SLR Investment (SLRC) - 2023 Q4 - Annual Report

PART I Business SLR Investment Corp. operates as a BDC and RIC, investing in U.S. middle-market companies to generate income and capital appreciation - SLR Investment Corp. operates as a Business Development Company (BDC) and Regulated Investment Company (RIC) for U.S. federal income tax purposes[8] - The company's objective is to generate current income and capital appreciation by investing in U.S. middle-market companies with annual revenues between $50 million and $1 billion, with typical investment sizes from $5 million to $100 million[10] Portfolio Snapshot as of December 31, 2023 | Metric | Value | | :--- | :--- | | Total Investment Portfolio | $2.2 billion | | Net Asset Value | $986.6 million | | Number of Portfolio Companies | 151 | Portfolio Composition by Investment Type (as of Dec 31, 2023) | Investment Type | % of Portfolio (Fair Value) | | :--- | :--- | | Cash Flow Senior Secured Loans | 32.5% | | Asset-Based Senior Secured Loans / SLR Credit Solutions | 27.8% | | Equipment Senior Secured Financings / SLR Equipment Finance / KBH | 23.0% | | Life Science Senior Secured Loans | 16.7% | Top 5 Portfolio Companies by % of Total Assets (as of Dec 31, 2023) | Portfolio Company | % of Total Assets | | :--- | :--- | | SLR Credit Solutions* | 11.3% | | Kingsbridge Holdings, LLC* | 9.4% | | SLR Equipment Finance* | 4.9% | | SLR Business Credit* | 3.6% | | Arcutis Biotherapeutics, Inc. | 2.7% | Top 5 Industries by % of Total Assets (as of Dec 31, 2023) | Industry | % of Total Assets | | :--- | :--- | | Diversified Financial Services | 18.7% | | Multi-Sector Holdings | 14.8% | | Health Care Providers & Services | 11.2% | | Health Care Equipment & Supplies | 6.5% | | Pharmaceuticals | 4.9% | - The company's weighted average investment rating was 2 as of December 31, 2023, indicating expected performance and similar risk to origination[90] - As a BDC, the company must maintain an asset coverage ratio of at least 150%, and as of December 31, 2023, its ratio was 183.4%[31][113] - The base management fee is 1.50% on gross assets up to 200% of net assets, and 1.00% above that, with a performance-based incentive fee tied to pre-incentive fee net investment income and realized capital gains[153][154][158] Risk Factors The company faces risks related to market competition, illiquid investments, portfolio concentration, NAV discount, key personnel, leverage, conflicts of interest, and cybersecurity - The company operates in a highly competitive market, potentially affecting its ability to source attractive investment opportunities[180] - Investments in privately held, leveraged middle-market companies are inherently risky, speculative, and illiquid, potentially hindering favorable dispositions[182][186] - The portfolio may be concentrated, with the top three investments comprising 11.3%, 9.4%, and 4.9% of total assets as of December 31, 2023[189] - Common stock may trade at a substantial discount to Net Asset Value (NAV), potentially limiting new share issuance and lending activities[223] - The business is dependent on key personnel of its Investment Adviser, SLR Capital Partners, whose loss could materially harm investment objectives[259] - Leverage magnifies potential losses, and failure to maintain the 150% minimum asset coverage ratio could necessitate forced asset sales[276][278] - Significant conflicts of interest exist as the Investment Adviser manages other funds with potentially overlapping investment objectives[294][295] - Failure to maintain Regulated Investment Company (RIC) qualification would result in corporate-level income tax, reducing net assets and distributable income[311][312] - The company is exposed to cybersecurity risks, including attacks that could compromise information, disrupt operations, and cause financial and reputational damage[323][332] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[392] Cybersecurity Cybersecurity risk management is handled through the Investment Adviser's enterprise-wide program, with Board oversight and no material threats identified during the period - The company relies on the Investment Adviser's enterprise-wide cybersecurity program for managing material risks from threats[394] - The Board of Directors oversees cybersecurity risk, supported by an Information Security Group (ISG) that reports annually[395][398][399] - No material cybersecurity threats or incidents were identified during the reporting period that affected business, operations, or financial condition[396] Properties The company's principal executive offices are located in New York and are provided by SLR Capital Management under an Administration Agreement - The company's offices are located at 500 Park Avenue, New York, NY 10022, provided by SLR Capital Management under the Administration Agreement[400] Legal Proceedings The company and its consolidated subsidiaries are not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[401] Mine Safety Disclosures This item is not applicable to the company - Not applicable[402] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SLRC common stock trades on NASDAQ, experienced a discount to NAV in FY2023, declared $1.64 per share in distributions, and maintains an opt-out dividend reinvestment plan Fiscal 2023 Quarterly Stock and Distribution Data | Quarter | NAV per Share ($) | High Closing Price ($) | Low Closing Price ($) | High Price to NAV (%) | Low Price to NAV (%) | Distributions per Share ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Q4 2023 | $18.09 | $15.43 | $14.14 | (14.7)% | (21.8)% | $0.41 | | Q3 2023 | $18.06 | $15.60 | $14.22 | (13.6)% | (21.3)% | $0.41 | | Q2 2023 | $17.98 | $15.20 | $13.59 | (15.5)% | (24.4)% | $0.41 | | Q1 2023 | $18.04 | $16.00 | $14.12 | (11.3)% | (21.7)% | $0.41 | - As of February 23, 2024, the common stock traded at an approximate 17.7% discount to its December 31, 2023 NAV[407] - The company maintains an "opt-out" dividend reinvestment plan, automatically reinvesting cash distributions unless elected otherwise[410] - No recent sales of unregistered securities or issuer purchases of equity securities were reported for the period[415][416] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, the company experienced increased investment activity and gross investment income, resulting in higher net investment income and a strong liquidity position Investment Activity (Year Ended Dec 31) | Activity | 2023 (millions) | 2022 (millions) | | :--- | :--- | :--- | | Investments Made | ~$812 | ~$610 | | Investments Sold/Repaid | ~$750 | ~$532 | Results of Operations (Year Ended Dec 31) | Metric (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Gross Investment Income | $229.3 | $177.5 | | Net Expenses | $137.2 | $101.1 | | Net Investment Income | $92.1 | $76.4 | | Net Realized Loss | $(28.0) | $(36.5) | | Net Change in Unrealized Gain (Loss) | $12.3 | $(21.5) | | Net Increase in Net Assets | $76.4 | $18.3 | Per Share Results (Year Ended Dec 31) | Metric | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Net Investment Income per Share | $1.69 | $1.48 | | Earnings per Share | $1.40 | $0.35 | - As of December 31, 2023, the company had $246.8 million of unused borrowing capacity under its credit facilities[498] - Total unfunded capital commitments decreased to $248.7 million as of December 31, 2023, from $364.2 million at year-end 2022[757] - The company declared a quarterly distribution of $0.41 per share on February 27, 2024[437] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a 1% SOFR change estimated to impact net investment income by $0.06 per share annually Interest Rate Sensitivity Analysis (as of Dec 31, 2023) | Change in SOFR | Impact on Net Investment Income Per Share (Annualized) ($) | | :--- | :--- | | +1.00% | +$0.06 | | -1.00% | -$0.06 | - The company may hedge interest rate fluctuations but had no outstanding hedging instruments as of December 31, 2023[545] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2023, including management's report on internal controls and an unqualified auditor's opinion - Management concluded that internal control over financial reporting was effective as of December 31, 2023[551] - KPMG LLP issued an unqualified opinion on the consolidated financial statements and internal control effectiveness[555] Key Financial Statement Balances (as of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Investments at Fair Value | $2,154,766 | | Total Assets | $2,523,868 | | Total Liabilities | $1,537,229 | | Total Net Assets | $986,639 | | Net Asset Value Per Share | $18.09 | Key Operating Results (Year Ended Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Investment Income | $229,312 | | Net Investment Income | $92,091 | | Net Increase in Net Assets from Operations | $76,388 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[787] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal controls during Q4 2023 - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[788] - No material changes to internal controls over financial reporting occurred during the fourth quarter of 2023[791] Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans during fiscal year 2023 - No directors or officers adopted or terminated any Rule 10b5-1 trading plans during fiscal year 2023[792] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[793] PART III Directors, Executive Officers and Corporate Governance This section details the company's directors and executive officers, board composition, Audit Committee, and adopted code of ethics - The Board of Directors comprises two interested directors and four independent directors[796][797][799][800][802][804][805] - The Audit Committee consists of four independent directors, with Steven Hochberg as Chairman and designated "audit committee financial expert"[811] - The company has adopted a code of ethics applicable to senior officers, directors, and employees, available on its website[813] Executive Compensation Executive officers are compensated by the Investment Adviser, while independent directors receive direct fees, and the company adopted a clawback policy in November 2023 - Executive officers do not receive direct compensation from the company, instead compensated by the Investment Adviser, SLR Capital Partners[815] Independent Director Compensation Structure | Component | Amount ($) | | :--- | :--- | | Annual Fee | $100,000 | | Board Meeting Fee | $2,500 ($1,500 telephonic) | | Committee Meeting Fee | $1,000 | | Audit Committee Chair Fee | $7,500 (annual) | | Other Committee Chair Fee | $2,500 (annual) | - The company adopted a clawback policy effective November 6, 2023, to recover erroneously awarded incentive-based compensation upon accounting restatement[826] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock as of February 23, 2024, including key insiders and a significant external owner Beneficial Ownership as of February 23, 2024 | Owner | Percentage of Class | | :--- | :--- | | Michael S. Gross (Co-CEO) | 7.0% | | Bruce Spohler (Co-CEO) | 6.4% | | All executive officers and directors as a group | 8.2% | | Thornburg Investment Management Inc. | 8.0% | Certain Relationships and Related Transactions, and Director Independence The company has significant related-party transactions with its Investment Adviser and Administrator, and the Board has determined four of its six directors are independent - Primary related-party relationships are with the Investment Adviser and Administrator, both affiliated with senior management[836] - The Board of Directors approved the continuation of the Investment Advisory Agreement on October 25, 2023, deeming fees reasonable[844] - Four of the six directors are independent, while Messrs. Gross and Spohler are not due to their roles with the company and Investment Adviser[850] - The company holds an SEC exemptive order allowing co-investment with affiliated funds managed by SLR Capital Partners under specific conditions[842] Principal Accountant Fees and Services This section discloses fees paid to KPMG LLP for 2023 and 2022, primarily for audit and tax services, all pre-approved by the Audit Committee Accountant Fees (in thousands) | Fee Type | Fiscal Year 2023 (thousands) | Fiscal Year 2022 (thousands) | | :--- | :--- | :--- | | Audit Fees | $803.0 | $828.1 | | Audit-Related Fees | $0.0 | $0.0 | | Tax Fees | $186.6 | $166.3 | | All Other Fees | $0.0 | $20.0 | | Total Fees | $989.6 | $1,014.4 | - The Audit Committee pre-approved 100% of services provided by KPMG LLP during fiscal year ended December 31, 2023[859] PART IV Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This item lists all financial statements and exhibits filed with the annual report, including those of the company and certain unconsolidated subsidiaries[862][863][870][871] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[872]