Rand Capital (RAND) Q4 2025 Earnings Transcript

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DATE

Thursday, March 5, 2026 at 1:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Daniel Penberthy
• Executive Vice President and Chief Financial Officer — Margaret Whalen Brechtel
• Investor Relations — Craig Mychajluk

TAKEAWAYS

• Liquidity -- Exited the year with more than $23 million of total liquidity and no debt outstanding, providing "significant flexibility" for new investments as conditions improve.
• Net Asset Value (NAV) Per Share -- NAV per share at year-end was $17.57, reflecting adjustments, particularly related to Tilson Technology.
• Dividends -- Paid $1.72 per share in total cash dividends for 2025, including a fourth quarter dividend of $0.85 per share, comprising $0.29 regular and $0.56 special dividend.
• Portfolio Composition -- Portfolio at year-end held a fair value of $48.5 million across 20 companies, with 79% in debt investments, up from 75% in the prior year.
• Annualized Weighted Average Yield -- Debt investments produced an 11.3% annualized weighted average yield at year-end, affected by portfolio mix, increased non-accruals, and repayments.
• Investment Activity -- Deployed $6.6 million across five transactions during the year, mainly in interest-earning investments, and generated $17.8 million from repayments and realizations.
• Tilson Technology Event -- The largest valuation driver was Tilson Technology's Chapter 11 filing, resulting in a significant realized loss following the asset sale; fair value was adjusted "promptly as the situation developed."
• Top Five Holdings -- As of year-end, the top five investments represented $21.9 million in fair value, or 45% of the portfolio; these holdings provide yields generally in the 12%-13% range and often include equity or PIK features.
• Expenses -- For the year, total expenses declined 75% to $1.2 million, largely due to a $2.6 million decrease in capital gains incentive fees, reduced interest expense, and a lower base management fee.
• Net Investment Income -- Net investment income was $5.3 million, or $1.80 per share, a 35% increase; adjusted net investment income per share was $1.26, down from $1.72 in 2024, due to lower capital gains incentive fees offsetting investment income decline.
• Borrowing Capacity -- No outstanding borrowings were reported, with $19.2 million available under a $25 million senior secured revolving credit facility at year-end, subject to borrowing and eligibility requirements.
• PIK Interest -- Non-cash PIK interest totaled $308,000 in the quarter, accounting for 24% of total investment income, compared to 30% in the prior year.

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RISKS

• The portfolio suffered a significant realized loss and unrealized depreciation from Tilson Technology's Chapter 11 bankruptcy, as CEO Penberthy stated, "Tilson filed for Chapter 11 bankruptcy protection following a contract dispute with its primary customer" and "ultimately resulted in a significant reduction in the fair value of our investments, and later the realization of that loss."
• Total investment income fell by approximately 24% to $6.5 million due to the repayment of several interest-yielding investments and a slowdown in deal originations.
• Non-cash PIK interest comprised 24% of investment income in the fourth quarter.

SUMMARY

Rand Capital Corporation (NASDAQ:RAND) ended the period with more than $23 million in liquidity and no outstanding debt, while maintaining a $17.57 NAV per share. The portfolio contracted to $48.5 million in fair value due to high repayments, selective originations, and major depreciation tied to Tilson Technology's bankruptcy and asset sale. Management emphasized "This was a year of disciplined execution and capital allocation." and flexibility for redeploying capital as the M&A environment improves, noting $19.2 million in available credit facility capacity and an upward shift to 79% debt investments. Shareholder returns remained a strategic focus, with $1.72 in cash dividends paid, partly funded by capital recycling and including a special dividend. The company's year concluded with a top five investment concentration of 45% and a weighted average debt yield of 11.3%, supported by expense discipline and a portfolio mix tailored for resilient income.

• Annual expenses declined sharply with a $2.6 million drop in capital gains incentive fees, reducing total costs 75% and damping the negative impact of falling investment income.
• The fourth quarter investment in Bauer Sheet Metal and Fabricating included a 13% term loan and warrants for 12% equity, reflecting continued use of yield-oriented, equity-linked structures.
• Management stated, "We believe the company is well positioned to pursue growth from a position of strength," highlighting confidence in redeployment capacity as the credit cycle shows signs of improvement.
• The company's full-year net investment income per share climbed 35% to $1.80 due to lower expenses, though adjusted net investment income declined as capital gains incentive credits normalized.

INDUSTRY GLOSSARY

• PIK (Payment-in-Kind) Interest: Interest paid in the form of additional securities or principal rather than cash, increasing the principal balance owed to the investor.
• Capital Gains Incentive Fees: Compensation arrangements where a portion of profit from realized or unrealized gains is paid to the investment manager, subject to specific benchmarks and calculation periods.
• BDC (Business Development Company): SEC-regulated firm providing capital to small and mid-sized private companies through debt or equity investments, typically emphasizing yield and growth.

Full Conference Call Transcript

Craig Mychajluk: Thank you, and good afternoon, everyone. We appreciate your interest in Rand Capital Corporation and for joining us today for our fourth quarter and full year 2025 financial results conference call. On the line with me are Daniel Penberthy, our President and Chief Executive Officer, and Margaret Whalen Brechtel, our Executive Vice President and Chief Financial Officer. A copy of the release and slides that accompany our conversation is available at randcapital.com. If you are following along with the slide deck, please turn to slide two. I would like to point out some important information. As you are likely aware, we may make forward-looking statements during this presentation.

These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from where we are today. You can find a summary of these risks and uncertainties and other factors in the earnings release and other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles.

We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's earnings release. With that, please turn to slide three, and I will hand the discussion over to Dan.

Daniel Penberthy: Thank you, Craig, and good afternoon, everyone. Before getting into specific numbers, I want to step back and frame 2025 at a high level. This was a year of disciplined execution and capital allocation. We operated in a market where M&A activity was uneven, senior lenders remained selective and, at times, temperamental, and new deal origination across the BDC sector was sporadic. In that environment, we needed to prioritize balance sheet strength, liquidity, and risk management over growth for growth’s sake. The result is that we closed the year with more than $23 million of total liquidity and no debt outstanding.

That gives us significant flexibility and allows us to move decisively as market conditions improve and compelling opportunities present themselves. During the year, we generated approximately $17.8 million from repayments and select realizations while deploying $6.6 million into new and follow-on investments. That capital recycling is core to our model. It strengthens the balance sheet in periods of muted origination, which we have experienced recently, while positioning us to redeploy into attractive income-producing assets as conditions normalize. Net asset value per share at year-end was $17.57. While valuation adjustments during the year did impact NAV, particularly related to Tilson earlier in the year, we believe we have taken a transparent and conservative approach to these valuations.

Most importantly, we continue to deliver meaningful income to shareholders during 2025, so as we move into 2026, our posture is one of strength and patience. We are positioned to scale the portfolio prudently and pursue attractive risk-adjusted returns as the M&A environment continues to evolve. With that overview, let us turn to shareholder returns on slide four. Delivering meaningful cash returns to shareholders remains central to our strategy. 2025 was a strong example of that commitment. During the year, we paid out total cash dividends of $1.72 per share. That includes our quarterly dividends, which were consistent in 2025, as well as the special dividend declared in the fourth quarter.

Specifically, our fourth quarter dividend totaled $0.85 per share, comprised of the regular dividend of $0.29 plus a special dividend of $0.56 per share. This special dividend reflects the success of our capital recycling efforts during the year. As we monetize investments and strengthen the balance sheet, we evaluated the appropriate balance between retaining capital for redeployment and returning excess capital to shareholders. And building on our consistency, last week we also announced our first quarter 2026 dividend of $0.29 per share.

That declaration reflects our belief in the underlying earnings power of the portfolio, anticipated deal origination in 2026, and the durability of our income stream as we enter this new year amidst the still challenging yet seemingly improving credit cycle. What I think is important here is the broader message. Even in a year where repayments outpaced originations, and where the market environment required patience, we were able to maintain our 2025 regular dividend, deliver a meaningful special dividend, and enter 2026 with strong liquidity and no leverage. Thus, our near-term actions are focusing on replacing our repaid debt instruments from 2025 with new portfolio debt investments.

Across the BDC sector, investors are increasingly focused on dividend sustainability and balance sheet flexibility. We believe our actions demonstrate that our model is designed to support both of these. Please turn to slide five for the portfolio composition. At year-end, our portfolio had a fair value of $48.5 million across 20 companies. The decline from prior-year levels was primarily driven by a combination of portfolio company loan repayments and valuation adjustments earlier in the year. Most notably, the single largest driver of the valuation change was our investment in Tilson Technology. As we discussed on our second and third quarter calls during 2025, Tilson filed for Chapter 11 bankruptcy protection following a contract dispute with its primary customer.

That situation ultimately resulted in a significant reduction in the fair value of our investments, and later the realization of that loss through the bankruptcy process and asset sale. Despite Tilson’s failure, we remain optimistic about the future of a former spin-off of Tilson. This is Tilson SQF, now simply referred to as Virta, which we currently have at a $3 million valuation on our equity holdings. VERTA stands for vertical infrastructure. Think cell phone towers or 5G antennas on telephone poles. Importantly, we took a conservative, transparent approach to valuing that original Tilson position as events unfolded.

We adjusted the fair value promptly as the situation developed, and by the time of the asset sale, the investment had already been marked appropriately. While the outcome was disappointing, it reflected a specific company-level event rather than a broader systemic weakness across our portfolio or our underwriting process. Excluding Tilson, the remainder of the portfolio experienced more modest valuation changes, largely reflective of the broader lower middle market environment, tighter credit conditions, and normal mark-to-market adjustments. At the same time, repayments during the year reduced total fair value but strengthened our liquidity and balance sheet. That capital recycling is part of the natural life cycle of our strategy.

As companies mature and access lower-cost senior financing, they refinance our subordinated debt. While that moderates near-term income, it validates our underwriting and returns capital for deployment. We now need to replace those paid-off investments with new portfolio investments to support our future dividend streams. At year-end, our portfolio mix continued to shift towards more income generation. Debt investments represented 79% of the portfolio, up from 75% at year-end 2024. That reflects our continued emphasis on yield-oriented structures with equity participation for upside. The annualized weighted average yield on debt investments was 11.3% at year-end. The change from prior-year levels reflects portfolio mix shifts, increased non-accrual activity during 2025, and the repayment of certain higher-yielding investments.

Across the broader BDC landscape, and to a greater degree in our own portfolio, we have seen continued and elevated use of PIK interest as borrowers manage tighter senior credit conditions. We monitor PIK exposure carefully and remain focused on underlying credit quality and enterprise value. Our objective remains consistent. We are building a resilient, income-oriented portfolio targeted to support sustainable dividends while maintaining long-term capital appreciation potential from our equity investments. Next, let us review investment activity on slide six. During the fourth quarter, we committed $3.25 million to Bauer Sheet Metal and Fabricating. This investment includes a 13% term loan along with warrants representing 12% ownership interest. Bauer serves industrial end markets including mining, marine, and engineering sectors.

It is a business with tangible assets, specialized fabrication capabilities, and established customer relationships. For the full year, we deployed a total $6.6 million across five transactions, primarily in interest-earning investments. This included two new portfolio companies and three follow-on investments supporting our existing portfolio companies. At the same time, we generated approximately $17.8 million from realizations and loan repayments during the year. That capital recycling is fundamental to our strategy, as I previously mentioned. As companies mature and access lower-cost senior financings, we are repaid. That validates our original underwriting and frees capital for redeployment. Many BDCs have commented recently that repayments have outpaced originations during 2025. We experienced similar dynamics.

The key difference for Rand Capital Corporation is that we ended the year with no leverage and substantial liquidity, giving us the flexibility to lean in when our opportunity set expands. Now let us turn to slide seven for our industry mix. Professional and business services represents the largest allocation, followed by manufacturing, distribution, and consumer products. This mix helps mitigate exposure to any single sector and allows us to participate in growth across a range of industries. While individual weighting shifted during the year due to the repayments and valuation changes I have noted, the broader structure remains balanced and aligned with our lower middle market focus.

We believe maintaining this balance strengthens portfolio resilience and positions us well as sector-specific opportunities emerge in 2026. Next, let us look at our top five holdings on slide eight. These portfolio investments represent $21.9 million in fair value, or approximately 45% of the total portfolio at year-end. These include Afinia, or International Electronic Alloys, Kitech, FCM Industries, Highland All About People, and BMP Foodservice Supply. Each of these investments is structured to provide attractive yield, generally in the 12% to 13% range, with several also including equity components or PIK features that provide additional return potential. They form the core income-producing engine of the portfolio.

Now stepping back and comparing this to where we stood at year-end 2024, there have been some notable changes. At the end of 2024, our top five included Tilson, Cybert, or The RAC Group, Foodservice Supply, Madison, and Kitech. As we discussed earlier, Tilson exited the top five following its Chapter 11 process and subsequent asset sale. Cybert, also known as the RAC Group, also dropped out following the repayment of our debt position. Madison similarly was repaid. Both, again, are examples of this life cycle strategy which I previously mentioned. As the businesses matured, they accessed lower-cost senior financing, we got repaid, and we have the opportunity to redeploy that capital elsewhere.

Overall, we believe the portfolio today is balanced and less concentrated in any single position. We are better positioned for disciplined redeployment as we move through 2026. With that, I will turn it over to Margaret to walk through the financial results in greater detail.

Margaret Whalen Brechtel: Thanks, Dan, and good afternoon, everyone. I will start on slide 10, which provides an overview of our financial summary and operational highlights for 2025. Total investment income was $1.3 million, down 40% compared with the prior-year period. The decrease primarily reflects a 46% reduction in interest income due to the repayment of five debt instruments over the past year along with lower fee income. Non-cash PIK interest totaled $308,000 in the fourth quarter, representing 24% of total investment income compared with 30% in the prior-year period. Total expenses were $666,000 for the quarter compared with a net credit in 2024. The variance primarily reflects capital gains incentive fee dynamics.

2024 included a credit related to portfolio valuation changes, whereas no capital gains incentive fee was recorded in 2025. Excluding capital gains incentive fees, adjusted expenses were down slightly year-over-year. Net investment income for the quarter was $600,000, or $0.20 per share. Adjusted net investment income per share was also $0.20. Now let us turn to the full-year summary on slide 11. Total investment income was $6.5 million compared with $8.6 million in 2024. The change reflects similar dynamics to the fourth quarter given the repayment of several interest-yielding investments and a slowdown in deal originations.

Total expenses declined 75% to $1.2 million, primarily driven by a $2.6 million decrease in capital gains incentive fees, lower interest expense, and a reduced base management fee. Net investment income for the year was $5.3 million, or $1.80 per share, a 35% increase over the prior year. Excluding capital gains incentive fees, adjusted investment income per share was $1.26 compared with $1.72 in 2024. While total investment income declined, disciplined expense management contributed meaningfully to earnings performance. Please turn to slide 12. Net assets at 12/31/2025 were $52.2 million. The waterfall chart illustrates the drivers of net asset value change during the year. We generated $5.3 million in net investment income.

This was offset by realized losses, unrealized depreciation, and dividends declared during the year. A significant portion of the unrealized changes relates to the Tilson Chapter 11 filing and subsequent asset sale earlier in 2025. We believe our valuations reflect a conservative and transparent assessment of portfolio fair value at year-end. Now turning to the balance sheet on slide 13, we ended the year with $4.2 million in cash and cash equivalents, up substantially from $835,000 at year-end 2024. Importantly, we had no outstanding borrowings under our senior secured revolving credit facility, leaving $19.2 million of available capacity. The facility permits up to $25 million in borrowings, subject to compliance with borrowing conditions and portfolio eligibility requirements.

Total assets were $53.2 million at year-end, and our net asset value per share was $17.57. Absence of leverage combined with available borrowing capacity provides meaningful financial flexibility as we move through 2026. With that, I will turn it back to Dan for closing remarks.

Daniel Penberthy: Thanks, Margaret. If you could please turn to slide 14. As we step back and look at where Rand Capital Corporation stands today, I believe 2025 was a transition year that strengthened the foundation of the company. We have navigated a challenging environment, addressed a significant portfolio event, recycled meaningful capital, and exited the year with no leverage and substantial liquidity. Across the BDC landscape, many are beginning to speak about improving sponsor activity and a gradual reopening of M&A markets. If that momentum continues, we believe and are hopeful that the coming year could present even more attractive deployment opportunities, perhaps potential exit opportunities for our equity holdings, and this would be an improvement over the past several quarters.

What differentiates Rand Capital Corporation in this environment is our flexibility. We are not constrained by leverage. We are not forced to aggressively originate to support the balance sheet. We have the ability to be selective, patient, and disciplined. That allows us to focus on structures that align with our risk-adjusted return objectives rather than simply chasing volume. At the same time, our portfolio remains income-oriented with the goal to support our dividend. Looking forward, our dividend strategy remains disciplined and earnings-driven. We will continue to evaluate opportunities to enhance shareholder returns while preserving capital and maintaining flexibility to scale the portfolio as market conditions improve.

Our focus in 2026 is clear: prudent capital deployment, active portfolio oversight, disciplined underwriting, and long-term shareholder value creation. We believe the company is well positioned to pursue growth from a position of strength. Today, March 5, is our record date, so please keep an eye out for our proxy statement and please vote your shares for our 2026 April annual meeting. Thank you. We look forward to updating you on our progress in 2026. Have a great day.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect.

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