8-K: Great Elm Capital Corp. Raises $24 Million in Equity at Net Asset Value

Great Elm Capital Corp. successfully raised $24 million through a share issuance at net asset value, alongside announcing preliminary Q4 2023 results and a Q1 2024 distribution.

Summary

• Great Elm Capital Corp. (GECC) entered into a Share Purchase Agreement on February 8, 2024, with Great Elm Strategic Partnership I, LLC, resulting in the issuance of 1,850,424 shares of common stock.
• The shares were priced at $12.97 each, which is the current net asset value (NAV), for a total of $24 million.
• The purchaser is a special purpose vehicle, 25% owned by Great Elm Group, Inc. (GEG), with Great Elm Capital Management, Inc. (GECM), GECC's investment manager, being a wholly-owned subsidiary of GEG.
• GECC's net asset value (NAV) for the three months ended December 31, 2023, was $98.7 million, or $12.99 per share.
• Net investment income for the same period was $0.43 per share.
• The board of directors has set a distribution of $0.35 per share for the three months ending March 31, 2024.

Sentiment

Score: 8

Explanation: The sentiment is positive due to the successful capital raise at NAV, the alignment of interests with the investment manager, and the strong dividend yield. However, the inherent risks of BDC investments and the limited transferability of the shares temper the overall sentiment.

Positives

• The capital raise was completed at net asset value, avoiding dilution for existing shareholders.
• The investment from GEG further aligns the interests of the investment manager with shareholders.
• The company's ability to raise capital at NAV is seen as a positive sign of its repositioning plan.
• The new equity will allow GECC to grow its asset base and pursue its investment strategy.
• The transaction provides a potential template for future capital raising and investment opportunities.

Risks

• The document mentions that the investment in the shares involves a significant degree of risk, including the potential loss of the entire investment.
• Transferability of the shares is extremely limited.
• The company is subject to risks related to credit markets, rising interest rates, and inflationary pressure.

Future Outlook

The company intends to use the proceeds from the share issuance to grow its asset base and pursue its investment strategy. The investment structure is seen as a potential template for future capital raising and investment opportunities.

Management Comments

• Matt Kaplan, GECC's Chief Executive Officer, stated that the ability to raise capital at net asset value is a testament to the repositioning plan implemented over the past two years.
• Matt Kaplan also mentioned that the new non-dilutive equity allows the company to grow its asset base and pursue its investment strategy.
• Jason Reese, GEG's Chief Executive Officer, said that GEG is committed to scaling GECC and that the transaction is beneficial for all parties.

Industry Context

This announcement is relevant to the business development company (BDC) sector, where raising capital at or above net asset value is a key indicator of market confidence. The transaction also highlights the importance of alignment between the BDC and its investment manager.

Comparison to Industry Standards

• Raising capital at NAV is generally seen as a positive for BDCs, as it avoids dilution for existing shareholders, which is a common concern in the sector.
• Many BDCs trade at a discount to NAV, so GECC's ability to raise capital at NAV suggests a strong market perception of its value.
• Other BDCs such as Ares Capital Corporation (ARCC) and Main Street Capital (MAIN) are often used as benchmarks in the industry, and their ability to raise capital and maintain NAV is closely watched by investors.
• The dividend yield of 14.6% on the closing market price and 11.5% on the NAV is competitive within the BDC sector, where high yields are a key attraction for investors.

Related Party Transactions

• The Purchaser, Great Elm Strategic Partnership I, LLC, is 25% owned by Great Elm Group, Inc. (GEG).
• Great Elm Capital Management, Inc. (GECM), the investment manager of the Company, is a wholly-owned subsidiary of GEG.

Stakeholder Impact

• Shareholders benefit from the non-dilutive capital raise and the potential for increased scale and diversification of the portfolio.
• The alignment of interests with the investment manager through GEG's investment is a positive for shareholders.
• The company's employees may benefit from the growth of the company and the execution of its strategy.
• Customers and suppliers are not directly impacted by this transaction.

Next Steps

• The company will use the proceeds from the share issuance to grow its asset base and pursue its investment strategy.
• The company will file a registration statement on Form N-2 for the resale of the shares issued.
• The company will continue to maintain its listing on the Nasdaq Global Market.

Key Dates

Keywords

equity, capital raise, net asset value, share issuance, business development company, investment income, distribution, private placement