Overview of the Company

Great Elm Capital Corp. (GECC) is a business development company (BDC) that seeks to generate both current income and capital appreciation through debt and income-generating equity investments, including investments in specialty finance businesses. To achieve its investment objective, GECC invests in secured and senior secured debt instruments of middle market companies, as well as income-generating equity investments in specialty finance companies.

In 2024, GECC took several strategic actions to expand its business. It contributed investments in certain CLOs to form a joint venture, the CLO Formation JV, LLC, to facilitate the creation of CLOs. GECC also contributed investments in certain operating company subsidiaries and other specialty finance assets to its subsidiary GESF in exchange for equity and subordinated indebtedness, with a strategic investor purchasing a 12.5% stake in GESF. Through GESF, GECC provides a variety of financing options to middle-market borrowers.

Financial Performance

GECC’s total investment income increased from $35.8 million in 2023 to $39.3 million in 2024, driven by growth in the debt portfolio and higher dividend income from the CLO Formation JV. Interest income rose from $28.9 million to $31.5 million, while dividend income increased from $3.5 million to $6.9 million. Other income, which includes commitment fees and other fees, decreased from $3.4 million to $0.9 million.

Total expenses increased from $23.0 million in 2023 to $26.5 million in 2024, primarily due to higher interest expense from the issuance of new notes payable, partially offset by lower incentive fees. Management fees increased from $3.5 million to $4.5 million due to growth in the investment portfolio, while incentive fees decreased from $3.1 million to $2.6 million. Interest expense rose from $11.7 million to $14.9 million.

GECC recorded net realized gains of $1.9 million in 2024, compared to net realized losses of $4.7 million in 2023. The 2024 gains were driven by partial sales of investments in American Coastal Insurance Corp and Blackstone Secured Lending Fund, partially offset by losses on investments in PFS Holdings Corp and Blue Ribbon, LLC. In 2023, realized losses included $7.0 million on the sale of Lenders Funding, LLC and $4.6 million related to the write-off of Avanti Communications Group.

The net change in unrealized appreciation/depreciation on investments was a loss of $10.8 million in 2024, compared to a gain of $17.5 million in 2023. The 2024 unrealized losses were primarily driven by decreases in the fair value of investments in Dynata, LLC and GESF, partially offset by increases in Nice-Pak Products warrants and CW Opportunity 2 LP. The 2023 unrealized gains were largely due to the reversal of previously recognized losses on Lenders Funding and Avanti Communications.

Portfolio and Investment Activity

GECC’s investment portfolio grew from $230.6 million at the end of 2023 to $324.3 million at the end of 2024, reflecting net acquisitions of $100.1 million. Acquisitions totaled $345.7 million, while dispositions were $245.6 million. The weighted average yield on the portfolio decreased from 13.77% to 12.37% over the same period.

The portfolio remains diversified across industries, with the largest exposures as of December 31, 2024 in specialty finance (13.3%), structured finance (12.4%), technology (9.2%), transportation equipment manufacturing (8.1%), and chemicals (8.1%). Notable changes from the prior year include increased investments in technology and structured finance, and decreased exposure to specialty finance and internet media.

Liquidity and Capital Resources

GECC generates liquidity primarily through its operations, with cash received from investment income, sales, and principal repayments. As of December 31, 2024, the company had $8.4 million in money market fund investments and $14.6 million in unfunded investment commitments.

For the year ended December 31, 2024, net cash provided by operating activities was $82.7 million, reflecting investment purchases and proceeds. Net cash provided by financing activities was $81.7 million, including $97.9 million in net proceeds from the issuance of new notes payable, partially offset by $45.6 million in note redemptions and $15.1 million in distributions to shareholders.

GECC has a $25 million senior secured revolving credit facility with CNB, which was undrawn as of December 31, 2024. The company also has $195.4 million in outstanding notes payable, including the GECCO Notes, GECCZ Notes, GECCI Notes, and GECCH Notes, with maturities ranging from 2026 to 2029.

GECC believes it has sufficient liquidity to meet its short-term and long-term obligations for the foreseeable future. The company’s asset coverage ratio was approximately 169.7% as of December 31, 2024, well above the required minimum of 150% under the Investment Company Act.

Strengths and Weaknesses

Key strengths of GECC’s business model include:

• Diversified investment portfolio across industries and asset types, including debt, equity, and specialty finance investments
• Expansion into CLO investments and formation of the CLO JV to generate additional income streams
• Contribution of specialty finance assets to GESF, allowing GECC to participate in the growth of this business
• Solid liquidity position and access to capital through its revolving credit facility and notes payable

Potential weaknesses and risks include:

• Exposure to interest rate risk, as a significant portion of the portfolio is in variable-rate debt investments
• Concentration in certain industries, such as specialty finance and structured finance, which could be vulnerable to economic downturns
• Reliance on GECM, the external investment manager, and the potential impact of terminating or amending the Investment Management Agreement
• Regulatory requirements as a BDC, which limit the company’s flexibility in managing its portfolio and capital structure

Outlook and Conclusion

GECC’s financial performance in 2024 was generally positive, with growth in investment income and a strengthening of the investment portfolio. The company’s strategic initiatives, such as the formation of the CLO JV and the contribution of assets to GESF, have the potential to generate additional revenue and cost synergies.

However, the company faces some risks, including interest rate sensitivity and industry concentrations, that could impact future results. Additionally, GECC’s reliance on its external investment manager, GECM, represents a potential vulnerability.

Overall, GECC appears to be in a solid financial position, with a diversified investment portfolio, access to capital, and a management team that has taken steps to expand the business. While the company faces some challenges, its recent performance and strategic actions suggest it is well-positioned to continue generating returns for shareholders in the years ahead.