CNL Strategic Capital LLC

03/31/2025 | Press release | Distributed by Public on 03/31/2025 12:43

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with our financial statements and related notes thereto appearing elsewhere in this annual report on Form 10-K (this "Annual Report"). In this Annual Report "we," "our," "us," and "our company" refer to CNL Strategic Capital, LLC. Capitalized terms used in this Item 7. have the same meaning as in Item 1. "Business" unless otherwise defined herein. The discussion of our financial condition and results of operations for the year ended December 31, 2022 included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023 as filed on March 27, 2024 is incorporated by reference herein.
Overview
Since we commenced operations on February 7, 2018 through March 24, 2025, we have acquired equity and debt investments in 16 middle market U.S. businesses. Our businesses generally have a track record of stable and predictable operating performance, are highly cash flow generative and have management teams who have a meaningful ownership stake in their respective company. As of March 24, 2025, we had eleven investments structured as controlling equity interests in combination with debt positions, four investments structured as minority equity interests in combination with debt positions and one investment structured as a minority equity interest. All of our debt investments were current as of December 31, 2024. See "Portfolio and Investment Activity" below for additional information related to our investments.
See Item 1. "Business" for additional information regarding our Manager, Sub-Manager and business objectives.
Our Common Shares Offerings
Public Offerings
On March 7, 2018, we commenced the Initial Public Offering of up to $1.1 billion of shares, which included up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Initial Registration Statement. On November 1, 2021, we commenced the Follow-On Public Offering of up to $1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, of our shares, upon which the Initial Registration Statement was deemed terminated. On November 1, 2024, we commenced the Second Follow-On Public Offering of up to $1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Second Follow-On Registration Statement upon which the Follow-On Registration Statement was deemed terminated.
Through December 31, 2024, we had received net proceeds from the Public Offerings of approximately $971.6 million, including approximately $46.4 million received through our distribution reinvestment plan. We incurred selling commissions and dealer manager fees of approximately $14.2 million from the sale of Class A shares and Class T shares in the Public Offerings through December 31, 2024. The Class D shares and Class I shares sold through December 31, 2024 were not subject to selling commissions and dealer manager fees. We also incurred obligations to reimburse the Manager and Sub-Manager for organization and offering costs of approximately $11.7 million based on actual amounts raised through the Public Offerings through December 31, 2024. These organization and offering costs related to the Public Offerings were advanced by the Manager and Sub-Manager, as described further in Note 5. "Related Party Transactions" of Item 8. "Financial Statements and Supplementary Data."
We are currently offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, "Non-founder shares") through the Second Follow-On Public Offering. There are differing selling fees and commissions for each share class. We also pay distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public Offerings (excluding shares sold pursuant to our distribution reinvestment plan).
As of December 31, 2024, the public offering price was $38.51 per Class A share, $37.04 per Class T share, $34.97 per Class D share and $35.78 per Class I share. In January, February and March 2025, our board of directors approved new per share public offering prices for each share class in the Second Follow-On Public Offering. The new public offering prices are effective as of January 31, 2025, February 28, 2025 and March 31, 2025, respectively. The following table provides the new public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the Second Follow-On Public Offering:
Class A Class T Class D Class I
Effective January 31, 2025:
Public Offering Price, Per Share $ 38.99 $ 37.50 $ 35.42 $ 36.12
Selling Commissions, Per Share 2.34 1.13 - -
Dealer Manager Fees, Per Share 0.97 0.65 - -
Effective February 28, 2025:
Public Offering Price, Per Share $ 38.89 $ 37.39 $ 35.32 $ 36.01
Selling Commissions, Per Share 2.33 1.12 - -
Dealer Manager Fees, Per Share 0.98 0.66 - -
Effective March 31, 2025:
Public Offering Price, Per Share $ 39.14 $ 37.62 $ 35.54 $ 36.23
Selling Commissions, Per Share 2.35 1.13 - -
Dealer Manager Fees, Per Share 0.98 0.66 - -
See Note 7. "Capital Transactions" and Note 13. "Subsequent Events" in Item 8. "Financial Statements and Supplementary Data" for additional information regarding the Second Follow-On Public Offering.
Portfolio and Investment Activity
As of December 31, 2024, we had invested in 16 portfolio companies, consisting of equity investments and debt investments in all but one portfolio company. The table below presents our portfolio company investments (in millions):
As of December 31, 2024
Equity Investments
Debt Investments(1)
Portfolio Company Initial Investment Date Ownership % Cost Basis Senior Secured Debt Interest Rate Maturity Date Cost Basis
Total Cost Basis (2)
Lawn Doctor 2/7/2018 61% $ 27.6 Second Lien 16.0% 2/7/2030 $ 15.0 $ 42.6
Lawn Doctor 6/30/2023 - - First Lien
(3)
8/6/2029 29.5 29.5
Polyform 2/7/2018 87 15.6 Secured 16.0 2/7/2026 15.7 31.3
Roundtables 8/1/2019 81 33.5 Second Lien 16.0 7/1/2028 12.1 45.6
Roundtables 11/13/2019 - - Secured 8.0 12/31/2028 2.0 2.0
Milton 11/21/2019 13 6.6 Second Lien 15.0 12/19/2030 3.4 10.0
Resolution Economics 1/2/2020 8 7.9 Second Lien 15.0 12/30/2027 2.8 10.7
Blue Ridge 3/24/2020 16 10.2 Second Lien 15.0 12/28/2029 2.6 12.8
HSH 7/16/2020 75 17.3 Secured 15.0 7/16/2027 24.4 41.7
ATA 4/1/2021 75 37.1 Secured 15.0 4/1/2027 37.0 74.1
Douglas 10/7/2021 90 35.5 Second Lien 16.0 10/7/2028 15.0 50.5
Clarion 12/9/2021 96 56.8 First Lien 15.0 12/9/2028 22.5 79.3
Vektek 5/6/2022 84 56.9 Second Lien 15.0 11/6/2029 24.4 81.3
Vektek 06/30/23 - - Secured
(3)
5/6/2029 24.6 24.6
TacMed 03/24/23 95 76.7 Secured 16.0 3/24/2030 29.0 105.7
Sill 10/20/23 93 90.6 Secured 14.0 10/20/2030 15.9 106.5
USAW 2/21/2024 5 8.6 Second Lien 16.0 8/20/2031 1.4 10.0
LBR 6/17/2024 7 62.2
(4)
(4)
(4)
- 62.2
MAP 7/18/2024 57 57.5 First Lien 15.0 7/18/2031 $ 15.0 72.5
$ 600.6 $ 292.3 $ 892.9
FOOTNOTES:
(1) The note purchase agreements contain customary covenants and events of default. As of December 31, 2024, all of our portfolio companies were in compliance with their respective debt covenants.
(2) See the Consolidated Schedules of Investments and Note 3. "Investments" of Item 8. "Financial Statements and Supplementary Data" for additional information related to our investments, including fair values as of December 31, 2024.
(3) As of December 31, 2024, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60% and SOFR + 4.35%, respectively. SOFR at December 31, 2024 was 4.53%.
(4) Investment in portfolio company consists of minority equity interests only.
The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on our results of operations and cash flows from operations, which would impact our ability to make distributions to shareholders.
Our Portfolio Companies
The below information regarding our portfolio companies contain a financial measure, Adjusted EBITDA, utilized by management to evaluate the operating performance and liquidity of our portfolio companies that is not calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Adjusted EBITDA should not be considered in isolation from or as superior to or as a substitute for net income (loss), income (loss) from operations, or other financial measures determined in accordance with GAAP. We present this non-GAAP measure quarterly for our portfolio companies in which we own a controlling equity interest and annually for all of our portfolio companies.
You are encouraged to evaluate the adjustments to Adjusted EBITDA, including the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future our portfolio companies may incur expenses that are the same as or similar to some of the adjustments in this presentation. The presentations of Adjusted EBITDA should not be construed as an inference that the future results of our portfolio companies will be unaffected by unusual or non-recurring items.
We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies, because not all companies calculate this non-GAAP measure in the same manner. Because of these limitations and additional limitations described below, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA only as supplemental measures.
Additionally, we provide our proportionate share of each non-GAAP measure because our ownership percentage of each portfolio company varies. We urge investors to consider our ownership percentage of each portfolio company when evaluating the results of each of our portfolio companies.
Adjusted EBITDA
When evaluating the performance of our portfolio, we monitor Adjusted EBITDA to measure the financial and operational performance of our portfolio companies and their ability to pay contractually obligated debt payments to us. In connection with this evaluation, the Manager and Sub-Manager review monthly portfolio company operating performance versus budgeted expectations and conduct regular operational review calls with the management teams of the portfolio companies.
We present Adjusted EBITDA as a supplemental measure of the performance of our portfolio companies because we believe it assists investors in comparing the performance of such businesses across reporting periods on a consistent basis by excluding items that we do not believe are indicative of their core operating performance.
We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain other non-recurring items that we do not consider indicative of the ongoing operating performance of our portfolio companies. These further adjustments are itemized below. Our proportionate share of Adjusted EBITDA is calculated based on our equity ownership percentage at period end.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: (i) Adjusted EBITDA does not reflect cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; (iii) Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness; (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; (v) Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the ongoing operations of our portfolio companies; and (vi) other companies in similar industries as our portfolio companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.
Lawn Doctor
Lawn Doctor, Inc. ("Lawn Doctor") is a leading franchisor of residential lawn care programs and services. Lawn Doctor's core service offerings provide residential homeowners with year-round monitoring and treatment by focusing on weed and insect control, seeding, and professionally and consistently-administered fertilization, using its proprietary line of equipment. Lawn Doctor is not involved in other lawn maintenance services, such as mowing, edging and leaf blowing. In May 2018, Lawn Doctor acquired a majority equity interest in Mosquito Hunters, a franchisor of mosquito and pest control services. Mosquito Hunters was founded in 2013, is based in Northbrook, Illinois and specializes in the eradication of mosquitos through regular spraying applications and follow-up maintenance. In May 2019, Lawn Doctor acquired a majority equity interest in Ecomaids, a franchisor of residential cleaning services. Ecomaids was founded in 2012. Ecomaids specializes in home cleaning services utilizing environmentally-friendly cleaning products and solutions. In October 2022, Lawn Doctor acquired a controlling equity interest in Elite Window Cleaning Inc., a Canadian-based franchisor offering window cleaning, gutter cleaning and power washing services to residential and commercial customers. These acquisitions further Lawn Doctor's strategy of both growing organically and also via acquisition of additional home service brands.
As of December 31, 2024 and 2023, Lawn Doctor had total assets of approximately $98.7 million and $100.0 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net income of Lawn Doctor for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 45,264 $ 40,996
Net income (GAAP) $ 3,388 $ 2,741
Interest and debt related expenses 5,900 5,880
Depreciation and amortization 2,614 2,653
Income tax expense 1,479 1,059
Adjusted EBITDA (non-GAAP) $ 13,381 $ 12,333
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 8,095 $ 7,466
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 61% of Lawn Doctor.
Polyform
Polyform Products Company, Inc. ("Polyform"), is a leading developer, manufacturer and marketer of polymer clay products worldwide. Through its two primary brands, Sculpey® and Premo!®, Polyform sells a comprehensive line of premium craft products to a diverse mix of customers including specialty and big box retailers, distributors and e-tailers.
As of December 31, 2024 and 2023, Polyform had total assets of approximately $31.7 million and $33.1 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net loss of Polyform for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 18,951 $ 16,073
Net loss (GAAP) $ (463) $ (1,072)
Interest and debt related expenses 2,918 2,899
Depreciation and amortization 1,863 1,860
Income tax benefit (148) (440)
Adjusted EBITDA (non-GAAP) $ 4,170 $ 3,247
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 3,632 $ 2,829
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 87% of Polyform.
Roundtables
Auriemma U.S. Roundtables ("Roundtables") is an information services and advisory solutions business to the consumer finance industry. Prior to our acquisition, Roundtables operated as a division of Auriemma Consulting Group, Inc. Roundtables offers membership in any of 30+ topic-specific roundtables across five verticals (credit cards, auto finance, banking, wealth management and other lending) that includes participation in hosted executive meetings, proprietary benchmarking studies, and custom surveys. The subscription-based model provides executives with key operational data to optimize business practices and address current issues within the consumer finance industry. In April 2021, Roundtables acquired Edgar Dunn's U.S. roundtables business, which added six roundtables to Auriemma's services offering. In August 2023, Roundtables acquired insideARM, a U.S.-based company providing services to the third-party debt collection industry. These acquisitions further Roundtables' strategy of both growing organically and through mergers and acquisitions ("M&A").
As of December 31, 2024 and 2023, Roundtables had total assets of approximately $59.5 million and $61.6 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net income of Roundtables for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 17,890 $ 17,507
Net income (GAAP)
$ 1,353 $ 1,232
Interest and debt related expenses 2,510 2,444
Depreciation and amortization 2,087 2,059
Income tax expense 329 602
Adjusted EBITDA (non-GAAP) $ 6,279 $ 6,337
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 5,071 $ 5,118
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 81% of Roundtables.
HSH
Healthcare Safety Holdings, LLC ("HSH") is a leading producer of daily use insulin pen needles, syringes and complementary offerings for the human and animal diabetes care markets. HSH specializes in providing "dispense and dispose" sharps solutions, which allow users to more easily and safely dispose of sharps.
As of December 31, 2024 and 2023, HSH had total assets of approximately $42.4 million and $45.0 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net income of HSH for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 35,002 $ 35,575
Net income (GAAP) $ 2,515 $ 3,080
Interest and debt related expenses 3,725 3,670
Depreciation and amortization 2,921 2,998
Income tax expense 722 1,319
Adjusted EBITDA (non-GAAP) $ 9,883 $ 11,067
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 7,364 $ 8,246
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 75% of HSH.
ATA
ATA National Title Group, LLC ("ATA") is a leading national independent title agency and settlement service provider for the residential resale, residential refinance, commercial and default markets in the Great Lakes Region. Its brands include ATA National Title Group, Greco Title Agency, Midstate Title Agency, Seaver Title Agency and Talon Title Agency. In February 2022, ATA acquired Absolute Title, Inc., which is a title services business providing services to the residential and commercial markets, in Ann Arbor, Michigan. This acquisition furthers ATA's strategy of both growing organically and through M&A.
As of December 31, 2024 and 2023, ATA had total assets of approximately $86.7 million and $89.2 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net loss of ATA for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 52,070 $ 48,448
Net loss (GAAP) $ (2,377) $ (3,482)
Interest and debt related expenses 5,870 5,986
Depreciation and amortization 4,302 4,378
Adjusted EBITDA (non-GAAP) $ 7,795 $ 6,882
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 5,846 $ 5,162
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 75% of ATA.
Douglas
Douglas Machines Corp. ("Douglas") is a leading manufacturer of innovative and customizable commercial cleaning and sanitizing equipment to the food, pet food, nutraceutical and industrial end-markets in the United States. Many of these end-markets, and in particular, food safety, are subject to increasingly stringent regulations.
As of December 31, 2024 and 2023, Douglas had total assets of approximately $55.9 million and $57.6 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net (loss) income of Douglas for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 27,468 $ 31,379
Net (loss) income (GAAP) $ (11) $ 566
Interest and debt related expenses 2,506 2,523
Depreciation and amortization 1,442 1,434
Income tax (benefit) expense (195) 144
Adjusted EBITDA (non-GAAP) $ 3,742 $ 4,667
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 3,376 $ 4,210
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 90% of Douglas.
Clarion
Clarion Safety Systems, LLC ("Clarion") is a provider of standards-based visual safety labels and signs that support original equipment manufacturers, facility owners, and employers in reducing risk and protecting workers. Clarion serves thousands of customers across the world in a large and diverse set of industries. Customers rely on Clarion's expertise to help them navigate applicable regulatory and safety standards related to risk communication, resulting in the implementation of tailored systems of risk reduction. In June 2022, Clarion acquired Machine Safety Specialists, which specializes in engineering consulting services, including machine safety audits and risk assessments, machine safeguarding plans, verification and validation services and other work streams that contribute to customers' compliance with applicable machine safety standards. In December 2023, Clarion acquired machine safeguarding integrator Arrow Industrial Solutions.
As of December 31, 2024 and 2023, Clarion had total assets of approximately $81.3 million and $80.4 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net income (loss) of Clarion for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 17,574 $ 13,094
Net income (loss) (GAAP) $ 462 $ (178)
Interest and debt related expenses 3,331 3,392
Depreciation and amortization 1,026 991
Income tax expense (benefit) 187 (70)
Adjusted EBITDA (non-GAAP) $ 5,006 $ 4,135
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 4,819 $ 3,986
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 96% of Clarion.
Vektek
Vektek Holdings, LLC ("Vektek") designs, engineers and manufactures automated workholding solutions for CNC (Computer Numerical Control) machining. A market leader in high-pressure hydraulic clamps, Vektek products are essential to machine automation, tight tolerance machining and user production throughput. Vektek serves domestic and international machining customers in end markets including general industrial, automotive, agriculture, medical devices, technology and aerospace.
As of December 31, 2024 and 2023, Vektek had total assets of approximately $110.1 million and $114.1 million, respectively. The following tables reconcile our proportionate share of Adjusted EBITDA from net income of Vektek for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Revenues $ 35,260 $ 38,608
Net income (GAAP) $ 387 $ 1,031
Interest and debt related expenses 6,333 6,853
Depreciation and amortization 3,638 3,635
Income tax expense 16 -
Adjusted EBITDA (non-GAAP) $ 10,374 $ 11,519
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 8,685 $ 9,643
FOOTNOTES:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023 , we owned approximately 84% of Vektek.
TacMed
Tacmed Holdings, LLC ("TacMed") designs, develops and manufactures medical products that equip, train and protect professionals in pre-hospital, emergency trauma situations. TacMed's suite of traumatic injury products, hemorrhage control tourniquets, immobilization tools and critical care kits serve first responders, military, law enforcement and civilian public safety operations. TacMed's medical simulation training solutions combine advanced technology and durable materials to offer customers the highest fidelity training simulators and provide realistic replicas for emergency medical personnel training exercises.
As of December 31, 2024 and 2023, TacMed had total assets of approximately $111.3 million and $114.3 million. The following tables reconcile our proportionate share of Adjusted EBITDA from net loss of TacMed for the year ended December 31, 2024 and for the period from March 24, 2023 (the date we acquired our investment in TacMed) to December 31, 2023 (in thousands):
Years Ended December 31,
2024
2023(1)
Revenues $ 47,239 $ 32,332
Net loss (GAAP) $ (1,460) $ (5,540)
Interest and debt related expenses 4,773 3,854
Depreciation and amortization 5,452 3,813
Income tax benefit
(417) (1,714)
Transaction related expenses(2)
45 1,959
Purchase accounting impact on cost of goods sold(3)
$ - 2,542
Adjusted EBITDA (non-GAAP) $ 8,393 $ 4,914
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(4)
$ 8,014 $ 4,692
FOOTNOTES:
(1)Results are for the period from March 24, 2023 (the date we acquired our investment in TacMed) to December 31, 2023.
(2) Initial buyer transaction costs paid by TacMed included in the purchase price. Transaction related expenses are non-recurring.
(3) Purchase accounting requires inventory to be recorded at fair value as of the purchase date. As inventory is sold, cost of goods sold is higher than the cost to manufacture inventory due to the step up in fair value. Increased cost of goods sold due to purchase accounting is non-recurring.
(4) Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 95% of TacMed.
Sill
Sill Holdings, LLC ("Sill") is among the leading specialty insurance consulting firms exclusively representing business and property owners in connection with their property insurance claims. Sill focuses on providing expert claim preparation, management and resolution services across North America and the Caribbean. Through its wide range of services (including end-to-end property loss adjusting, forensic accounting, and business interruption analysis), Sill seeks to deliver expert representation and support for claims stemming from fire, catastrophic, and other related events.
As of December 31, 2024 and 2023, Sill had total assets of approximately $120.0 million and $76.9 million. The following tables reconcile our proportionate share of Adjusted EBITDA from net loss of Sill for the year ended December 31, 2024 and period from October 20, 2023 (the date we acquired our investment in Sill) to December 31, 2023 (in thousands):
Years Ended December 31,
2024
2023(1)
Revenues $ 22,311 $ 3,804
Net loss (GAAP) $ (1,397) $ (1,011)
Interest and debt related expenses 2,297 454
Depreciation and amortization 2,736 369
Income tax expense (benefit)
911 (532)
Transaction related expenses(2)
- 1,801
Adjusted EBITDA (non-GAAP) $ 4,547 $ 1,081
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(3)
$ 4,242 $ 1,071
FOOTNOTES:
(1) Results are for the period from October 20, 2023 (the date we acquired our investment in Sill) to December 31, 2023.
(2) Initial buyer transaction costs paid by Sill included in the purchase price. Transaction related expenses are non-recurring.
(3) Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024 and 2023, we owned approximately 93% and 99% of Sill.
MAP
Madison Retirement Holdings TopCo, LLC ("MAP") is a third-party administrator of retirement plans. Servicing small and mid-size businesses across all 50 states, MAP provides customer with plan design and implementation, plan administration, compliance, fiduciary services and customer support to approximately 3,700 plans and 200,000 participants. Established in 1993, MAP has over 100 employees and is headquartered in Appleton, WI.
As of December 31, 2024, MAP had total assets of approximately $122.7 million. The following table reconciles our proportionate share of Adjusted EBITDA of MAP from net loss for the period from July 18, 2024 (the date we acquired our investment in MAP) to December 31, 2024 (in thousands):
2024(1)
Revenues $ 8,418
Net loss (GAAP) $ (4,994)
Interest and debt related expenses 748
Depreciation and amortization 1,481
Transaction related expenses(2)
1,412
Adjusted EBITDA (non-GAAP) $ (1,353)
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(3)
$ (771)
FOOTNOTES:
(1)Results are for the period from July 18, 2024 (the date we acquired our investment in MAP) to December 31, 2024.
(2)Initial buyer transaction costs paid by MAP included in the purchase price. Transaction related expenses are non-recurring.
(3) Amounts based on our ownership percentage as of the end of the periods presented. As of December 31, 2024, we owned approximately 57% of MAP.
Other Portfolio Companies
Milton
Milton Industries, Inc. ("Milton") is a leading provider of highly-engineered tools and accessories for pneumatic applications across a variety of end markets including vehicle service; industrial maintenance, repair and operating supplies; aerospace and defense; and agriculture. The company has more than 5,000 active customers and over 3,000 SKUs with products including couplers, gauges, chucks, blow guns, filters, regulators and lubricators. Milton's high-quality products, engineering expertise and partnership approach creates long-term relationships, with an average tenure of over 30 years among its top ten customers. Milton completed four add-on acquisitions during 2021 and 2020, including GH Meiser & Co., Milton's Bells, Zeeline, and Global-Flex. We believe these add-on acquisitions bolster Milton's tire gauge, grease and fluid handling, hose assemblies, rubber expansion and metal expansion joints, "PTFE" products and pump connectors product lines. During 2022, Milton completed three additional add-on acquisitions, including Thunder Technologies which specializes in critical and demanding hose, rubber and expansion joint applications, Lock Technology which provides specialty tools to the automotive end market, and ProMax which provides specialty tools, components and accessories for the automotive and truck industries. In March 2023, Milton acquired Steck Manufacturing, which expands Milton's product suite and end-market reach to offer specialty tools to the automotive, body shop, towing and public safety end markets. In December 2024, Milton acquired GoatThroat Pumps, a manufacturer of precision-engineered fluid and chemical handling systems. These acquisitions further Milton's strategy of both growing organically and through M&A.
Resolutions Economics
Resolution Economics, LLC ("Resolution Economics") is a leading specialty consulting firm that provides services to law firms and corporations in labor and employment and commercial litigation matters. In October 2022, Resolutions Economics acquired Berkshire Associates which specializes in outsourced affirmative action plan consulting. In November 2023, Resolution Economics acquired a division of Biddle Consulting Group, Inc. headquartered in Folsom, CA. The acquired division is a provider of outsourced affirmative action plan services and other compliance related services.
Blue Ridge
Blue Ridge ESOP Associates ("Blue Ridge") is an independent, third-party employee stock ownership plans ("ESOP") and 401(k) administrator. For over 30 years, Blue Ridge has developed proprietary and comprehensive solutions to address the unique and complex administrative needs of companies operating as ESOPs and managing 401(k) plans. Blue Ridge's services and solutions include recordkeeping, compliance, reporting, distribution and processing, administrative services and plan management and analysis software. In July 2020, Blue Ridge acquired Benefit Concepts Systems, Inc., a full service benefit consulting firm with expertise in the design, implementation, and administration of ESOPs. In April 2021, Blue Ridge acquired Coastal Pension Services, a leading provider of outsourced 401(k) administration services in the greater Washington, D.C. area. In December 2021, Blue Ridge acquired a California based provider of outsourced 401(k), defined benefit and cash balance plan administration services. In January 2022, Blue Ridge acquired Nicholas and Associates which specializes in the design and administration of retirement plans. Additionally, in August 2022, Blue Ridge acquired substantially all of the Tax Benefits Plan Services business of Crowe LLP which specializes in ESOP administration as well as retirement plan and consulting services. These acquisitions further Blue Ridge's strategy of both growing organically and through M&A. In February 2023, Blue Ridge acquired a majority investment in Workplace Development Inc., which provides innovative ESOP communication, training and ownership culture services that complement the services Blue Ridge offers its customers. In May 2024, Blue Ridge acquired TSC 401K, a premier third-party administration firm that offers expert retirement plan consulting, design and administration solutions for businesses and their financial advisors.
USAW
USA Water Intermediate Holdings, LLC ("USAW") is a leading provider of operations and maintenance services for water and wastewaster systems across the Southeast United States. USAW was established in 2012 and is based in Rosenberg, TX. USAW's non-discretionary services enable municipalities and utility districts to entrust their water infrastructure maintenance, asset management and regulatory compliance needs to a professional partner of scale. USAW's industry-leading technical expertise and comprehensive service offerings play a critical role in ensuring the integrity, safety and reliability of clean, high-quality water access. USA Water provides customers with wastewater facility operations, pipe repair and maintenance, meter reading, new water tap installations, regulatory and compliance, and billing and administrative services. In August 2024, USAW acquired AWR Services, Inc ("AWR"). Headquartered in Austin, TX, AWR provides utility management services to the water and wastewater industry. AWR is a strategic acquisition serving to broaden USAW's service capabilities, expand its geographic footprint, diversify its customer base, and contribute to increased scale of the business.
LBR
LOCI Topco Limited ("LBR") is a technology-driven information services business powering the global legal, intellectual property and governance, risk and compliance markets. LBR's proprietary intelligence, data, and insight services are dedicated to supporting legal professionals in understanding market trends, regulatory developments and best practices. LBR goes to market under multiple proprietary brands led by its Lexology platform to provide its legal professional and corporate clients with subscription-based services for analytical content, informed case strategy, conducting research and to drive business development opportunities across its client base. Established in 1996, LBR has over 550 employees with headquarters in London, and offices in Washington, DC, Austin, New York and Hong Kong.
Co-Investments
We refer to our investments in Milton, Resolution Economics, Blue Ridge, USAW, and LBR collectively as our "Co-Investments." As of December 31, 2024, our Co-Investments had total assets of approximately $1,760.0 million, which included all five investments. As of December 31, 2023, our Co-Investments had total assets of $535.4 million, which was
represented by Milton, Resolutions Economics and Blue Ridge. The following tables reconcile our proportionate share of Adjusted EBITDA from net loss of our Co-Investments for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024(1)
2023
Revenues $ 389,921 $ 204,556
Net loss (GAAP) $ (50,656) $ (2,898)
Interest and debt related expenses 66,074 30,477
Depreciation and amortization 30,699 9,436
Income tax (benefit) expense
(757) 2,268
Adjusted EBITDA (non-GAAP) $ 45,360 $ 39,283
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(2)
$ 4,331 $ 5,003
FOOTNOTES:
(1)Results for USAW and LBR are for the periods from February 21, 2024 and June 17, 2024 (the dates the Company acquired its investments in each), respectively, to December 31, 2024.
(2)Amounts based on our ownership percentage as of the end of the periods presented. We owned approximately 13%, 8%, 16%,5%and 7%of Milton, Resolution Economics, Blue Ridge, USAW and LBR, respectively, at the end of December 31, 2024. We owned approximately 13%, 8% and 16% of Milton, Resolution Economics and Blue Ridge, respectively, at the end of December 31, 2023.
Factors Impacting Our Operating Results
We expect that the results of our operations will be affected by a number of factors. Many of the factors that will affect our operating results are beyond our control. We will be dependent upon the earnings of and cash flow from the businesses that we acquire to meet our operating and management fee expenses and to make distributions. These earnings and cash flows, net of any minority interests in these businesses, will be available:
•first, to meet our management fees and corporate overhead expenses; and
•second, to fund business operations and to make distributions to our shareholders.
Size of assets
If we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make. The size of our assets will be a key revenue driver. Generally, as the size of our assets grows, the amount of income we receive will increase. In addition, our assets may grow at an uneven pace as opportunities to acquire assets may be irregularly timed, and the timing and extent of the Manager's and the Sub-Manager's success in identifying such opportunities, and our success in making acquisitions, cannot be predicted.
Market conditions
From time to time, the global capital markets may experience periods of disruption and instability, as we have seen and continue to see with the recent public health crises, natural disasters and geopolitical events, which could materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital. Furthermore, economic growth remains affected by inflationary pressure, tariff policies and supply chain related disruptions and could be slowed or halted by significant external events. Some of our portfolio companies have experienced supply chain related disruptions from time to time. In some instances, strategic decisions to hold more inventory have been made as a result of ongoing supply chain related disruptions. Significant changes or volatility in the capital markets have and may continue to have a negative effect on the valuations of our businesses and other assets. While all of our assets are likely to not be publicly traded, applicable accounting standards require us to assume as part of our valuation process that our assets are sold in a principal market to market participants (even if we plan on holding an asset long term or through its maturity) and impairments of the market values or fair market values of our assets, even if unrealized, must be reflected in our financial statements for the applicable period, which could result in significant reductions to our net asset value for the period. Significant changes in the capital markets may also affect the pace of our activity and the potential for liquidity events involving our assets. Thus, the illiquidity of our assets may make it difficult for us to sell such assets to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our assets if we were required to sell them for liquidity purposes.
Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, make additional investments in our portfolio companies, make distributions to our shareholders and fund our operations. Our primary sources of cash will generally consist of:
•the net proceeds from the Public Offerings;
•distributions and interest earned from our assets; and
•proceeds from sales of assets and principal repayments from our assets.
We expect we will have sufficient cash from current sources to meet our liquidity needs for the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In light of the current economic environment, impacted by rising interest rates, record inflationary pressures due to global supply chain issues, a rise in energy prices and the impact of the recent public health crises, natural disasters and geopolitical events on the global economy, we are closely monitoring overall liquidity levels and changes in the business performance of our portfolio companies to be in a position to enact changes to ensure adequate liquidity going forward.
While we generally intend to hold our assets for the long term, certain assets may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty.
As of December 31, 2024 and 2023, we had approximately $146.3 million and $134.5 million, respectively, of cash. Information related to the year ended December 31, 2022 is included in our Form 10-K filed with the SEC on March 27, 2024.
Sources of Liquidity and Capital Resources
Offerings. We received approximately $220.8 million and $245.8 million in net proceeds during the years ended December 31, 2024 and 2023, respectively, from the Public Offerings, which excludes approximately $18.1 million and $12.8 million raised through our distribution reinvestment plan during the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, we had approximately 811 million authorized common shares remaining for sale.
Operating Activities. We generated operating cash flows (excluding amounts related to investment activity) of approximately $31.2 million and $21.1 million, during the years ended December 31, 2024 and 2023, respectively.
The increase in operating cash flows (excluding amounts related to investment activity) for the year ended December 31, 2024, as compared to the year ended December 31, 2023, was primarily attributable to (i) an increase in interest income of approximately $12.5 million (ii) an increase in return of capital of approximately $3.3 million offset by (iii) an increase in third-party operating expenses, net of changes in liabilities, of approximately $3.8 million and (iv) an increase in amounts paid to related parties of approximately $1.8 million.
Borrowings. We did not borrow any amounts during the years ended December 31, 2024 and 2023. The purpose of the Line of Credit is for general Company working capital and acquisition financing purposes. See Note 8. "Borrowings" of Item 8. "Financial Statements and Supplementary Data" for additional information regarding the 2022 Line of Credit.
Uses of Liquidity and Capital Resources
Investments. We used approximately $173.7 million and $243.2 million of cash to purchase portfolio company investments during the years ended December 31, 2024 and 2023, respectively. Additionally, we used net cash of approximately $109.3 million to invest in U.S. Treasury bills during the year ended December 31, 2023. No U.S. Treasury bills were held at December 31, 2024.
Distributions. We paid distributions to our shareholders of approximately $19.8 million and $17.3 million (which excludes distributions reinvested of approximately $18.1 million and $12.8 million, respectively) during the years ended December 31, 2024 and 2023, respectively. See "Distributions Declared" below for additional information.
Share Repurchases. We paid approximately $46.5 million and $18.0 million during the years ended December 31, 2024 and 2023, respectively, to repurchase shares in accordance with our Share Repurchase Program.
Deferred Financing Costs.We paid approximately $0.2 million and $0.1 million in deferred financing costs during the years ended December 31, 2024 and 2023, respectively.
Reimbursement of Expense Support.We accrued a reimbursement of expense support due to the Manager and Sub-Manager of approximately $0.6 million during the year ended December 31, 2023, all of which was paid in January 2024. As of December 31, 2024, there is no remaining unreimbursed Expense Support under the terms of the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements will automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. See Note 5. "Related Party Transactions" of Item 8. "Financial Statements and Supplementary Data" for additional information.
Distributions Declared
The Company's board of directors declared distributions on a monthly basis during the years ended December 31, 2024 and 2023 (twelve record dates). The following table reflects total distributions declared during the years ended December 31, 2024 and 2023 (in thousands expect per share data):
Distribution Period
Distributions
Declared(1)
Distributions Reinvested(2)
Cash Distributions Net of Distributions Reinvested
Range of Distribution Rates(3)
Year ended December 31, 2024
$ 37,899 $ 18,145 $ 19,754 2.7% - 3.7%
Year ended December 31, 2023
30,063 12,759 17,304 2.8% - 3.8%
FOOTNOTES:
(1) Monthly distributions declared per share for each share class were as follows:
Record Date Period Class FA Class A Class T Class D Class I Class S
January 1, 2024 - December 31, 2024
$ 0.104167 $ 0.104167 $ 0.083333 $ 0.093750 $ 0.104167 $ 0.104167
January 1, 2023 - December 31, 2023
0.104167 0.104167 0.083333 0.093750 0.104167 0.104167
(2) Amounts based on distribution record date.
(3) Represents the range of monthly distribution rates during the period, measured on the dollar value of distributions per share class as a percentage of the respective share class public offering price.
Cash distributions declared net of distributions reinvested were funded from the following sources noted below (in thousands):
Years Ended December 31,
2024 2023
Amount
Percentage(1)
Amount
Percentage (1)
Net investment income before reimbursement of expense support (reimbursement) $ 21,065 106.6 % $ 23,110 133.5 %
Expense support (reimbursement) 20 0.1 (644) (3.7)
Net investment income $ 21,085 106.7 % $ 22,466 129.8 %
Cash distributions declared, net of distributions reinvested(2)
$ 19,754 100.0 % $ 17,304 100.0 %
FOOTNOTES:
(1) Represents percentage of cash distributions declared, net of distribution reinvested for the period presented.
(2) Excludes $18,145 and $12,759 of distributions reinvested pursuant to our distribution reinvestment plan during the years ended December 31, 2024 and 2023, respectively.
Distribution amounts and sources of distributions declared vary among share classes. We calculate each shareholder's specific distribution amount for the period using record and declaration dates. Distributions are declared on all classes of our shares at the same time. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. There is no assurance that we will pay distributions in any particular amount, if at all.
See Note 6. "Distributions" in Item 8. "Financial Statements and Supplementary Data" for additional disclosures regarding distributions.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in the Public Offerings have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash, are residents of Opt-In States, or are clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan. Opt-In States include Alabama, Arkansas, California, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon,
Vermont and Washington. Shareholders who are residents of Opt-In States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.
The purchase price for shares purchased under our distribution reinvestment plan is equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under the Share Repurchase Program.
We do not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in the Public Offerings is allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.
Our shareholders will be taxed on their allocable share of income, even if their distributions are reinvested in additional shares of our common shares and even if no distributions are made.
Share Repurchase Program
We adopted the Share Repurchase Program effective March 2019, as amended, pursuant to which we conduct quarterly share repurchases to allow our shareholders to sell all or a portion of their shares (at least 5% of his or her shares) back to us at a price equal to the net asset value per share of the month immediately prior to the repurchase date. The repurchase date is generally the last business day of the month of a calendar quarter end. We are not obligated to repurchase shares under the Share Repurchase Program. If we determine to repurchase shares, the Share Repurchase Program also limits the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The Share Repurchase Program also includes certain restrictions on the timing, amount and terms of our repurchases intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.
The aggregate amount of funds under the Share Repurchase Program is determined on a quarterly basis at the sole discretion of our board of directors. At the sole discretion of our board of directors, we may use sources, including, but not limited to, offering proceeds and borrowings to repurchase shares.
To the extent that the number of shares submitted to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, from among the requests for repurchase received by us based upon the total number of shares for which repurchase was requested and the order of priority described in the Share Repurchase Program. We may repurchase shares including fractional shares, computed to three decimal places.
Under the Share Repurchase Program, our ability to make new acquisitions of businesses or increase the current distribution rate may become limited if, over any two-year period, we experience repurchase demand in excess of capacity. If, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, we will not make any new acquisitions of businesses (excluding short-term cash management investments under 90 days in duration) and we will use all available investable assets (as defined below) to satisfy repurchase requests (subject to the limitations under the Share Repurchase Program) until all Unfulfilled Repurchase Requests have been satisfied. Additionally, during such time as there remains any Unfulfilled Repurchase Requests outstanding from such period, the Manager and the Sub-Manager will defer their total return incentive fee until all such Unfulfilled Repurchase Requests have been satisfied. "Investable assets" includes net proceeds from new subscription agreements, unrestricted cash, proceeds from marketable securities, proceeds from the distribution reinvestment plan, and net cash flows after any payment, accrual, allocation, or liquidity reserves or other business costs in the normal course of owning, operating or selling our acquired businesses, debt service, repayment of debt, debt financing costs, current or anticipated debt covenants, funding commitments related to our businesses, customary general and administrative expenses, customary organizational and offering costs, asset management and advisory fees, performance or actions under existing contracts, obligations under our organizational documents or those of our subsidiaries, obligations imposed by law, regulations, courts or arbitration, or distributions or establishment of an adequate liquidity reserve as determined by our board of directors.
During the years ended December 31, 2024 and 2023, we received requests for the repurchase of approximately $57.5 million
and $23.8 million, respectively, of our common shares. Our board of directors approved the repurchase requests received.
The following table summarizes the shares repurchased during the years ended December 31, 2024 and 2023 (in thousands except per share data):
Years Ended December 31,
2024 2023
Share Class Number of Shares Total Consideration Average Price Paid per Share Number of Shares Total Consideration Average Price Paid per Share
Class FA 162 $ 6,076 $ 37.44 65 $ 2,309 $ 35.75
Class A 135 4,624 34.20 127 4,187 33.03
Class T 153 5,175 34.04 69 2,270 33.13
Class D 121 4,154 34.33 40 1,318 32.73
Class I 1,031 36,078 35.02 391 13,098 33.44
Class S 36 1,387 38.44 17 624 36.45
Total 1,638 $ 57,494 $ 35.13 709 $ 23,806 $ 33.58
Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
Through December 31, 2024, we had acquired equity and debt investments in 16 portfolio companies using the net proceeds from our Offerings. As of December 31, 2024 and 2023, the fair value of our portfolio company investments totaled approximately $1.1 billion and $876.8 million, respectively. See "Portfolio and Investment Activity" above for discussion of the general terms and characteristics of our investments and for information regarding our portfolio companies.
The following table summarizes our operating results for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Total investment income $ 71,701 $ 59,511
Total operating expenses (50,607) (36,401)
Expense support (reimbursement), net 20 (644)
Net investment income before taxes 21,114 22,466
Income tax expense (29) -
Net investment income 21,085 22,466
Total net realized gain on investments - 4
Total net change in unrealized appreciation on investments, including unrealized foreign currency gain 88,671 41,689
Net increase in net assets resulting from operations $ 109,756 $ 64,159
Investment Income
Investment income consisted of the following for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
From portfolio company investments:
Interest income $ 40,623 $ 34,172
Dividend income 22,354 20,190
PIK dividend income 2,755 -
From U.S. Treasury bills and cash and cash equivalents:
Interest income 5,969 5,149
Total investment income $ 71,701 $ 59,511
Interest income from portfolio company investments is generated from our senior secured note investments, the majority of which had fixed rate interest as of December 31, 2024 and 2023. As of December 31, 2024 and 2023, our weighted average annual yield on our accruing debt investments was 14.1% and 14.2%, respectively, based on amortized cost as defined above in "Portfolio and Investment Activity." The increase in interest income from portfolio company investments during the year ended December 31, 2024, as compared to the year ended December 31, 2023, is primarily attributable to (i) receiving a full year of interest income on debt investments acquired in March 2023 and October 2023 of approximately $44.9 million (ii) receiving a full year of interest income on additional senior debt investments in existing portfolio companies during the year ended December 31, 2023 of approximately $54.5 million and (iii) acquisitions of new portfolio companies during the year ended December 31, 2024 resulting in debt investments of $16.4 million. The increase in interest income resulting from the above transactions was $2.9 million, $2.7 million and $0.8 million, respectively.
Dividend income from portfolio company investments is recorded on the record date for privately issued securities, but excludes any portion of distributions that are treated as a return of capital. During 2024 and 2023, we received dividend income from 13 and nine of our portfolio companies, respectively.
PIK dividend income from portfolio company investments is computed at the contractual rate specified in each applicable agreement and is accrued and recorded as dividend income and added to the principal balance of the preferred equity. PIK dividend income was approximately $2.8 million for the year ended December 31, 2024. No PIK dividend income was recognized for the year ended December 31, 2023. The increase in PIK dividend income is primarily attributable to the new preferred equity investment made during June 2024.
Our total investment income from portfolio company investments for the year ended December 31, 2024, resulted in cash yields ranging from 1.9% to 17.8% based on our investment cost, as compared to 3.1% to 20.5% for the year ended December 31, 2023.
The increase in interest income from U.S. Treasury bills and cash and cash equivalents is a result of a modest increase in the average investment yield and an increase in the average investment balance driven by the net dollars raised in Public Offerings offset by lower deal volume during the year ended December 31, 2024.
We stopped investing in U.S. Treasury bills by the end of the fourth quarter of 2023. For the year ended December 31, 2023 our effective yield on U.S. Treasury bills ranged from 3.4% to 5.0%. Beginning in July 2023, we have invested in an IntraFi Cash Service ("ICS") account. During the year ended December 31, 2024, our effective yield on cash invested in the ICS account ranged from 4.0% to 5.0% compared to an effective yield of 5.0% for the year ended December 31, 2023.
We do not believe that our interest income, dividend income and total investment income are representative of either our stabilized performance or our future performance. We expect investment income to increase in future periods as we increase our base of assets that we expect to acquire from existing cash, borrowings and an expected increase in capital available for investment using proceeds from the Public Offerings.
Operating Expenses
Our operating expenses for the years ended December 31, 2024 and 2023 were as follows (in thousands):
Years Ended December 31,
2024 2023
Total return incentive fees $ 24,119 $ 13,506
Base management fees 18,083 13,208
Offering expenses 1,265 3,419
Professional services 3,119 1,875
Pursuit costs 1,301 1,875
Distribution and shareholder servicing fees 1,313 1,184
Custodian and accounting fees 536 452
General and administrative expenses 449 480
Insurance expense 215 207
Director fees and expenses 207 195
Total operating expenses 50,607 36,401
Expense support (20) -
Reimbursement of Expense Support - 644
Net operating expenses $ 50,587 $ 37,045
We consider the following expense categories to be relatively fixed in the near term: insurance expenses and director fees and expenses. Variable operating expenses include total return incentive fees, base management fees, organization and offering expenses, professional services, distribution and shareholder servicing fees, custodian and accounting fees, general and administrative expenses and pursuit costs. We expect these variable operating expenses to increase in connection with the growth in our asset base (base management fees, total return incentive fees, accounting fees and general and administrative expenses), the number of shareholders and open accounts (professional services, distribution and shareholder servicing fees and custodian and accounting fees), and/or the complexity of our investment processes and capital structure (professional services).
Total Return Incentive Fee
The Manager and Sub-Manager are eligible to receive incentive fees based on the Total Return to Shareholders, as defined in the Management Agreement and Sub-Management Agreement, for each share class in any calendar year, payable annually in arrears. We accrue (but do not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and perform a final reconciliation at completion of each calendar year. The total return incentive fee is due and payable to the Manager and Sub-Manager no later than ninety (90) calendar days following the end of the applicable calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement.
We incurred total return incentive fees of approximately $24.1 million and $13.5 million during the years ended December 31, 2024 and 2023, respectively. The increase in total return incentive fees during the year ended December 31, 2024, as compared to the year ended December 31, 2023, is primarily due to an increase in the net change in unrealized appreciation on investments.
Base Management Fee
Our base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares, 2% of the product of (x) our average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears.
We incurred base management fees of approximately $18.1 million and $13.2 million during the years ended December 31, 2024 and 2023, respectively. The increase in base management fees is primarily attributable to the increase in our average gross assets (excluding cash and U.S. Treasury bills) which were approximately $982.0 million and $738.2 million during the years ended December 31, 2024 and 2023, respectively.
Offering Expenses
Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the Public Offerings, are capitalized on our consolidated statements of assets and liabilities as deferred offering expenses and expensed to our consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager. We incurred offering expenses of approximately $1.3 million and $3.4 million during the years ended December 31, 2024 and 2023, respectively.
Pursuit Costs
Pursuit costs relate to transactional expenses incurred to identify, evaluate and negotiate acquisitions that ultimately were not consummated. We incurred pursuit costs of approximately $1.3 million and $1.9 million during the years ended December 31, 2024 and 2023, respectively.
Distribution and Shareholder Servicing Fees
The Managing Dealer is eligible to receive a distribution and shareholder servicing fee, subject to certain limits, with respect to our Class T and Class D shares sold in the Public Offerings (excluding Class T shares and Class D shares sold through our distribution reinvestment plan and those received as share distributions) in an amount equal to 1.00% and 0.50%, respectively, of the current net asset value per share.
We incurred distribution and shareholder servicing fees of approximately $1.3 million and $1.2 million during the years ended December 31, 2024 and 2023, respectively. The increase in distribution and shareholder servicing fees during the year ended December 31, 2024, as compared to the year ended December 31, 2023, is attributable to an increase in Class T and Class D shares outstanding.
Other Operating Expenses
Other operating expenses (consisting of professional services, insurance expense, custodian and accounting fees, director fees and expenses, and general and administrative expenses) were approximately $4.5 million and $3.2 million during the years ended December 31, 2024 and 2023, respectively. The increase in other operating expenses during the year ended December 31, 2024, as compared to the year ended December 31, 2023, is primarily attributable to an increase in custodian, accounting, legal, tax and valuation professional services resulting from an increase in the number of shareholders and investments.
Expense Support (Reimbursement) and Conditional Reimbursement Agreement
We have entered into an Expense Support and Conditional Reimbursement Agreement with the Manager and the Sub-Manager, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that our annual regular cash distributions exceed our annual net income (with certain adjustments). Expense support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of our distribution reinvestment plan) to shareholders minus (b) the available operating funds (the "Expense Support"). The Expense support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. The Manager and Sub-Manager equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable to the Manager or the Sub-Manager.
If, on the last business day of the calendar year, the annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the "Excess Operating Funds"), we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to the conditional reimbursements as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make conditional reimbursements shall automatically terminate and be of no further effect three years following the date which the expense support amount was provided and to which such conditional reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.
Expense support (reimbursement) totaled approximately less than $0.1 million and $(0.6) million during the years ended December 31, 2024 and 2023, respectively. The actual amount of expense support or expense support reimbursement is determined as of the last business day of each calendar year and is paid within 90 days after each year end per the terms of the Expense Support and Conditional Reimbursement Agreement described above. See Note 5. "Related Party Transactions" of Item 8. "Financial Statements and Supplementary Data" for details regarding total Expense Support received since inception.
Other Expenses and Changes in Net Assets
Income Tax Expense
We incur income tax expense to the extent we have or expect to have taxable income or loss for the current year related to our Taxable Subsidiaries. During the years ended December 31, 2024 and 2023, we recorded current income tax expense of approximately $0.03 million and $0.0 million, respectively. Additionally, we recorded a provision for deferred taxes on investments of approximately $2.4 million and $3.2 million during the years ended December 31, 2024 and 2023, respectively, primarily related to unrealized appreciation on investments held by our Taxable Subsidiaries. As of December 31, 2024 and 2023, six and three of our equity investments were held in Taxable Subsidiaries, respectively. As of December 31, 2024, one of our debt investments was held in Taxable Subsidiary.
The table below presents a reconciliation of tax expense the Company would be subject to if it were taxed as a corporation to the Company's actual income tax expense incurred by its Taxable Subsidiaries for the years ended December 31, 2024 and 2023 (in thousands):
Years Ended December 31,
2024 2023
Tax expense computed at the federal statutory rate $ 23,555 21.0 % $ 14,148 21.0 %
State income tax expense net of federal benefit 123 0.1 205 0.3
Benefit of partnership structure (21,267) (19.0) (11,138) (16.5)
Income tax expense $ 2,411 2.1 % $ 3,215 4.8 %
The effective tax rate will fluctuate from year to year as the amount of taxable income (or loss) at our Taxable Subsidiaries fluctuates in relation to the Company's net income.
Net Change in Unrealized Appreciation on Portfolio Company Investments
Unrealized appreciation on portfolio company investments is based on the current fair value of our investments as determined by our board of directors based on inputs from the Sub-Manager and our independent valuation firm and consistent with our valuation policy, which take into consideration, among other factors, actual results of our portfolio companies in comparison to budgeted results for the year, future growth prospects, and the valuations of publicly traded comparable companies as determined by our independent valuation firm.
The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on twelve portfolio companies of approximately $105.1 million, offset partially by gross unrealized depreciation on four portfolio companies of approximately $14.0 million during the twelve months ended December 31, 2024. Gross unrealized appreciation was primarily due to EBITDA growth, accretive add-on acquisitions and multiple expansion. Gross unrealized depreciation was primarily driven by EBITDA declines, multiple compression and unrealized foreign currency loss. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $2.4 million during the twelve months ended December 31, 2024.
The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on nine portfolio companies of approximately $60.1 million, offset partially by gross unrealized depreciation on two portfolio companies of approximately $15.2 million during the twelve months ended December 31, 2023. Two portfolio company investments remained flat due to the recency of investments. Gross unrealized appreciation was primarily due to EBITDA growth and accretive add-on acquisitions. Gross unrealized depreciation was primarily driven by EBITDA declines. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $3.2 million during the twelve months ended December 31, 2023.
Net Assets
During the years ended December 31, 2024 and 2023, the net increase in net assets consisted of the following:
Years Ended December 31,
2024 2023
Operations $ 109,756 $ 64,159
Distributions to shareholders (37,899) (30,063)
Capital transactions 180,002 236,154
Net increase in net assets $ 251,859 $ 270,250
Operations increased by approximately $45.6 million during the year ended December 31, 2024, as compared to the year ended December 31, 2023. The increase in operations was primarily due to an increase of approximately $47.0 million in the net change in unrealized appreciation on investments and a decrease of approximately $1.4 million in net investment income during the year ended December 31, 2024 as compared to the year ended December 31, 2023.
Distributions increased approximately $7.8 million during the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily as a result of an increase in shares outstanding.
Capital share transactions decreased approximately $56.2 million during the year ended December 31, 2024, as compared to the year ended December 31, 2023. The decrease was primarily due a decrease in net proceeds received through our Offerings of approximately $27.9 million and an increase of approximately $5.4 million in amounts received through our distribution reinvestment plan, which was offset partially by an increase in share repurchases of approximately $33.6 million under the Share Repurchase Program.
Total Returns
The following table illustrates year-to-date ("YTD"), trailing 36 months ("Three Year"), Average Annual Return ("AAR") and cumulative total returns with and without upfront selling commissions and dealer manager fees ("sales load"), as applicable. All total returns with sales load assume full upfront selling commissions and dealer manager fees. Total returns are calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other share classes assume distributions are reinvested in the same share class. Management believes total return is a useful measure of the overall investment performance of our shares.
YTD Total Return
Three Year Total Return(1)
AAR Since Inception(2)
Cumulative Total Return(2)
Cumulative Total Return Period(2)
Class FA (no sales load) 11.2 % 33.7 % 15.3 % 105.5 % Feb. 7, 2018 - Dec. 31, 2024
Class FA (with sales load) 4.0 % 25.0 % 13.4 % 92.1 % Feb. 7, 2018 - Dec. 31, 2024
Class A (no sales load) 10.2 % 29.9 % 13.3 % 89.5 % Apr. 10, 2018 - Dec. 31, 2024
Class A (with sales load) 0.9 % 18.9 % 10.9 % 73.4 % Apr. 10, 2018 - Dec. 31, 2024
Class I 9.9 % 29.6 % 13.5 % 91.1 % Apr. 10, 2018 - Dec. 31, 2024
Class T (no sales load) 9.3 % 27.6 % 11.7 % 77.2 % May. 25, 2018 - Dec. 31, 2024
Class T (with sales load) 4.1 % 21.6 % 10.4 % 68.8 % May. 25, 2018 - Dec. 31, 2024
Class D 9.9 % 29.5 % 12.2 % 79.8 % Jun. 26, 2018 - Dec. 31, 2024
Class S (no sales load) 11.2 % 35.5 % 15.4 % 73.5 % Mar. 31, 2020 - Dec. 31, 2024
Class S (with sales load) 7.3 % 30.7 % 14.2 % 67.4 % Mar. 31, 2020 - Dec. 31, 2024
FOOTNOTES:
(1) For the period from January 1, 2022 to December 31, 2024.
(2) For the period from the date the first share was issued for each respective share class to December 31, 2024. The AAR since inception is calculated by taking the Cumulative Total Return and dividing it by the cumulative total return period.
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above and the risk factors identified in Item 1A in Part I of this Annual Report, including the negative impacts from public health crises, natural disasters and geopolitical events.
Our shares are illiquid investments for which there currently is no secondary market. Investors should not expect to be able to resell their shares regardless of how we perform. If investors are able to sell their shares, they will likely receive less than their purchase price. Our net asset value and total returns - which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations - are inherently uncertain. Past performance is not a guarantee of future results. Current performance may be higher or lower than the performance data reported above.
Hedging Activities
As of December 31, 2024, we had not entered into any derivatives or other financial instruments. With respect to any potential financings, general increases in interest rates over time may cause the interest expense associated with our borrowings to increase, and the value of our debt investments to decline. We may seek to stabilize our financing costs as well as any potential decline in our assets by entering into derivatives, swaps or other financial products in an attempt to hedge our interest rate risk. In the event we pursue any assets outside of the United States we may have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We may in the future, enter into derivatives or other financial instruments in an attempt to hedge any such foreign currency exchange risk. It is difficult to predict the impact hedging activities may have on our results of operations.
Seasonality
We do not anticipate that seasonality will have a significant effect on our results of operations.
Critical Accounting Policies and Use of Estimates
Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based are reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates will be expanded over time as we continue to implement our business and operating strategy. Our significant accounting policies are described in Note 2. "Significant Accounting Policies" of Item 8. "Financial Statements and Supplementary Data." Those material accounting policies and estimates that we expect to be most critical to an investor's understanding of our financial results and condition, as well as those that require complex judgment decisions by our management, are discussed below.
Basis of Presentation
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties. In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for the fair presentation of financial results as of and for the periods presented.
Although we are organized and intend to conduct our business in a manner so that we are not required to register as an investment company under the Investment Company Act, our financial statements are prepared using the specialized accounting principles of ASC Topic 946 to utilize investment company accounting. We obtain funds through the issuance of equity interests to multiple unrelated investors, and provide such investors with investment management services. Further, our business strategy is to acquire interests in middle-market businesses to provide current income and long term capital appreciation, while protecting invested capital. Overall, we believe that the use of investment company accounting on a fair value basis is consistent with the management of our assets on a fair value basis, and make our financial statements more useful to investors and other financial statement users in facilitating the evaluation of an investment in us as compared to other investment products in the marketplace.
Valuation of Investments
We have adopted, and our valuation policy is performed in accordance with, ASC Topic 820, as described in Note 2. "Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." As of December 31, 2024, all of our portfolio company investments were categorized as Level 3.
U.S. Treasury bill investments are recorded at fair value based on the average of the bid and ask quotes for identical instruments.
Our portfolio company investments are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), a transaction approach, or a combination of such approaches, as appropriate. The market approach uses prices, including third party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The transaction approach uses pricing indications derived from recent precedent merger and acquisition transactions involving comparable target companies. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors we may take into account to determine the fair value of our investments include, as relevant: available current market data, including an assessment of the credit quality of the security's issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.
Our board of directors is responsible for determining in good faith the fair value of the Company's Level 3 investments in accordance with the valuation policy and procedures approved by the board of directors, based on, among other factors, the input of the Manager, the Sub-Manager, our audit committee, and the independent third-party valuation firm. The determination of the fair value of our Level 3 assets requires judgment, which include assets for which market prices are not available. For most of our assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of our net asset value is based, in part, on the fair value of our assets, our calculation of net asset value is subjective and could be adversely affected if the determinations regarding the fair value of its assets were materially higher than the values that we ultimately realize upon the disposal of such assets. Furthermore, through the valuation process, our board of directors may determine that the fair value of the Company's Level 3 assets differs materially from the values that were provided by the independent valuation firm.
U.S. Federal and State Income Taxes
We believe that we are properly characterized as a partnership for U.S. federal income tax purposes and expect to continue to qualify as a partnership, and not be treated as a publicly traded partnership or otherwise be treated as a taxable corporation, for such purposes. As a partnership, we are generally not subject to U.S. federal and state income tax at the entity level. However, the Company holds certain equity investments in Taxable Subsidiaries. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies which are "pass through" entities for tax purposes. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of the Taxable Subsidiaries' ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company's consolidated financial statements.