管理層發言
Good morning, everyone. Thank you for joining us. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. Please be aware that this 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 Third 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 third 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 references to Q3 results reflects our November 30 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. This quarter, Saratoga Investment Corp achieved several highlights, including continued growth in net asset value (NAV) from both the previous quarter and year, stable NAV per share, and an increase in net investment income (NII) of $0.03 per share compared to the last quarter. We reported a strong return on equity of 13.5%, exceeding industry standards, and net originations of $17.2 million, comprising three new portfolio companies. Notably, our core BDC portfolio has demonstrated solid performance despite a volatile macroeconomic environment. Upholding our strong history of dividend distribution, we declared a monthly base dividend of $0.25 per share, totaling $0.75 per share for the fourth quarter of fiscal 2026, which, when annualized, translates to a yield of 12.9% based on the stock price of $23.19 as of January 6, 2026, providing substantial current income from an investment perspective.
While we observed an adjusted NII increase of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share reflects the influence of the declining short-term interest rates and spreads on our largely floating-rate assets, coupled with ongoing high levels of repayments. Strong originations surpassed repayments during the third quarter. However, the repayment of a $12 million baby bond led to a decrease in our cash position to $169.6 million at the end of the quarter, although we still have ample cash available for accretive investments or to pay down existing debt. During the quarter, we experienced an uptick in M&A activity amid ongoing competitive market dynamics. Despite multiple debt repayments within our portfolio in Q3, strong new originations resulted in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in three new investments and nine follow-ons, and we closed on new investments in various BB and BBB structured credit securities.
Our strong reputation and unique market positioning, along with the development of sponsor relationships, continue to yield attractive investment opportunities from high-quality sponsors. This trend is ongoing, with four new portfolio company investments either closed or in the process of closing in Q4, further enhancing our run rate earnings. We remain cautious and selective regarding new commitments in this volatile environment, believing that Saratoga is strategically positioned for potential economic opportunities and challenges ahead. The foundation of our strong operational performance lies in the high-quality nature and resilience of our $1.016 billion portfolio, successfully resolving all four historically challenged portfolio company situations. Our current noncore CLO portfolio was marked up, including realized gains of $2.9 million this quarter, more than offsetting a $0.4 million markdown, leading to a $2.5 million increase in fair value during the quarter.
As of the end of the quarter, our total portfolio fair value stood at 1.7% above cost, with our core non-CLO portfolio at 2.1% above cost. The overall financial performance and robust earnings capability of our portfolio reflect strong underwriting in our expanding portfolio companies and sponsors within well-selected industry segments. In the third quarter, our net interest margin rose from $13.1 million last quarter to $13.5 million, primarily due to a $0.5 million reduction in interest expense from the recent repayment of the $12 million baby bond. This quarter's interest income remained largely stable, benefiting from an approximate 0.9% increase in average non-CLO assets to $962 million, as well as repayments resulting in various accelerated OID recognitions. However, this was largely countered by two factors: First, the absolute yields of our core non-CLO BDC portfolio decreased from 11.3% to 10.6%, influenced by SOFR rate adjustments; second, the timing of new originations and repayments during Q3.
Additionally, the full-period effect of 0.5 million shares issued via the ATM program in Q2 and the partial impact of another 0.1 million shares issued in Q3 caused a $0.01 per share dilution to NII. Our credit quality improved this quarter, with 99.8% of credits rated in our highest category. Only one investment, Pepper Palace, remains on nonaccrual status, which has been successfully restructured, representing a mere 0.2% of fair value and 0.4% of cost. With 83.9% of our investments at quarter-end in first lien debt backed by strong enterprise values and balance sheets in historically resilient industries, our portfolio and company leverage are well-structured for current and future economic conditions and uncertainties. As we navigate the challenges from geopolitical tensions and market volatility, we maintain confidence in our management team's experience, a robust pipeline, strong leverage structure, and disciplined underwriting standards to steadily enhance the size, quality, and investment performance of our portfolio over the long term, delivering attractive risk-adjusted returns to shareholders.
As always, particularly in today's uncertain environment, our focus on balance sheet strength, liquidity, and NAV preservation is crucial. At the end of the quarter, we held a substantial $396 million in investment capacity to support our portfolio companies, including $136 million through our existing SBIC III license, $90 million from our two revolving credit facilities, and $169.6 million in cash. This cash position positively impacts our current regulatory leverage, improving from 168.4% to 183.7% net leverage after accounting for available cash against outstanding debt. Now, turning to Saratoga Investment’s fiscal 2026 third quarter key performance indicators compared to the quarters ended November 30, 2024, and August 31, 2025: our quarter-end NAV reached $413 million, reflecting a 10.2% increase from $375 million last year and a slight uptick from $410.5 million last quarter. Our NAV per share was $25.59, compared to $26.95 last year and $25.61 last quarter.
Our adjusted NII was $9.8 million this quarter, down 21.3% from last year but up 7.8% from last quarter, translating to an adjusted NII per share of $0.61, down 32.2% from last year but up 5.2% from last quarter. The adjusted NII yield was 9.5% for this quarter, down from 13.3% last year and up from 9% last quarter. The return on equity over the latest 12 months was 9.7%, an increase from 9.2% last year and 9.1% last quarter, which is above the industry average of 6.6%. While last year saw some markdowns in a few credits within our core BDC, our recent results illustrate a 9.7% return on equity for the last 12 months, surpassing the industry average of 6.6%. Furthermore, our long-term average return on equity over the past 12 years stands at 10.1%, significantly above the BDC industry average of 6.9%. Our long-term return on equity has consistently remained robust over the past decade, outperforming the industry in nine of the last 12 years, with positive results every year.
As depicted in our data, our assets under management have consistently increased since we took over the BDC 15 years ago, despite a recent slight pullback due to significant repayments. This quarter, we again saw originations outpacing repayments, leading to a rise in AUM compared to the previous quarter, and we anticipate long-term AUM growth. Our credit quality remains strong, with only one recently restructured investment, Pepper Palace, on nonaccrual status. Our management team is dedicated to continuing this positive trend by deploying our significant available capital into our pipeline while remaining cautiously aware of the evolving and volatile credit and economic environment. I would like to turn the call over to Henri for a review of our financial results and the composition and performance of our portfolio.
Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter compares to 11.8% as of last year and 11.3% as of last quarter.
The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry.
You will see that our nonaccrual rate of 0.4% of cost is 8 times lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio. Moving on to Slide 6. NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased in 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years. On 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 $0.03 in Q3.
This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01. On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend, fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million.
This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 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 $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, 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. This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank.
The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. 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 and that most of our debt is long term in nature. 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 $1.016 billion of AUM at fair value and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% 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 decreased to 10.6% from last quarter's 11.3%, with 3/5 of the decrease reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%.
Slide 11 shows how our investments are diversified through primarily the United States. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities. And finally, moving on to Slide 13. 8.3% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13-plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. 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. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms.
Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first stay disciplined on asset selection; second, invest in and generally 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. Now before leaving this topic, I'd like to reiterate that we continue to believe that the lower 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. 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, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year.
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 is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just 1 investment still on nonaccrual status, Pepper Palace and now only 0.2% of the portfolio at fair value and 0.4% at cost are on nonaccrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% 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. Now looking at leverage on the same slide, you can see that industry debt multiples move closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is down to 5.05x, excluding Pepper Palace. 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. This recent increase of deal sourced is as a result of our recent business development initiatives, with 25 of the 79 term sheets issued over the last 12 months being for 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.
Our originations this fiscal quarter totaled $72.1 million, consisting of 3 new investments totaling $40.5 million, 9 follow-ons totaling $25.6 million, and BB and BBB CLO debt investments of $6 million. Two of the 3 new portfolio companies closed in the quarter are with new relationships. Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio, approximately $89.3 million of new originations in 4 new portfolio companies and 6 follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these 4 new portfolio companies are with new relationships. 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 nonaccrual 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 values of the businesses will sustainably exceed the last dollar of our investment.
Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 85 of those investments, achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across 2 portfolio companies and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt.
As mentioned, we now have only 1 investment on nonaccrual, although Pepper Palace has been restructured, we are still classifying it as red with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, 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 remains strong as seen by our track record on this slide. 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 over 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 November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Our Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the 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 for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC indexes' negative 4%. This places us in the top 6 of all BDCs for calendar 2025.
Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 5-year total return places us above the BDC index, and our 3-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851%, has been almost 3 times the industry's 283%. 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 has lagged this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed. With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments.
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. Our focus remains long-term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity with our long-term return on equity at roughly 1.5 times the industry average, and latest 12 months return on equity also beating the industry by 310 basis points. 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 on 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 1 of the highest levels of management ownership in the industry at 10.8%, ensuring that we are strongly aligned with our shareholders.
Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards the private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals. In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the long term. 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.
分析師問答
Our first question comes from Erik Zwick with Lucid Capital Markets.
I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here?
Well, we’re not really in a position to discuss the entire M&A market. However, there have been significant mega deals recently, indicating that large M&A activity has increased substantially. In our area of focus, there are more people on both sides—sellers and buyers—preparing to make transactions. As Mike pointed out in his comments, while M&A activity is up, we're also seeing heightened competition and increased interest in these transactions. We are optimistic that this signals a return to a more normal level of M&A activity, which has been lacking over the past couple of years. Mike?
Yes. Let me elaborate on that. When we examine the deal flow from our long-standing relationships, we see it as an indicator of the M&A market's movement. We're already observing deal flow from that sector, and an increase there suggests a positive trend in M&A activity. While it's still early for definitive conclusions, we definitely see an uptick, along with more change of control transactions and increased involvement in various processes, which is encouraging. One aspect we appreciate about our position in the market is that we’re not solely reliant on M&A trends; we can be proactive. In the lower middle market, there are countless companies. By dedicating time to understand different markets across the country and building relationships with dealmakers and investors in this segment, we can generate significantly more deal flow. This deal flow doesn't necessarily correlate directly with larger M&A trends. Some businesses engage in change of control transactions due to factors like retirement or succession, often related to baby boomer transitions. Therefore, while M&A activity impacts us and we recognize an increase, we also believe we can influence our outcomes, as evidenced by our successful origination activities, which stem from our intensified outreach in the marketplace.
That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there?
As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment.
Yes, Erik, I would say that it's difficult to determine the timing, but we are pleased that in our core non-CLO BDC business, our fair value is approximately 2% higher than our costs. Overall, we are happy to see this.
Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned provides you the opportunity to potentially grow NII dollars over the next few quarters?
I believe you've outlined many of our considerations. One additional point is regarding capital deployment. We have significant capital that is yet to be utilized, and our pipeline is expanding. Thus, all the factors you've mentioned, including additional deployment, are being taken into account as we move forward. We're optimistic about our quarterly progress this year across all areas, and we hope this trend will persist. While we can't predict the future, we acknowledge the headwinds we've faced throughout the year, and despite that, we're making strides. Capital deployment is an area to keep an eye on. As the M&A market grows, we hope that any spread compression may reverse. There's a lot happening in the M&A space, including advances in AI and large transactions that could produce favorable outcomes. Additionally, the private credit market seems to be experiencing some challenges, which may reduce the previous influx of capital. We anticipate that the market will eventually stabilize to more normalized conditions. We believe that current spreads are tighter than they ought to be given the existing variables, and this situation appears to be temporary. Historically, as interest rates decrease, spreads tend to widen, so with all these factors considered, we feel confident in our ability to seize upcoming opportunities.
Our next question comes from the line of Casey Alexander with Compass Point Research & Trading.
Mike, I'm curious about the mention of tighter spreads on new investments that I heard several times during the prepared remarks. What are the trade-offs to ensure that you're achieving an adequate risk-adjusted rate of return? Are the spreads allowing you to still secure the covenants? Is there a competitive aspect to this? Is the spread enabling you to capture a bit more equity on the deal? How can we be assured that you're still earning a satisfactory risk-adjusted rate of return when spreads are tight like they currently are?
Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set. That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint. Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time. And is that going to be accretive to our shareholders relative to our cost of capital. So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure. I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment.
And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys.
Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort?
Yes, that’s a very fair question and something we think about a lot. I want to remind you that what's unique about our business model and investment strategy is that most quarters our follow-on investments surpass our new platform activities. Typically, we enter investments with a smaller amount and then observe the asset's performance, supporting its growth over time, which provides us with additional options. Historically, most of this has been through existing relationships. The progress we are making with new relationships is a relatively recent development, driven by our team's business development efforts over the past year to 18 months. The process of closing a deal with a new relationship takes quite a while, and we wish it could be quicker. This lengthy timeframe contributes to the substantial barriers to entry when establishing new relationships. However, when we develop a new relationship, we generally have a solid understanding of the sponsor's reputation in the market, the performance of their portfolio, and the key team members involved.
We've been in this market for a long time, and we do extensive work to ensure that the ownership group is suitable for the asset they are investing in and that we are supporting. We put a lot of thought into this process. As you mentioned, the standards are typically higher when we know a group well and understand their strengths and weaknesses. This familiarity can simplify investment decisions. In contrast, when we lack that history, we must conduct more thorough due diligence, which is something we have done and will continue to prioritize.
The other thing I would add, Casey, is that there is the opportunity aspect of this, which involves new relationships for making deals. We've been nurturing these connections for a long time, so in many cases, we've been tracking them. They are not completely new parties. As we look at our growth and market opportunity in the smaller middle market, each of these new relationships can lead to a series of investments with follow-ons and a compounding growth effect in terms of the opportunity flow. This creates a relatively preferred flow in our direction, allowing us more control over our involvement in the follow-ons and new deals.
Our next question comes from the line of Heli Sheth with Raymond James.
So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs?
Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally. Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully.
Alright. That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas of what industries you would say are vulnerable to AI outside of tech?
That could be a much longer answer than I can provide on this call. However, when we assess any business, we always consider what AI could contribute. We evaluate whether AI might significantly disrupt the business. If it's difficult to predict the impact, we generally avoid those deals. AI development is still relatively new, but we are very attentive to it and assess it for every deal we consider. Additionally, we have some portfolio companies that are integrating AI, which is enhancing their operations and improving the credit profiles of these companies. It presents both opportunities and challenges, but it's a key focus for us.
And we're definitely staying away from taxi medallions.
Perfect. And then 1 last quick one. Could I get the spillover balance as of the end of the quarter?
Yes. And per share, Heli, it's probably around approximately $2 per share at the moment.
And I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks.
Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.