Great Elm Capital Corp.

Great Elm Capital Corp. (GECC) operates as a closed-end, externally managed, non-diversified management investment company, regulated as a Business Development Company (BDC) under the Investment Company Act of 1940, and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes since October 1, 2016. The company aims to generate current income and capital appreciation through debt and income-generating equity investments, primarily focusing on secured and senior secured debt instruments of middle-market companies, defined as those with enterprise values between $100 million and $2 billion. Additionally, GECC invests in collateralized loan obligations (CLOs) and related warehouse facilities through its joint venture, CLO Formation JV, LLC, and makes debt and equity investments in operating platforms that originate and/or service commercial specialty finance businesses, such as factoring, equipment finance, inventory leasing, merchant cash advance, and hard money real estate lending. The company also invests in other parts of a company's capital structure, including subordinated debt, mezzanine debt, and equity or equity-linked securities, sourcing these transactions directly and in secondary markets ¹.

GECC's core business model revolves around generating revenue primarily from interest on its debt investments, supplemented by dividends on equity investments, capital gains from dispositions, and lease, fee, and other income. The company's debt investments typically have an expected maturity of three to five years, with interest paid quarterly or semi-annually. Some debt and preferred stock investments may defer payments of cash interest or dividends, or utilize payment-in-kind (PIK) interest. Revenue is also generated from prepayment fees, commitment, origination, due diligence fees, end-of-term or exit fees, and fees for providing managerial assistance and consulting ¹.

As of December 31, 2025, GECC's portfolio included investments in 68 debt instruments across 53 companies, with a fair value of approximately $203.5 million, and 21 equity investments in 18 companies, with an aggregate fair value of approximately $94.8 million ². The company's portfolio is concentrated in a limited number of industries. As of December 31, 2025, Structured Finance represented 16.05% of the fair value of investments, Specialty Finance 12.90%, Technology 10.58%, Consumer Products 8.10%, Insurance 7.58%, Chemicals 6.49%, and Food & Staples 5.33% ³.

A significant component of GECC's portfolio is CLO Formation JV, LLC, a joint venture 71.25% owned by the Company and 28.75% by strategic partners ⁴. This JV primarily invests in subordinated note securities in CLOs (CLO equity) and loan accumulation facilities (CLO warehouses). CLO subordinated notes provide recurring distributions from the residual cash flow of underlying broadly syndicated senior secured loans. CLO warehouses are short-to medium-term finance vehicles used to aggregate loans for future CLO portfolios, offering potential return enhancement through fee sharing agreements with collateral managers ¹.

Another key segment is Great Elm Specialty Finance, LLC (GESF), in which GECC owns approximately 87.5% ⁵. GESF, through its subsidiaries, offers a range of financing options to middle-market borrowers, including receivables factoring, asset-based and asset-backed lending, lender finance, and equipment financing. GESF aims to achieve revenue and cost synergies across its specialty finance company subsidiaries ¹.

For the fiscal year ended December 31, 2025, GECC reported total investment income of $49.988 million ⁶, with interest income of $31.007 million ⁷ and dividend income of $16.643 million ⁸. Total expenses for the year were $32.090 million ⁹, leading to net investment income before taxes of $17.898 million ¹⁰. After an excise tax of $0.579 million ¹¹, net investment income was $17.319 million ¹². The company experienced a net realized loss of $5.507 million ¹³ and a net change in unrealized depreciation of $43.601 million ¹⁴, resulting in a net decrease in net assets from operations of $31.789 million ¹⁵. Diluted EPS for the year was $(2.57) ¹⁶. As of December 31, 2025, cash and cash equivalents were $1.834 million ¹⁷, total investments at fair value were $331.071 million ¹⁸, and total notes payable (including unamortized discount) were $189.319 million ¹⁹. Net assets stood at $112.946 million ²⁰, with a net asset value per share of $8.07 ²¹.

Comparing fiscal year 2025 to 2024, total investment income increased from $39.323 million ²² to $49.988 million ⁶. This was primarily driven by an increase in dividend income from $6.925 million ²³ to $16.643 million ⁸, largely due to the CLO Formation JV, LLC. Interest income slightly decreased from $31.541 million ²⁴ in 2024 to $31.007 million ⁷ in 2025, despite an increase in the average debt investment portfolio size, due to lower average SOFR rates. Total expenses increased from $26.522 million ²⁵ to $32.090 million ⁹, mainly due to higher interest expense from the issuance of $57.5 million in GECCG Notes ²⁶ and increased management and incentive fees. Net realized gains shifted from a gain of $1.871 million ²⁷ in 2024 to a loss of $5.507 million ¹³ in 2025. The net change in unrealized appreciation (depreciation) worsened from a depreciation of $10.771 million ²⁸ in 2024 to $43.601 million ¹⁴ in 2025, primarily due to decreases in the fair value of investments in First Brands, CLO JV, Del Monte Foods Corp., Maverick Gaming LLC, and Flexsys Holdings.

During the year ended December 31, 2025, GECC made portfolio acquisitions of $178.134 million ²⁹ and dispositions of $158.200 million ³⁰. Significant operational developments included the issuance of $57.5 million in GECCG Notes in September and October 2025 ²⁶, and the repurchase of $18.5 million of GECCO Notes in December 2025 ³¹. The company also redeemed all outstanding GECCZ Notes on September 30, 2025 ³². The fair value of investments in First Brands decreased by approximately $16.9 million due to alleged fraudulent activity ³³. The CLO JV experienced an approximately $11.3 million decline in fair value due to broader market pressures on CLO equity valuations ³⁴. Del Monte Foods Corp. saw a decrease in fair value of approximately $5.2 million due to its bankruptcy filing and auction process ³⁵.

GECC's Board has set a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share ³⁶, which will be paid in cash from distributable earnings on March 31, 2026, to stockholders of record as of March 16, 2026 ³⁷.

A significant growth area for GECC is its continued investment in specialty finance businesses. The company has expanded its investment allocation in specialty finance companies and participation opportunities generated by both unrelated and related specialty finance companies. Great Elm Capital Management, LLC (GECM), GECC's investment adviser, believes that investments in specialty finance companies along the "continuum of lending" offer attractive risk-adjusted returns that are expected to be largely uncorrelated to the liquid credit markets. This "continuum of lending" encompasses various stages of capital provision to under-banked small and medium-sized businesses, including inventory and purchase order financing, receivables factoring, asset-based and asset-backed lending, and equipment financing. GECM anticipates that ownership interests in multiple specialty finance companies will create a natural competitive advantage for each business and generate both revenue and cost synergies across these companies ¹.

Another growth area is GECC's strategic focus on collateralized loan obligations (CLOs) and related warehouse facilities through its joint venture, CLO Formation JV, LLC. This joint venture primarily invests in CLO subordinated note securities (CLO equity) and loan accumulation facilities (CLO warehouses). CLO subordinated notes provide recurring distributions from the residual cash flow of underlying broadly syndicated senior secured loans. Participation in CLO warehouse investments may enhance returns through fee sharing agreements with CLO collateral managers ¹.

Operationally, GECM waived all accrued and unpaid incentive fees through March 31, 2026 ³⁸. As of December 31, 2025, approximately $2.3 million of accrued incentive fees were payable ³⁹. GECC expects to recognize the reversal of these accrued incentive fees during the period ending March 31, 2026, which will result in a corresponding increase in net income in that period ⁴⁰.

Regarding capital allocation, GECC repurchased $18.5 million of the outstanding principal on the GECCO Notes in December 2025 ³¹. Furthermore, on February 27, 2026, GECC issued a notice to redeem an additional $20 million aggregate principal amount of the GECCO Notes on March 31, 2026 ⁴¹. As of December 31, 2025, net assets were $112.9 million and net asset value per share was $8.07 ⁴². Pro forma for the reversal of accrued incentive fees payable and the GECCO Notes redemption, net assets would be $115.1 million and net asset value per share would be $8.23 ⁴³.

GECC faces structural headwinds and execution risks, including the potential for its portfolio companies to experience financial distress, leading to restructurings that could alter, reduce, or delay payments ⁴⁴. The company also faces increasing competition for investment opportunities, which could lead to holding a larger percentage of assets in liquid securities if attractive opportunities are limited ⁴⁵. Its portfolio is concentrated in a limited number of industries, making it susceptible to significant losses if there is a downturn in a particular industry ⁴⁶. Furthermore, GECC is exposed to risks related to its specialty finance investments, including the potential for fraud that could lead to material losses ⁴⁷. The company's investments may be risky, with debt portfolios subject to credit and interest rate risk, and equity investments potentially not appreciating in value ⁴⁸. The illiquidity of its investments in private companies may make it difficult to sell them quickly if needed ⁴⁹.

GECC faces several material risks, including those related to its investments, business structure, and indebtedness. The company's portfolio companies may experience financial distress, leading to restructurings that could alter, reduce, or delay payments, potentially resulting in substantial or complete loss on investments ⁵⁰. Competition for investment opportunities is increasing, with larger competitors having greater financial and managerial resources, potentially forcing GECC to accept less attractive terms or hold a larger percentage of assets in liquid securities ⁵¹. The portfolio is concentrated in a limited number of industries, with Structured Finance and Specialty Finance representing approximately 16.0% and 12.9%, respectively, of total investments at fair value as of December 31, 2025, making GECC susceptible to significant losses if there is a downturn in these sectors ⁵². There is a risk that controls to monitor and detect fraud in specialty finance investments may not be effective, leading to exposure to credit risk and potential material losses ⁵³. The fair value of investments, particularly Level 3 assets which were $153,054,649 as of December 31, 2025, is inherently subjective and may differ materially from realized values ⁵⁴. Economic recessions or downturns could impair portfolio companies, increase non-performing assets, decrease portfolio value, and increase funding costs ⁵⁵. Global economic, political, and market conditions, including new tariffs enacted in the first quarter of 2025 and geopolitical tensions, may adversely affect business, revenue growth, and profitability ⁵⁶. The incentive fee structure may incentivize GECM to pursue riskier investments or use leverage when it may not be prudent, as the base management fee is calculated on gross assets, including those acquired through leverage, and the income incentive fee is based on pre-incentive fee net investment income, which can include accrued but not yet received cash income ⁵⁷. As of December 31, 2025, GECC had approximately $194.4 million of total outstanding indebtedness, with an asset coverage ratio of 158.1%, and incurring additional debt magnifies the potential for loss ⁵⁸. The Loan Agreement contains covenants, including a minimum net assets requirement of not less than $80 million and an asset coverage ratio of at least 150%, which if not complied with, could accelerate repayment and materially adversely affect liquidity ⁵⁹.

Management's message to shareholders conveys a focus on managing distributions and optimizing the capital structure. The Board has declared a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share ³⁶, which will be paid in cash. A key strategic priority is the management of incentive fees, as GECM has waived all accrued and unpaid incentive fees through March 31, 2026. This action is expected to result in the reversal of approximately $2.3 million ³⁹ of accrued incentive fees payable as of December 31, 2025, leading to a corresponding increase in net income in the period ending March 31, 2026. Another strategic priority is the proactive management of debt obligations, as evidenced by the repurchase of $18.5 million of GECCO Notes in December 2025 ³¹ and the subsequent notice to redeem an additional $20 million aggregate principal amount of GECCO Notes on March 31, 2026 ⁴¹. These actions aim to optimize the company's financial position, with pro forma net assets expected to be $115.1 million and net asset value per share of $8.23 ⁴³ after these adjustments.