Great Elm Capital (GECC) - 2025 Q4 - Annual Report

Investment Overview - As of December 31, 2025, the company has invested in various industries, with specific companies representing over 5% of the fair market value of its portfolio[24] - The company owns approximately 87.5% of Great Elm Specialty Finance, LLC, which provides a range of financing options to middle-market borrowers[26] - GECM's investment team has over 100 years of combined experience in financing and investing in leveraged middle-market companies[28] - GECM has expanded its investment allocation in specialty finance companies, aiming for attractive risk-adjusted returns largely uncorrelated to liquid credit markets[30] Management Fees and Incentives - The base management fee for GECM is calculated at an annual rate of 1.50% of the average adjusted gross assets, payable quarterly in arrears[48] - The Income Incentive Fee is based on pre-incentive fee net investment income, which includes interest and dividend income, minus operating expenses[51] - The fixed hurdle rate for pre-incentive fee net investment income is set at 1.75% per quarter (7.00% annualized)[53] - The company incurred $5.0 million in base management fees and $3.7 million in income-based fees for the year ended December 31, 2025, with no capital gains incentive fees earned[66] - For the year ended December 31, 2024, the company incurred $4.5 million in base management fees and $2.6 million in income-based fees, with deferred incentive fees and no capital gains incentive fees earned[67] - For the year ended December 31, 2023, the company incurred $3.5 million in base management fees and $3.1 million in income-based fees, with deferred incentive fees and no capital gains incentive fees earned[68] - The capital gains incentive fee is calculated as 20% of the positive difference between cumulative realized capital gains and cumulative realized capital losses, adjusted for any unrealized capital depreciation[64] Portfolio Management and Assistance - The company provides significant managerial assistance to certain portfolio companies, including monitoring operations and participating in management meetings[37] - GECM's investment team conducts ongoing monitoring of portfolio companies, assessing financial trends and appropriate actions[38] - The company is required to provide managerial assistance to portfolio companies to include certain securities as qualifying assets[87] Regulatory Compliance - The company must maintain at least 70% of its total assets in qualifying assets to comply with regulations[84] - To qualify as a regulated investment company (RIC), the company must derive at least 90% of its gross income from specific sources[95] - The company is prohibited from acquiring assets other than qualifying assets unless the value of qualifying assets represents at least 70% of total assets[84] - The company must satisfy the Annual Distribution Requirement to qualify as a RIC, or it will face taxation at regular corporate rates on all taxable income[119] - The company is required to distribute at least 98% of its ordinary income and 98.2% of capital gains exceeding capital losses to avoid excise tax[103] - The company may face a 4% federal excise tax if it does not meet certain distribution requirements each calendar year[99] - The company may face limitations on declaring dividends due to loan covenants, which could jeopardize its RIC qualification[115] - The company’s ability to meet distribution requirements may be limited by the illiquid nature of its portfolio and asset diversification requirements[117] - The company may need to sell investments or raise additional capital to meet distribution requirements, potentially at non-advantageous times[106] - Income from certain investments, such as lease income or management fees, may disqualify the company from meeting the 90% gross income requirement[118] Agreements and Administrative Services - The Investment Management Agreement was most recently approved on July 22, 2025, and renews for successive annual periods subject to board approval[73] - The Investment Management Agreement was renewed by the Board on July 22, 2025, extending through September 26, 2026[77] - The Board evaluated the advisory services provided by GECM, focusing on investment performance and economies of scale[77] - The Administration Agreement allows GECM to provide various administrative services, including financial record maintenance and report preparation[120] - The company bears all operational costs and expenses not specifically assumed by GECM under the Investment Management Agreement[121] Financial Performance - Aggregate realized capital gains were $30.0 million with no realized capital losses and $5.0 million in unrealized capital depreciation, resulting in a capital gains incentive fee calculated as ($30.0 million - $5.0 million) × 20%[70] - Aggregate realized capital gains were $35.0 million with no realized capital losses and $6.0 million in unrealized capital depreciation, resulting in a capital gains incentive fee calculated as ($35.0 million - $6.0 million) × 20% less $5.0 million paid in prior years[70] - As of December 31, 2025, the company had approximately $159.8 million in debt investments with variable interest rates, which are influenced by SOFR or US prime rate[386] - As of December 31, 2025, the company had accrued approximately $2.3 million in unpaid incentive fees, which are expected to be reversed, increasing net income for the period ending March 31, 2026[388] - The company plans to redeem $20 million of the GECCO Notes on March 31, 2026, following a notice issued to the holders of these notes[389] - As of December 31, 2025, the company's net assets were $112.9 million, with a net asset value per share of $8.07; pro forma adjustments would increase net assets to $115.1 million and net asset value per share to $8.23[389] Other Information - The company has a license agreement with GEG to use the name "Great Elm Capital Corp." as long as GECM remains its investment adviser[123] - The total brokerage commissions paid by the company over the last three fiscal years amounted to approximately $113 million, with nearly 100% of these commissions paid to Imperial Capital, LLC[125]