfolio?
Sure. The foundation of our investment in this area comes from years of managing CLOs, giving us a solid understanding of that marketplace. Our goal is to achieve strong risk-adjusted returns primarily through credit securities. Over time, our research has shown that the BB asset classes typically provide yields that align closely with those we seek in our regular private credit investments, alongside a strong historical credit performance and good liquidity. This allows for easier entry and exit, although significant market disruptions can affect that. Generally, this asset class offers considerably greater liquidity than others. We have a detailed process for determining which BBs and managers we invest in, utilizing our own tiering system and extensive research based on our long-term observation of this market. As we start participating in it, we recognize that it is a substantial industry and asset class, albeit not massive. There is room for more deployment, dependent on the available opportunities within the BB section and our traditional private credit sector. Regarding your question about the mix, we currently see a blend of primary and secondary market activity. Recently, there has been a stronger focus on primary issues due to seasonal trends in issuance. We are attentive to both markets as we seek the best opportunities for alpha.
Yes, we focus on both primary and secondary opportunities depending on the market conditions at that time. It will always be a mix of the two.
Our next question will be coming from Robert Dodd of Raymond James.
Following up on the question regarding the balance sheet, you have a significant amount of liquidity and time to address larger maturities. In this quarter, you paid off a $20 million bond, but you chose to enhance the Live Oak facility instead of using cash. Can we interpret this as a preference to preserve cash for investments while managing refinancing through other debt, such as drawing on the revolver? Is the intention to use cash primarily for investments to increase your assets under management, or is there a significant chance of that cash being used to reduce debt?
That's a very good question, and it's something we constantly consider. We take issue with the term bias, as we strive to remain unbiased. Our focus is on optimizing...
Yes, Robert, to clarify regarding the credit facility, we didn't choose to draw from it. Instead, we opted to increase it, which is a more strategic long-term decision for us, and there's a 50% utilization. That explains the draw. The key aspect is the increase and the creation of more liquidity available to us.
Understood. Regarding your point, when dealing with high-quality assets, receiving repayment is a favorable result. Your focus is on maintaining quality in those assets. However, currently, there seems to be less activity in that area. It's a tricky question, but what conditions in the market are necessary for improvement? Is the timing an issue, such that, even if tariffs stabilize now, is it realistic to think about M&A activity being a 2026 event? Can you provide any insights on when we might see an increase in opportunities for quality deals? While there will always be lower quality options, those are not what you're pursuing. So, when do you anticipate more quality deals becoming available?
Sure. I'll hand it over to Mike after I share a few thoughts. We have several interesting deals in our pipeline. The environment is competitive, but if we experience a winning streak, we could see significant additions over the next three to six months; however, that is not guaranteed. Our sponsors are at various stages; some are in the letter of intent phase, while others are still exploring options. We're examining some high-quality deals, but it's difficult to predict whether they will actually end up on our balance sheet. First, this isn't something we will speculate on during this call, and second, it's simply unpredictable. We are committed to working hard to secure these opportunities, but the market is competitive right now. We are not concerned about our cash position because we believe there are numerous opportunities available, and we are actively pursuing them. However, we can't control the timing of these opportunities on a quarterly basis. Mike?
Let me add to that. Addressing your question directly about our current situation and observations in the marketplace, we continue to note a decline in deal activity without any indications of a recovery. Having been in this field for a long time, there is generally no visibility on this. It's not something we attempt to predict or time. However, we are confident in our current pipeline, as well as the initiatives we are implementing, such as investing in more resources and intensifying our origination efforts. We believe these actions will lead us back to a growth path, even if deal activity remains low. We are optimistic about this outcome. While time will reveal the results, we are confident in our ability to operate successfully and continue to grow our balance sheet regardless of the deal market's status. If the market improves, that would be an added bonus.
And I would now like to hand the call back to Christian Oberbeck for closing remarks.
Okay. Well, again, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Thank you, everyone, for joining us today. We look forward to speaking to everyone next quarter. This concludes today's conference call.