Silver Spike Investment (US:SSIC)2024-03-28 00:03IPO and Financial Overview - Silver Spike Investment Corp. completed its IPO on February 8, 2022, raising approximately $83.3 million from the sale of 6,071,429 shares at $14.00 per share[19]. - As of December 31, 2023, the company is reviewing approximately $422 million in potential investments across various stages of underwriting[30]. - The cannabis capital markets have seen a significant decline in capital raises, with public and private equity in 2023 totaling only $0.4 billion and debt at $0.6 billion[44]. - The overall capital markets activity is expected to remain muted until the Drug Enforcement Agency issues a recommendation on rescheduling cannabis, anticipated before the upcoming presidential election[45]. - The company’s investment objective is to maximize risk-adjusted returns on equity, focusing on secured and unsecured debt, equity warrants, and direct equity investments[26]. Cannabis Industry Insights - The cannabis industry in the U.S. saw retail sales reach $31.6 billion in 2023, a 12.9% increase year-over-year, and is projected to grow to approximately $67.5 billion by 2030[38]. - The cannabis industry is characterized by a complex regulatory framework, creating significant barriers to entry and a void in the market for credit-based solutions due to limited bank lending[41]. - Demand for credit-based solutions is expected to increase compared to last year, as cannabis companies prefer less dilutive forms of growth capital[45]. - U.S.-based cannabis companies will continue to require access to debt capital for growth, refinancing existing debt, and financing acquisitions[48]. - The anticipated rescheduling of cannabis to Schedule III is expected to relieve companies from the 280E tax burden, improving after-tax cash flows and investor sentiment[43]. Investment Strategy and Management - The company plans to expand its investment strategy to include companies outside the cannabis and health and wellness sectors, effective around April 22, 2024[24]. - The investment strategy focuses on maximizing risk-adjusted returns by generating current income from debt investments and capital appreciation from equity investments[53]. - The investment process includes a multi-channel sourcing strategy, focusing on strong management teams with a successful history[65]. - The underwriting process involves a detailed evaluation of historical and projected financial performance, company-specific characteristics, and management team experience[73]. - The company monitors financial trends of each portfolio company to assess appropriate actions and evaluate overall portfolio quality[79]. Credit and Risk Management - The company applies a five-level numeric rating scale to characterize and monitor the credit profile and expected returns on each investment[79]. - Investments rated 1 indicate the least risk, with borrowers performing above expectations, while investments rated 5 indicate substantial underperformance and significant risk[83]. - The imbalance between the supply of and demand for cannabis debt capital creates attractive pricing dynamics for lenders[49]. - Federally legal cannabis companies are expected to have more conservative capital structures, allowing for higher cash flows available to service their debt[50]. Fees and Compensation - The base management fee is set at an annual rate of 1.75% of the company's gross assets, excluding cash and cash equivalents[111]. - The incentive fee consists of two parts: the Incentive Fee on Income and the Incentive Fee on Capital Gains, with the latter being 20% of cumulative realized capital gains[113][114]. - The "hurdle rate" for the Incentive Fee on Income is 1.75% per quarter, equating to 7% annualized[113]. - Pre-Incentive Fee Net Investment Income must exceed the hurdle rate for any incentive fee to be payable[117]. - The investment committee members are not directly compensated by the company but receive compensation through the Adviser, including performance bonuses and a share of profits[102]. Regulatory Compliance and Governance - The company is classified as an emerging growth company under the JOBS Act, allowing it to take advantage of reduced disclosure requirements for up to five years following its IPO[159]. - As a Business Development Company (BDC), the company is restricted from investing in portfolio companies where its Adviser or affiliates have existing investments without SEC approval[162]. - The company must ensure that qualifying assets represent at least 70% of its total assets to comply with BDC regulations[163]. - The company has adopted a code of ethics to establish procedures for personal investments and restrict certain personal securities transactions[175]. - The company is in compliance with corporate governance regulations applicable to business development companies (BDCs) as mandated by the Nasdaq Stock Market[187]. Taxation and Distributions - The company intends to qualify as a regulated investment company (RIC) under Subchapter M of the Code, which would exempt it from U.S. federal income tax on income distributed in a timely manner to shareholders[193]. - To qualify as a RIC, at least 90% of the company's gross income must consist of qualifying RIC income, and it must meet specific asset diversification tests[194]. - The company must distribute at least 90% of its investment company taxable income to shareholders to avoid U.S. federal income tax on undistributed income[195]. - Non-U.S. Holders may be subject to a 30% U.S. federal withholding tax on distributions unless certain conditions are met[213]. - The ultimate tax characterization of distributions cannot be determined until after the end of the taxable year, which may lead to total distributions exceeding current and accumulated earnings[202].