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Great Elm Capital Corp.

GECCO
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Business Summary

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, including factoring, equipment finance, inventory leasing, merchant cash advance, and hard money real estate lending .

GECC’s competitive positioning is influenced by its focus on the underserved market for investments in lower middle-market companies, where traditional commercial banks and other financing sources are less active. However, the company faces competition from other BDCs, investment funds (including private equity, hedge, mezzanine, and small business investment companies), and traditional financial services firms, many of which possess greater financial and managerial resources, lower cost of capital, and broader funding sources . GECC has received exemptive relief from the SEC to co-invest with other investment vehicles managed by its investment adviser, GECM, and its affiliates .

The core business model revolves around generating revenue primarily from interest on debt investments, supplemented by dividends on equity investments, capital gains from dispositions, and lease, fee, and other income. Debt investments typically have an expected maturity of three to five years, with interest paid quarterly or semi-annually. A portion of debt and preferred stock investments may defer cash interest or dividends through payment-in-kind (PIK) . The company's primary operating expenses include a base management fee of 1.50% annually of average adjusted gross assets, an administration fee, and an incentive fee based on performance .

As of December 31, 2025, GECC's portfolio of investments, excluding short-term investments, had a fair value of $298.268 million . The largest industry concentrations were Structured Finance at 16.05% ($47.899 million) , Specialty Finance at 12.90% ($38.462 million) , and Technology at 10.58% ($31.550 million) . Other significant sectors included Consumer Products at 8.10% ($24.174 million) , Insurance at 7.58% ($22.604 million) , and Chemicals at 6.49% ($19.359 million) .

For the fiscal year ended December 31, 2025, total investment income was $49.988 million , an increase from $39.323 million in the prior year . Interest income was $31.007 million , and dividend income significantly increased to $16.643 million from $6.925 million in 2024 . Total expenses for 2025 were $32.090 million , up from $26.522 million in 2024 . Net investment income before taxes was $17.898 million , and net investment income after excise tax was $17.319 million . The company reported a net realized loss of $5.507 million and a net change in unrealized depreciation of $43.601 million for the year. Basic and diluted EPS was $(2.57) . As of December 31, 2025, cash and cash equivalents were $1.834 million . Total notes payable (including unamortized discount) were $189.319 million . The asset coverage ratio was approximately 158.1% .

Comparing 2025 to 2024, total investment income increased from $39.323 million to $49.988 million , driven primarily by a substantial increase in dividend income from $6.925 million to $16.643 million , largely due to the investment in CLO Formation JV, LLC. Interest income saw a slight decrease from $31.541 million to $31.007 million , despite an increase in the average debt investment portfolio size, due to lower average SOFR rates. Total expenses rose from $26.522 million to $32.090 million , mainly due to increased interest expense from new note issuances and higher management and incentive fees. The company shifted from a net realized gain of $1.871 million in 2024 to a net realized loss of $5.507 million in 2025 , and experienced a greater net change in unrealized depreciation, from $10.771 million in 2024 to $43.601 million in 2025 .

During 2025, GECC issued $57.5 million in aggregate principal amount of 7.75% notes due 2030 (GECCG Notes) and repurchased $18.5 million of the outstanding principal on the 5.875% notes due 2026 (GECCO Notes) . The company also redeemed all $40.0 million of the 8.75% notes due 2028 (GECCZ Notes) on September 30, 2025 . The Loan Agreement with City National Bank was amended on August 13, 2025, increasing the revolving line of credit to up to $50 million (subject to a borrowing base) and allowing for a potential further increase of $40 million (up to $90 million) .

Business Outlook

Management has set a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share , which will be paid in cash from distributable earnings .

A key growth area for GECC is its continued investment in specialty finance businesses. The company has expanded its investment allocation in these companies and participation opportunities generated by both unrelated and related specialty finance companies. GECM believes that investments in specialty finance companies along the "continuum of lending" provide attractive risk-adjusted returns that are expected to be largely uncorrelated to the liquid credit markets. This "continuum of lending" includes 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 companies .

Another growth vector is the company's investment in Collateralized Loan Obligations (CLOs) and related warehouse facilities through its joint venture, CLO Formation JV, LLC. The CLO JV primarily invests in subordinated note securities in CLOs (CLO equity) and loan accumulation facilities (CLO warehouses). CLO subordinated note securities offer recurring distributions from residual cash flow after payments to more senior debt holders and fund expenses. Participation in CLO warehouse investments may enhance returns through fee-sharing agreements with CLO collateral managers .

Regarding the operational outlook, GECM waived all accrued and unpaid incentive fees through March 31, 2026 . As of December 31, 2025, approximately $2.3 million of accrued incentive fees were payable . This waiver is expected to result in the reversal of these accrued incentive fees during the period ending March 31, 2026, leading to a corresponding increase in net income in that period .

GECC's planned capital allocation includes managing its debt obligations. On February 27, 2026, the company issued a notice to redeem $20 million aggregate principal amount of the outstanding GECCO Notes on March 31, 2026 . Pro forma for the reversal of accrued incentive fees and this GECCO Notes redemption, net assets would be $115.1 million and net asset value per share would be $8.23 . The company also has a revolving line of credit of up to $50 million with City National Bank, which can be increased by an aggregate amount not to exceed $40 million (up to a total of $90 million), subject to CNB's discretion .

Risk Factors

GECC faces several material risks, including intense competition for investment opportunities from larger entities with greater financial resources, which could lead to less attractive investment terms or a higher percentage of assets held in liquid securities . The portfolio's concentration in a limited number of portfolio companies and industries, such as structured finance (16.05% of fair value) and specialty finance (12.90% of fair value) , exposes the company to significant loss if a single investment fails or an industry downturn occurs . Risks related to specialty finance investments include the potential for fraud in borrowing base assets or invoices, which could lead to material losses . The company is also exposed to distressed lending risks, as it may invest in companies experiencing financial difficulties, potentially leading to substantial or complete loss on such investments . Economic recessions or downturns could impair portfolio companies, increase non-performing assets, and decrease portfolio value . Global economic, political, and market conditions, including new tariffs enacted in the first quarter of 2025 and ongoing geopolitical tensions, may adversely affect business, revenue growth, and profitability . The illiquidity of private investments may hinder timely disposition, potentially resulting in realizing significantly less than recorded values . Furthermore, the company's ability to raise equity capital is constrained by BDC regulations, generally prohibiting issuance below NAV, and debt financing is limited by an asset coverage ratio of at least 150% . 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 with leverage . The company is also subject to corporate-level U.S. federal income tax if it fails to meet RIC qualification and distribution requirements . Cybersecurity threats, potentially exacerbated by the use of artificial intelligence technologies, pose risks of unauthorized access, system failures, and disruptions, which could lead to financial losses, litigation, and regulatory penalties .

Management Priorities

Management's message to shareholders emphasizes a strategic focus on generating both current income and capital appreciation through a diversified approach to debt and income-generating equity investments, particularly in middle-market companies and specialty finance businesses. The company also highlights its investments in CLOs and related warehouse facilities through its CLO Formation JV, LLC. Management has communicated a distribution for the quarter ending March 31, 2026, at a rate of $0.30 per share , payable in cash . A key strategic priority is the continued expansion into specialty finance, with the belief that this "continuum of lending" offers attractive risk-adjusted returns and fosters revenue and cost synergies across subsidiaries . Another priority is the active management of the capital structure, as evidenced by the redemption of $40.0 million of GECCZ Notes on September 30, 2025 , the repurchase of $18.5 million of GECCO Notes in December 2025 , and the planned redemption of an additional $20 million of GECCO Notes on March 31, 2026 . Furthermore, management's decision to waive all accrued and unpaid incentive fees through March 31, 2026 , which amounted to approximately $2.3 million as of December 31, 2025 , is expected to increase net income in the upcoming period , signaling a focus on enhancing shareholder value.

View Source Annual Report on SEC.gov ↗

References

  1. [1] Item 1, Business — Overview
  2. [2] Item 1, Business — Competition
  3. [3] Item 1, Business — Exemptive Relief
  4. [4] Item 7, MD&A — Revenues
  5. [5] Item 1, Business — Management and Incentive Fees
  6. [6] Item 7, MD&A — Portfolio Reconciliation
  7. [7] Item 7, MD&A — Portfolio Classification
  8. [8] Item 7, MD&A — Portfolio Classification
  9. [9] Item 7, MD&A — Portfolio Classification
  10. [10] Item 7, MD&A — Portfolio Classification
  11. [11] Item 7, MD&A — Portfolio Classification
  12. [12] Item 7, MD&A — Portfolio Classification
  13. [13] Item 7, MD&A — Investment Income
  14. [14] Item 7, MD&A — Investment Income
  15. [15] Item 7, MD&A — Investment Income
  16. [16] Item 7, MD&A — Investment Income
  17. [17] Item 7, MD&A — Investment Income
  18. [18] Item 7, MD&A — Expenses
  19. [19] Item 7, MD&A — Expenses
  20. [20] Item 7, MD&A — Net investment income before taxes
  21. [21] Item 7, MD&A — Net investment income
  22. [22] Item 7, MD&A — Net Realized Gain (Loss)
  23. [23] Item 7, MD&A — Net change in unrealized appreciation/ (depreciation)
  24. [24] Item 7, MD&A — Earnings per share (basic and diluted)
  25. [25] Item 8, Statements of Assets and Liabilities — Cash and cash equivalents
  26. [26] Item 8, Statements of Assets and Liabilities — Notes payable
  27. [27] Item 7, MD&A — Notes Payable
  28. [28] Item 7, MD&A — Net Realized Gain (Loss)
  29. [29] Item 7, MD&A — Net change in unrealized appreciation/ (depreciation)
  30. [30] Item 7, MD&A — Notes Payable
  31. [31] Item 7, MD&A — Notes Payable
  32. [32] Item 7, MD&A — Notes Payable
  33. [33] Item 7, MD&A — Revolver
  34. [34] Item 7, MD&A — Revolver
  35. [35] Item 7, MD&A — Recent Developments
  36. [36] Item 7, MD&A — Recent Developments
  37. [37] Item 1, Business — Investment Selection
  38. [38] Item 1, Business — Our Portfolio as of December 31, 2025
  39. [39] Item 7, MD&A — Recent Developments
  40. [40] Item 7, MD&A — Recent Developments
  41. [41] Item 7, MD&A — Recent Developments
  42. [42] Item 7, MD&A — Recent Developments
  43. [43] Item 7, MD&A — Recent Developments
  44. [44] Item 7, MD&A — Revolver
  45. [45] Item 1A, Risk Factors — We face increasing competition for investment opportunities.
  46. [46] Item 1A, Risk Factors — Our portfolio is limited in the number of portfolio companies which may subject us to a risk of significant loss if one or more of these companies defaults on its obligations under any of its debt instruments.
  47. [47] Item 1A, Risk Factors — We are exposed to risks relating to our specialty finance investments.
  48. [48] Item 1A, Risk Factors — If we invest in companies that experience significant financial or business difficulties, we may be exposed to certain distressed lending risks.
  49. [49] Item 1A, Risk Factors — Economic recessions or downturns could impair our portfolio companies and harm our operating results.
  50. [50] Item 1A, Risk Factors — Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.
  51. [51] Item 1A, Risk Factors — Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.
  52. [52] Item 1A, Risk Factors — The lack of liquidity in our investments may adversely affect our business.
  53. [53] Item 1A, Risk Factors — Our ability to grow depends on our ability to raise equity capital and/or access debt financing.
  54. [54] Item 1A, Risk Factors — The incentive fee structure and the formula for calculating the management fee may incentivize GECM to pursue speculative investments, advise us to use leverage when it may be unwise to do so, or advise us to refrain from reducing debt levels when it would otherwise be appropriate to do so.
  55. [55] Item 1A, Risk Factors — We will be subject to corporate level U.S. federal income tax if we are unable to meet certain RIC qualification and distribution requirements under the Code.
  56. [56] Item 1A, Risk Factors — The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning affecting us or our third-party service providers, could impair our ability to conduct business effectively.

Analysis on 5/21/2026