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. GECC invests in secured and senior secured debt instruments of middle market companies, as well as income-generating equity investments in specialty finance companies. The company also invests in collateralized loan obligation (CLO) securities and related warehouse facilities.

In 2024, GECC contributed investments in certain CLOs to form a joint venture called the CLO Formation JV, LLC to facilitate the creation of CLOs. The company also contributed investments in operating company subsidiaries and other specialty finance assets to its subsidiary GESF in exchange for equity and subordinated debt, with a strategic investor purchasing a 12.5% stake in GESF.

GECC has elected to be treated as a regulated investment company (RIC) for U.S. federal income tax purposes, which allows it to avoid corporate-level taxes as long as it distributes at least 90% of its investment company taxable income to shareholders annually.

Investment Activity and Portfolio

GECC’s investment activity can vary substantially from period to period. In 2024, the company made $345.7 million in new investments and had $245.6 million in dispositions, compared to $226.1 million in new investments and $235.6 million in dispositions in 2023. The weighted average yield on the portfolio was 12.37% at the end of 2024, down from 13.77% at the end of 2023.

The company’s investment portfolio was diversified across various industries, with the largest exposures in specialty finance (13.31%), structured finance (12.36%), technology (9.19%), and chemicals (8.06%) as of December 31, 2024. The total fair value of the investment portfolio was $324.3 million at the end of 2024, up from $230.6 million at the end of 2023.

Revenue and Profitability

GECC generates revenue primarily from interest on its debt investments, as well as dividends on equity investments, capital gains, and other fees. 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.

Expenses also 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. Management fees and incentive fees paid to the external investment manager GECM also increased, but administration fees decreased.

Net realized gains on investments were $1.9 million in 2024, compared to a $4.7 million net realized loss in 2023. However, the company experienced a $10.8 million net decrease in unrealized appreciation on investments in 2024, compared to a $17.5 million net increase in 2023.

Overall, GECC’s net investment income increased from $12.8 million in 2023 to $12.8 million in 2024. The company’s net asset value (NAV) per share decreased from $16.91 at the end of 2023 to $15.81 at the end of 2024.

Liquidity and Capital Resources

GECC generates liquidity through its operations, with cash received from investment income, sales, and principal repayments on investments. The company also raises capital through the issuance of notes payable and its revolving credit facility.

As of December 31, 2024, GECC had $8.4 million in money market fund investments and $14.6 million in unfunded investment commitments. The company believes it has sufficient liquidity to meet its short-term and long-term obligations for the foreseeable future.

In 2024, GECC issued $97.9 million in new notes, including $56.5 million of 8.50% notes due 2029 and $41.4 million of 8.125% notes due 2029. The company also redeemed $45.6 million of its 6.75% notes due 2025. As of the end of 2024, GECC had $195.4 million in total notes payable outstanding.

The company’s asset coverage ratio, a measure of leverage, was approximately 169.7% as of December 31, 2024, well above the minimum 150% required under the Investment Company Act.

Strengths and Weaknesses

Key strengths of GECC’s business model include:

• Diversified investment portfolio across various industries and asset types
• Ability to generate consistent interest and dividend income
• Prudent use of leverage, with a strong asset coverage ratio
• Tax-efficient structure as a RIC

Potential weaknesses and risks include:

• Exposure to credit and interest rate risks in its debt investments
• Reliance on the performance of its external investment manager, GECM
• Potential for volatility in realized and unrealized gains/losses on investments
• Competition from other BDCs and alternative lenders for middle-market deals

Outlook and Conclusion

Looking ahead, GECC’s future performance will depend on its ability to continue sourcing attractive investment opportunities, effectively manage its portfolio, and control costs. The company’s investment in the CLO Formation JV and its specialty finance subsidiary GESF could provide additional avenues for growth and diversification.

However, the company faces headwinds from a rising interest rate environment, which could pressure yields on new investments, as well as potential economic uncertainty that could impact the creditworthiness of its portfolio companies.

Overall, GECC appears to be a well-managed BDC with a diversified investment strategy and a prudent approach to leverage. While the company experienced some volatility in its investment portfolio in 2024, its core business of providing financing to middle-market companies continues to generate stable income. Investors should closely monitor GECC’s ability to navigate the evolving market conditions and execute on its growth initiatives in the coming years.