Capital Southwest Corp (CSWC) Updates on Recent Divestitures, Investments

Capital Southwest Corp (NASDAQ: CSWC) provided an update on recent portfolio activity, including its recent divestitures of its stakes in KBI Biopharma, Inc. ("KBI") and Trax Technologies Inc ("Trax"), as well as the business development company's (BDC) initial credit investment.

Divestitures

Capital Southwest and its wholly-owned subsidiary, Capital Southwest Venture Corporation ("CSVC"), recently successfully divested its investments in KBI Biopharma and Trax Technologies.

KBI Biopharma, a provider of fully-integrated, outsourced drug development and bio-manufacturing services, was acquired by a consortium led by JSR Corporation. Capital Southwest received proceeds of $16.8 million, excluding further proceeds of up to $2.1 million as recovery of its contribution to a customary escrow, which may be used to satisfy certain post-closing indemnification claims, if any. Additionally, Capital Southwest will retain a minority ownership stake in kSep Systems, the former subsidiary of KBI that was spun off to KBI shareholders prior to the sale. With an initial investment in KBI in September 2009 of $5 million, Capital Southwest realized a capital gain of $14.4 million, generating an internal rate of return (IRR) of 28.5%, all before realizing any value for the stake in kSep Systems.

In addition, the Company successfully exited its investment in Trax Technologies, a SaaS provider of solutions to improve the validation, accounting and payment of transportation-related invoices, in Trax's majority recapitalization by Strattam Capital. Capital Southwest received proceeds of $14.5 million, excluding further proceeds of up to $1.6 million as recovery of its contribution to a customary escrow, which may be used to satisfy certain post-closing indemnification claims, if any. Additionally, Capital Southwest is retaining an ownership interest in Trax's common stock. With an initial investment in Trax in 2009 of $5 million and a follow-on investment of $4 million in 2012, Capital Southwest realized a capital gain of $7.9 million, generating an IRR of 12.8%, all before realizing any value for its retained common ownership.

"We have been pleased thus far with the valuations we have realized upon the monetization of some of our smaller equity investments as our BDC shifts its focus toward a lending strategy more appropriate for its structure," said Joseph B. Armes, Chairman and Chief Executive Officer of Capital Southwest. "We expect to continue to divest those investments that are inconsistent with the scope of our new BDC strategy and/or where we believe that we can achieve a full valuation."

Portfolio Investments

Earlier this month, Capital Southwest funded $7 million of a $135 million senior secured second lien debt tranche to finance the acquisition of Research Now Group, Inc., a leading digital data collection provider powering analytics and insights, by Court Square Capital Partners. The loan bears an interest rate of 8.75% over the greater of LIBOR and 1% and matures in 2022. With the original issue discount on the purchase by Capital Southwest in the offering, Capital Southwest's expected all-in yield will be approximately 10.4% on the loan. A portion of the proceeds from the monetizations of KBI and Trax were used to fund the initial credit investment as the BDC takes a further step toward becoming a more traditional, debt-focused investment company.

"Our initial investment demonstrates our early progress in our shift to a credit focus, as we hit the ground running in funding our investment in Research Now months before finalizing the planned spin-off of the industrial company from the BDC," added Bowen S. Diehl, Chief Investment Officer of Capital Southwest. "Research Now has a compelling value proposition to its customers and has proven to be a performer in both up and down economic cycles. We are pleased to have been allocated a meaningful participation in this transaction. Further, we are pleased with our pipeline of investment opportunities and we are confident that through repositioning our portfolio toward debt investments, we will be able to generate attractive risk-adjusted returns that should support a market-based dividend, creating long-term sustainable value for our shareholders."

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