SCHEDULE: Dondero Group Boosts Highland Fund Stake to 5.2%

James D. Dondero and affiliated entities have increased their beneficial ownership in Highland Opportunities & Income Fund to 5.2% through recent open market purchases, signaling potential strategic engagement.

Summary

• James D. Dondero and affiliated entities (Highland Global Allocation Fund, Drugcrafters, NexPoint Asset Management, and Nancy Marie Dondero) collectively beneficially own 2,877,547.37 Common Shares of Highland Opportunities & Income Fund, representing approximately 5.2% of the outstanding shares as of September 15, 2025.
• Between August 6, 2025, and September 15, 2025, the reporting persons acquired an aggregate of 1,372,189 Common Shares in open market transactions for a total purchase price of $8,361,900.
• Nancy Marie Dondero, as trustee of a trust, purchased 900,000 shares for $5,379,758 between August 6, 2025, and August 26, 2025.
• Highland Global Allocation Fund purchased 472,189 shares for $2,982,142 between August 27, 2025, and September 15, 2025.
• The shares were acquired for investment purposes, and the reporting persons intend to purchase additional shares.
• The reporting persons may engage in discussions with the Issuer's board, shareholders, and other parties regarding the Issuer's business, management, capital structure, corporate governance, board composition, and strategic alternatives.

Sentiment

Score: 8

Explanation: The significant increase in beneficial ownership by James D. Dondero and affiliated entities, coupled with their stated intention to engage with the Issuer's management and board on strategic matters, suggests a strong belief in the fund's potential for value creation. This active accumulation and potential for strategic influence are generally viewed positively by the market.

Positives

• Significant increase in beneficial ownership by a prominent investor group, indicating confidence in the Issuer's value.
• Intent to purchase additional shares suggests continued belief in future appreciation.
• Commitment to engage with management and the board on strategic matters could lead to enhanced shareholder value.

Risks

• Reporting persons have pledged 134,213.93 Common Shares as collateral for an $8.0 million credit facility with Lakeside Bank, which could lead to forced sales if loan covenants are breached or margin calls occur.
• An aggregate of 376,075.51 Common Shares are pledged as collateral for a $13.0 million loan and a $5.0 million revolving line of credit with CrossFirst Bank, exposing these shares to similar risks.
• Holding 3,196.48 Common Shares in margin accounts with Morgan Stanley provides access to financing but exposes the trust to potential margin calls and forced liquidation.
• The timing and amount of future share purchases are subject to various factors, including market conditions and the Issuer's prospects, meaning further accumulation is not guaranteed.

Future Outlook

The reporting persons intend to purchase additional shares of Common Shares on the open market, with timing and amount dependent on market conditions and the Issuer's prospects. They also plan to engage in discussions with the Issuer's board and other stakeholders regarding business, management, capital structure, corporate governance, board composition, and strategic direction, aiming to increase shareholder value.

Management Comments

• "We acquired such shares for investment purposes."
• "We intend to purchase additional shares of Common Shares on the open market."
• "We expect to continue to engage in discussions with members of the board of trustees of the issuer, other current or prospective shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other third parties regarding a variety of matters relating to the Issuer, which may include, among other things, the Issuer's business, management, capital structure and allocation, corporate governance, board composition and strategic alternative and direction, and may take other steps seeking to increase shareholder value."

Industry Context

This filing indicates an increased stake by an influential investor group, James D. Dondero and his affiliates, in a closed-end fund. Such accumulation often signals a belief in the fund's undervaluation or potential for strategic changes, aligning with broader trends of activist investors seeking to influence corporate governance and capital allocation to unlock shareholder value in investment vehicles.

Corporate Governance

Related Party Transactions

• James D. Dondero is the managing member of Pharmacy Ventures II, LLC (general partner of Drugcrafters) and sole stockholder/director of Strand Advisers XVI, Inc. (general partner of NexPoint), establishing control over multiple reporting entities.
• Nancy Marie Dondero, James D. Dondero's sister, serves as trustee of a trust that holds a significant stake and engaged in recent share purchases.
• Entities managed by NexPoint, which is ultimately controlled by James D. Dondero, manage Highland Global Allocation Fund.
• Loan agreements and credit facilities with Lakeside Bank and CrossFirst Bank involve James D. Dondero and the trust for which Nancy Marie Dondero serves as trustee, with pledged shares of the Issuer as collateral.

Stakeholder Impact

• Shareholders: Potential for increased shareholder value through active engagement and strategic initiatives by the reporting persons.
• Management/Board: May face increased scrutiny and pressure to consider strategic changes proposed by the significant shareholder group.
• Creditors (Lakeside Bank, CrossFirst Bank, Morgan Stanley): Hold pledged shares as collateral, providing security for loans and credit facilities extended to the reporting persons.

Next Steps

• Purchase additional Common Shares on the open market.
• Engage in discussions with the Issuer's board of trustees, shareholders, and other third parties regarding the Issuer's business, management, capital structure, corporate governance, board composition, and strategic direction.
• Review investment in the Issuer on a continuing basis.

Key Dates

Recommendation

The filing reveals a substantial increase in beneficial ownership by James D. Dondero and his affiliated entities, now totaling 5.2% of Highland Opportunities & Income Fund. This aggressive accumulation, coupled with the stated intent to engage with the Issuer's board on strategic matters, suggests a strong conviction in the fund's undervaluation and potential for significant shareholder value creation. Such activist positions often precede positive corporate actions or improved governance, making the stock an attractive 'buy' for investors seeking to capitalize on potential catalysts.

Keywords

Highland Opportunities & Income Fund, Schedule 13D, James D. Dondero, NexPoint Asset Management, beneficial ownership, activist investor, open market purchases, investment strategy, corporate governance, shareholder value