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 elected to be treated as a Regulated Investment Company (RIC) for tax purposes ¹. The company aims to generate current income and capital appreciation through debt and income-generating equity investments, primarily in secured and senior secured debt instruments of middle market companies, defined as those with enterprise values between $100 million and $2 billion ¹. GECC also 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 companies and operating platforms that originate and/or service commercial specialty finance businesses ¹.

GECC competes for investments with other BDCs, various investment funds (including private equity, hedge, mutual, mezzanine, and small business investment companies), and traditional financial services companies such as commercial banks and direct lending funds ¹. Many of these competitors are larger and possess greater financial, technical, and marketing resources, potentially offering lower cost of capital and broader funding sources ¹. The company's competitive advantage is stated to stem from the underserved market for investments in lower middle-market companies by traditional financing sources ¹. The filing does not explicitly state GECC's market share or relative standing.

The core business model of GECC involves generating revenue primarily from interest on debt investments, with additional revenue from dividends on equity investments, capital gains from dispositions, and lease, fee, and other income ¹. The company's investment strategy includes secured and senior secured debt instruments, income-generating equity investments in specialty finance companies, CLOs and related warehouse facilities, and other parts of a company's capital structure such as subordinated debt, mezzanine debt, and equity or equity-linked securities ¹. Transactions are sourced directly with issuers and in secondary markets through industry relationships ¹.

As of December 31, 2025, GECC's portfolio included a significant concentration in Structured Finance, representing 16.05% of fair value ², and Specialty Finance, at 12.90% of fair value ². The CLO Formation JV, LLC, a joint venture 71.25% owned by GECC ¹, primarily invests in subordinated note securities in CLOs (CLO equity) and loan accumulation facilities (CLO warehouses) ¹. These CLO subordinated notes provide recurring distributions from residual cash flow after payments to senior debt holders and expenses ¹. CLO warehouses are short-to medium-term finance vehicles for aggregating loans for future CLO portfolios, potentially enhancing returns through fee sharing agreements ¹.

Great Elm Specialty Finance, LLC (GESF), approximately 87.5% owned by GECC ¹, provides various financing options to middle-market borrowers, including receivables factoring, asset-based and asset-backed lending, lender finance, and equipment financing ¹. GESF aims to generate revenue and cost synergies across its specialty finance company subsidiaries ¹. Vivos Holdings, LLC, a consumer packaged goods holding company, focuses on household and personal care products for retail and industrial customers across North America, with product categories including nail, hand hygiene, first-aid, baby care, body care, oral care, hair care, skin care, bath, household, institutional cleaning, and healthcare ¹.

For the fiscal year ended December 31, 2025, GECC reported total investment income of $49,988 thousand ³, with interest income of $31,007 thousand ³ and dividend income of $16,643 thousand ³. Total expenses were $32,090 thousand ⁴, leading to net investment income before taxes of $17,898 thousand ⁵. After an excise tax of $579 thousand ⁶, net investment income was $17,319 thousand ⁷. The company experienced a net realized loss of $5,507 thousand ⁸ and a net change in unrealized depreciation of $43,601 thousand ⁹, resulting in a net decrease in net assets from operations of $31,789 thousand ¹⁰. Diluted EPS was $(2.57) ¹¹. As of December 31, 2025, cash and cash equivalents were $1,834 thousand ¹². Total notes payable (including unamortized discount) were $189,319 thousand ¹³, and net assets were $112,946 thousand ¹⁴. The asset coverage ratio was approximately 158.1% ¹⁵.

Comparing fiscal year 2025 to 2024, total investment income increased from $39,323 thousand ¹⁶ to $49,988 thousand ³. Interest income slightly decreased from $31,541 thousand ¹⁷ in 2024 to $31,007 thousand ³ in 2025, primarily due to lower average coupon rates driven by a decrease in SOFR, partially offset by an increase in the average debt investment portfolio size ¹. Dividend income significantly increased from $6,925 thousand ¹⁸ in 2024 to $16,643 thousand ³ in 2025, mainly due to the investment in CLO Formation JV, LLC ¹. Total expenses increased from $26,522 thousand ¹⁹ in 2024 to $32,090 thousand ⁴ in 2025, primarily due to increased interest expense from the issuance of $57.5 million ²⁰ in GECCG Notes, partially offset by the redemption of $18.5 million ²¹ in GECCO Notes ¹. Management fees increased from $4,456 thousand ²² to $4,987 thousand ²³ due to an increase in underlying management fee assets ¹. Incentive fees increased from $2,580 thousand ²⁴ to $3,742 thousand ²⁵ due to higher pre-incentive net investment income ¹. Net realized gain shifted to a net realized loss of $5,507 thousand ⁸ in 2025 from a net realized gain of $1,871 thousand ²⁶ in 2024. Net change in unrealized depreciation worsened from $10,771 thousand ²⁷ in 2024 to $43,601 thousand ⁹ in 2025.

During the fiscal year 2025, GECC made significant operational developments. The company issued $57.5 million ²⁰ in aggregate principal amount of 7.75% notes due 2030 (GECCG Notes) in September and October 2025 ¹. It also repurchased $18.5 million ²¹ of the outstanding principal on the GECCO Notes in December 2025 ¹. The GECCZ Notes, with an aggregate principal amount of $40.0 million ²⁸, were redeemed in full on September 30, 2025 ¹. The Loan Agreement with City National Bank was amended on August 13, 2025, increasing the revolving line of credit commitment to up to $50 million ²⁹ (subject to a borrowing base) and allowing for a potential further increase of $40 million ³⁰ (up to $90 million) at CNB's discretion ¹. The amendment also updated the maturity date of the revolving line to the earlier of May 5, 2027, and May 31, 2026, if the 5.875% notes due 2026 have not been refinanced ¹.

GECC's Board has set a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share ³¹, which will be paid in cash from distributable earnings ¹. Management expects to recognize the reversal of approximately $2.3 million ³² of accrued incentive fees payable during the period ending March 31, 2026, which will result in a corresponding increase in net income ¹. Pro forma for this reversal and the GECCO Notes redemption, net assets would be $115.1 million ³³ and net asset value per share would be $8.23 ³⁴.

The company's growth strategy includes expanding its investment allocation in specialty finance companies and participation opportunities generated by both unrelated and related specialty finance companies ¹. GECC 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 ¹. This continuum includes inventory and purchase order financing, receivables factoring, asset-based and asset-backed lending, and equipment financing ¹. The company anticipates that ownership interests in multiple specialty finance companies will create a natural competitive advantage and generate both revenue and cost synergies across these businesses ¹.

GECC's operational outlook includes a focus on managing its portfolio to generate investment income, with a majority of its debt investments bearing interest at variable rates, generally based on SOFR or US prime rate, many with certain floors ¹. The company's cost structure is influenced by advisory fees (base management and incentive fees) and interest expense on outstanding indebtedness ¹. The base management fee is calculated at an annual rate of 1.50% of average adjusted gross assets ¹. The incentive fee is structured with an income-based component and a capital gains-based component, with the income incentive fee calculated quarterly based on pre-incentive fee net investment income exceeding a hurdle rate of 1.75% per quarter (7.00% annualized) ¹. The company expects to recognize a reversal of $2.3 million ³² in accrued incentive fees in Q1 2026, which will increase net income ¹.

Regarding capital allocation, GECC plans to continue generating liquidity through operations, with cash from investment income and sales/paydowns on investments generally reinvested in new opportunities, distributed to shareholders, or used for operating expenses ¹. The company also accesses proceeds from issuances of notes payable and its revolving credit facility, and may raise additional equity capital ¹. As of December 31, 2025, GECC had no unfunded commitments to provide financing to portfolio companies ¹. The company's contractual obligations include $38,983 thousand ³⁵ for GECCO Notes due in less than 1 year, and $155,400 thousand ³⁶ for GECCI, GECCH, and GECCG Notes due in 3-5 years ¹. On February 27, 2026, GECC issued a notice to redeem $20 million ³⁷ aggregate principal amount of GECCO Notes on March 31, 2026 ¹.

GECC explicitly flags several structural headwinds and execution risks. The company's portfolio is concentrated in a limited number of portfolio companies and industries, making it susceptible to significant loss if a single investment fails or if there is a downturn in a concentrated industry ¹. Investments in structured finance and specialty finance represented 16.0% ² and 12.9% ² of total investments at fair value as of December 31, 2025, respectively, making the company vulnerable to adverse conditions in these sectors ¹. The company also faces increasing competition for investment opportunities from larger entities with greater resources, potentially leading to less attractive investment terms or holding a larger percentage of assets in liquid securities ¹.

Geographic, regulatory, and macro factors are also identified as constraints. Global economic, political, and market conditions, including increased market volatility, social and political tensions, elevated inflation, supply chain challenges, labor market shortages, changes in interest rates, and geopolitical events (such as the Russia-Ukraine conflict and Middle East/South America unrest), may adversely affect GECC's business and portfolio companies ¹. Specifically, the United States enacted significant new tariffs in Q1 2025, leading to global market volatility, and further tariff proposals are being evaluated ¹. Regulatory changes, including increased scrutiny and potential regulation of artificial intelligence technologies, could disrupt markets, increase competition, and impose legal, regulatory, and compliance costs ¹. GECC's ability to maintain its RIC status depends on meeting annual distribution, source of income, and asset diversification requirements, and failure to do so could result in corporate-level U.S. federal income tax ¹.

GECC faces material risks including its portfolio concentration in a limited number of portfolio companies and industries, such as structured finance (16.05% of fair value ²) and specialty finance (12.90% of fair value ²), which exposes it to significant loss from individual investment failures or industry downturns ¹. The company is exposed to distressed lending risks, as it invests in companies experiencing financial difficulties, and cannot assure successful reorganization or recovery of advanced amounts ¹. Competition for investment opportunities is intense, with larger competitors potentially offering more favorable terms, which could force GECC to accept less attractive returns or hold more liquid assets ¹. Economic recessions or downturns could impair portfolio companies' ability to repay loans, increasing non-performing assets and decreasing portfolio value ¹. Global economic, political, and market conditions, including tariff enactments in Q1 2025 ¹, geopolitical tensions, inflation, and interest rate volatility, may adversely affect GECC's business ¹. Regulatory changes, particularly concerning artificial intelligence, could disrupt markets and increase compliance costs ¹. Cybersecurity threats, including those leveraging AI, pose risks of data breaches, system failures, and reputational damage ¹. 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 borrowed funds ¹. GECC's ability to maintain its RIC status is contingent on meeting distribution, income, and asset diversification requirements, with failure potentially leading to corporate-level U.S. federal income tax ¹. The company's asset coverage ratio of 158.1% ¹⁵ as of December 31, 2025, must be maintained at or above 150% ¹ to incur additional debt or make distributions, and failure to comply with loan covenants could accelerate repayment ¹.

Management's message to shareholders emphasizes the company's strategy to generate both current income and capital appreciation through debt and income-generating equity investments, focusing on secured and senior secured debt instruments of middle market companies, as well as investments in specialty finance businesses and CLOs ¹. They highlight the formation of the CLO Formation JV, LLC and Great Elm Specialty Finance, LLC as key initiatives to facilitate CLO creation and provide diverse financing options, respectively ¹. Management has set a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share ³¹, payable in cash ¹. A significant forward-looking statement is the waiver of all accrued and unpaid incentive fees through March 31, 2026, amounting to approximately $2.3 million ³², which is expected to increase net income in Q1 2026 ¹. Pro forma for this and the GECCO Notes redemption, net assets are projected to be $115.1 million ³³ and NAV per share $8.23 ³⁴. Strategic priorities include leveraging the "continuum of lending" in specialty finance to achieve attractive risk-adjusted returns and generating revenue and cost synergies across specialty finance subsidiaries ¹. They also focus on managing liquidity through operations, reinvesting in new opportunities, and prudent capital allocation, including managing debt obligations and potentially raising additional equity capital ¹.